In this episode, Douglas of MMT Macro Trader joins Adam and Ryan to discuss:
Links:
AppliedMMT.com
AppliedMMT on Twitter
Douglas (@MMTmacrotrader) on Twitter
Disclaimer: The content of this podcast is for informational purposes only and should not be construed as financial or investment advice. The views and opinions expressed in this podcast are those of the hosts and guests and do not necessarily reflect the official policy or position of any associated employers or organizations. Listeners should consider their financial circumstances and consult with a professional advisor before making any investment decisions
In this episode, Douglas of MMT Macro Trader joins Adam and Ryan to discuss:
Links:
AppliedMMT.com
AppliedMMT on Twitter
Douglas (@MMTmacrotrader) on Twitter
Disclaimer: The content of this podcast is for informational purposes only and should not be construed as financial or investment advice. The views and opinions expressed in this podcast are those of the hosts and guests and do not necessarily reflect the official policy or position of any associated employers or organizations. Listeners should consider their financial circumstances and consult with a professional advisor before making any investment decisions
The content of this podcast is for informational purposes only and should not be construed as financial or investment advice. The views and opinions expressed in this podcast are those of the hosts and their guests. They do not necessarily reflect a position of any associated employers or organizations.
Adam Rice:Hello, everyone, and welcome to episode three of the applied MMT podcast today, Ryan and I have a special guest on who we're very excited to have join us. And with that, we'll get started. All right, Doug, welcome to the show. Doug, it would be great. Well, I'll give the audience some background. So Doug runs a Patreon channel and a YouTube channel called MMT. Macro trader, he's doing some great work. And we thought just given his work, and what Ryan and I are focusing on with the podcast, you'd be a great guest to have on so Douglas, thank you for coming on. Do you mind introducing yourself and maybe given some, some background and tell us a little bit about your Patreon?
Douglas Padgett:Yeah, thanks for having me on. Glad to be here. Yeah, let's see, I run I run the MMT macro trader YouTube channel, we have a Patreon as well. I also have my right hand man, my my partner in crime BS you Smith as well. That helps me out with it. He's he's really the brains. Behind the endeavor. He's the he's the PhD physicist that actually truly knows what he's talking about. When it when it comes to it when it comes to the math. But yeah, we run the we run the channel, and I do beta, the market stuff. And then we do a live stream during the week on Wednesday nights where Yeah, we just kind of talk all things MMT and finance and kind of the, you know, the crossroads between the two. And then I've also been trying to get a little bit more active on Twitter published some of the research that I've been spending the better half for the better part of the last decade, piecing together and then yeah, so that's kind of where we're at. If you if you get on Twitter, YouTube and type in MMT, macro trader, you'll find me if you're looking for me. And that's a little bit about who I am. In terms of terms of my actual background, I assume you mean background with him and t i can i can tell you that I can tell you that origin story of if that'll help kind of set the stage here. But I was a big Austrian economics guy. If you're not familiar with that, go Google it. I've never heard of it. Yeah. But yeah. We Austrians just really, really think that all business cycle problems happen because the government comes in and changes the money supply changes the interest rate, and that affects the signal that's given to the markets to to set the proper price of money. And I was a big Austrian. And I was really starting to try and piece together various what would turn out to be macro models, even at the time, I didn't fully understand that what I was trying to do was macro economics. And this was a little over 10 years ago and a buddy of mine, I think it's hard to remember now it's been so long at this point, I think a buddy of mine had said and I know he had pushed me a few times to understand that the the idea that the government is you know, running, running deficits on a credit card wasn't right. And I think he had mentioned MMT and so it's about 10 years ago, I'm about ready to used to wake up go to the gym. This is all back when it was something that before kind of work from home and the new world that we're in, but I'd wake up every morning and I'd hit the gym and and up up pops and it was June of 2013 up pop this debate between MMT and Austrian economics Bob Murphy, if you're familiar with him, he's on Twitter. He's a big Austrian guy and works for nesis, which is big on Austrian, Austrian Think Tank, Austrian economic think tank, he had a debate against this guy named Warren Mosler and I'm like, Oh, this will be fun. I can you know, when I get on the, the elliptical to warm up, I'll listen to Bob Murphy, you know, make fun of this. This MMT guy, whatever this is, and I listen to this, and I'll have a good time watching some Austrian wipe the floor with whatever this MMT guy is. And at the same time, here, I am trying to figure out these macro models, right? I mean, in the back of my mind, I'm like, Look, somehow price should be a function of something, right? Somehow we should be able to deduce where the s&p should be at when there's some sort of fair value model, something like that, right. I mean, it's something like that should be done. So I'm listening into this. And during the entire debate, Bob Murphy keeps saying the exact same thing every time Warren Mosler talks. Well, yeah, technically you're right. Well, technically, you're right. Well, yeah, I mean, you're right. But what about you know, what about this thing? And it was just the whole debate. i i Usually I warmed up for 10 minutes, I spent the entire morning on the elliptical, no lifting weights, just barely pedaling forward, watching this debate that was two and a half hour and two hours long on 2x speed and, and by the end of it, I was convinced this this Warren Mosler guy knew something that I needed to know. And it was at that point that I Dove Dove in to the MMT world and slowly but surely have kind of built up my understanding of it. And yet now we're bringing it full circle to where we're at today where I think I have a pretty darn good understanding of, of every lever, every switch everything that comes as part of the macro economy, I think I understand where the data is, that expresses everything that kind of MMT would would understand. And now we're just trying to build various deep learning models. And kind of validate some of the theories at at a much deeper level and get that information out there not only for kind of public consumption, just to push the MMT idea, but also as someone who's very an active trader, I love the markets. This is really, I mean, this is really, this is the driver of the markets. MMT really explains where markets head and how to understand how to understand markets. And so yeah, there's kind of the there's the origin story to where we're at today.
Adam Rice:That's awesome. And it's funny you say that, because the you know, when I first found out about MMT, back in 20, around 2016, that Mosler Bob Murphy video, is really what sold me on it. I was like, alright, this, this makes total sense. And Murphy couldn't really refute anything about what Mosler was saying. Other than saying that, you know, he didn't believe in the system. And Mosley was saying that's not my system. It's just the way the system works, you know?
Douglas Padgett:Exactly. I think that's why Bob Murphy eventually grew up beard, I just I have, he probably looked at himself in the mirror anymore, he had a cover as much of his face as he could.
Adam Rice:So how did you and NBC meet?
Douglas Padgett:Yeah, so I was doing my YouTube channel, and you just kind of comment on my videos. And I'm like, holy cow, this guy's like, he's onto something. Right. And, and so I reached out to him on Twitter, and I, you know, I'm far from a software developer, even a good programmer, but yeah, I mean, I know enough, but I could never really fully utilize the, you know, the tools that are available with Python, and a lot of the deep learning tools and a lot of the statistical tools. And, and I reached out to him, and unbeknownst to me, that's, you know, that's what he did. It was his life. And he's a professor of statistics. And, you know, he's like, Hey, you should try this, this, this, this, and this. And, you know, you're just kind of, you know, we chat on and off. And, and he consistently had the right tools to apply to the data that I was seeing, and able to put them in a manner in which, you know, really at a high level would be, would be meaningful to those who would look and know, to look at the data in the right way. And then also rigorous to know that to validate the thoughts and theories that we have to make sure that the MIT has, when I say we emit T and then also just, you know, theories that I have that yeah, this is really how the this is really how the markets work. This is really what you know, one flow is doing to the other and, and it's important to validate those things for various reasons. I'm sure we'll talk about but that's that's how we met he just he waves comment on my videos, and I'm like that this guy's this guy's onto something he knows, you know, something that I don't and, and eventually, I'm like, Yeah, let's just team up and do this. And so yeah, we're still at work, we have some follow up, definitely follow me on Twitter, follow me on YouTube, if you really liked the deep dive data stuff, because that's what I'm going to be posting over the next six months or so is kind of everything that we're coming across and working on. That's a that's a value and and you know, then you can show it to show to your friends and say, hey, look, man, another, there's really real data on there's reasons for this, right?
Adam Rice:Now, I think you guys are doing incredible work, and it's great to see, you know, MMT being empirically validated. It really feels to me it feels kind of like next level MMT. You know, it's it's very in the weeds, and it's very, you know, data heavy, which is great. And hopefully that, you know, kind of helps to spread the word about MMT.
Ryan Benincasa:By the way, guys, speaking of, you know, being validated, I mean, did you see that? The jobs growth and unemployment number today?
Douglas Padgett:Was it better than expected? Was it better than preseason?
Ryan Benincasa:The lowest unemployment rate since I think 1969? Is that is that is that right? That's right. 517,000 non farm payrolls. I think, Doug, I don't know about you, but Adam, and I just felt kinda like we were going a little crazy in the fall when everyone was was screaming recession. And we were kind of like, I think this is actually going to be quite the expansion with all of the the interest rate hikes and the the money being handed out to people via the the the interest income channel, and so it's just it's just, not only does it feel like a little bit of a victory lap today, but it also just, like, feels good because I don't know about you guys, but I just kind of feel like I was betting on America. And, and, you know, we were kind of proven right?
Douglas Padgett:So on Wednesday after the FOMC, I put out my nightly commentary for the year my Patreon I put out, you know, it's it's probably too soon to take a victory lap at this point. And then I've been bullish I, you know, I started, I tried to start to get long stocks back in October and kind of got shaken out of a few positions. But finally, a couple weeks ago, I finally made my big bet when I really saw it was all tied together to the jobs data. But when I really saw government spending really start to accelerate, I'll explain that in just a second. I'm like, You know what, this is just looking too strong. My models are finally starting to turn bullish. I'm taking the big bet. And I'd said in my commentary, you know, I think it's a it's a little too soon to take a victory lap. So I won't do that. Well, tonight's commentary is going to be, it's going to be Yeah, I should I was wrong, I should have been taking a victory lap. That's that's where we're at. I mean, that's where we're at. So what's played out over the last three years post COVID. Now at this point is we obviously saw a massive, massive spending spree by the government, right, that that took out it was necessary. Was it as good as it could have been? No. Did they have weeks to figure out the right answer? Yes. Does that mean that there's going to be mistakes? Absolutely. But the good news is they at least understood they least understood. And by that, I mean, policymakers and those in charge, they at least understood that the right answer to a crisis is government spending. Right. So I mean, that is it is a huge win. In my books from where we would have been all the way back to a, you know, pre pre great financial crisis or something like that, right? I mean, Europe is still barely figuring this out, right? You're in Europe, it's a crisis. And they'll go, I'll stare at austerity. Right. But we've at least figured this out. And I think that's, you know, that's a win. The very least I know, it looks like we you know, there's the debt ceiling, and there's probably going to be spending concessions and all that sort of stuff. And we might be you know, we might be having a conversation and six months, a year, two years that, you know, we're right back to where we were in the in the late 90s. But suffice to say, so far, one success, but what happened is we hit this massive spending spending spree post post COVID. And what I measure is not so much the actual level of spending, or even the rate of change of spending, or the percent change of spending, but what I measure is the acceleration of spending. And that's really what matters. That's what we're finding out in a lot of the research that we're doing is it's the acceleration rate, that spending are really really any, any, any kind of monetary, any kind of macro indicator is it's really the acceleration. And we saw this massive acceleration and that they correlated with the growth, the growth that we saw, but it was, it was really starting in mid to late 2021, that we started to see that acceleration come down. And that acceleration went negative heading into 2022. Well, actually, I knew it was going to start to head negative because we were gonna have just massive tax receipts come tax season of 2022, right? I mean, right, massive growth. And so that acceleration was going to come down, there was going to be a natural lol to the growth that we had seen. And, and so that's I mean, that's why we saw things look like they were getting relatively, they were starting to contract. But starting in June, somewhere between June and October, we really did start to see that acceleration begin to begin to roll over. And actually this last month, at the end of the year, last year, we really started to see things start to start to re accelerate at at massive levels. And so that is what caused everything we've seen over the last three years or so really, the story of the interest rate hikes isn't going to hit I mean, the story, the interest rate hikes are just starting to hit and the money that's coming in from the higher interest on those bonds is just gonna start finally hitting the economy. And this is this is where things are just gonna get crazy. Because we're this whole post COVID era is just one massive petri dish for everything that MMT has ever wondered. The unfortunate part is their real lives that are going to be affected from all this. Nevertheless, it's going to be one big it's going to be one big petri dish, and I don't know where we're gonna land this year. So I mean, if we skip the debt ceiling, and that gets resolved, and we still have the massive acceleration and spending that we're seeing, the sky's the limit at this point, and I think it will absolutely indicate so vindicate MMT my final point is, I wouldn't say that the drop, the contraction that we saw during 2022 should have been a sweat from for from an MMT standpoint. MMT absolutely understood that we were seeing a contraction as as a function of the acceleration of spending heading into 2022. They, to me that would have been absolutely anticipated from from an MMT perspective. And what we're seeing now is anticipated from an MMT perspective.
Ryan Benincasa:Well, I just want to say yeah, I agree with everything you said. And I just want to support that last part by saying, you know, so I spent a week at the, at the levy Institute of Economics, which is sort of like the ground zero for MMT. Last June. And I mean, Stephanie Kelton got up there and made a presentation. And this, you know, she's like, look like, our models are showing recession, if new spending bills don't get passed, which, which I thought was it was a fairly reasonable assumption, right. I mean, you saw, I mean, April, Greg, from wrong, April 2022. We saw the largest tax receipts ever in history in a single month in history. Massive fiscal tightening on top of the oil price spike, which, which, again, like that was really squeezing, like consumers wallets and stuff as well. So her point was without new spending bills, we're, we're, we're going to have a recession, essentially, almost right after that, like, like, a couple of months after that. The, you know, Congress passed the chips Act and the, the infrastructure, or, excuse me, the inflation Reduction Act. And, and Biden also declared the or took the executive action to forgive, I think up to like, I forget the exact number, but it was like half a trillion in student loan debt or something like that. And my interpretation was that well, this is exactly what Stephanie Kelton said needed to happen to avoid recession is passing spending bills, right to further stimulate the economy, in addition to the rapid interest rate hikes, which which Warren Mosler was pounding the table about as being stimulated, because they were so because of the high level of debt to GDP, and also because of the high reserve balances. Right, like, that's not really something we've dealt with in the past, because, you know, if the Fed didn't pay interest, interest on reserves until Oh, eight, and you know, rates were held fairly low, since then. So that's another so all these things are kind of like, like, this hasn't happened before. So you can't just assume that, you know, these past models are going to are going to be right, because they're, they're not factoring in, you know, some of these the these new kind of novel conditions.
Douglas Padgett:Yeah, I agree. I don't know if we needed the spending bills or not, you know, to be honest, I track the aggregate, I don't know, I don't know what, what ends up in the spending or not. You know, again, to me, it's all kind of it really is all this kind of acceleration function of anything. But but in aggregate, I mean, what I mean, here's what I can actually tell you that I mean, I do at an aggregate level. So I track two things just kind of in the short run, just to see where we're at, on a daily basis. And that's the what I call the net fiscal flow, which is just the 90 day average of what's being spent. And then I also capture the raw 90 day average, what I call the raw flow, which is everything that's been spent, but nothing, none of the receipts being taken out. Right. So just you know, what's actually being spent. And we're like, 20%, higher on just the total, what's actually being spent into the economy. We're in 2019. So I mean, we have a much. Yeah, it's it's, yeah, it's on average, every day of the 90 day rolling average, I think is about 22 billion. We're up to 27 billion. Now, obviously, eventually, some of that gets taken back in taxes, right. So the net is the net gets a little bit lower. But I mean, we're going to start to re accelerate here. Again, most likely, again, that debt ceiling is all discussion about how bullish things could get all is one big caveat. One big qualifier sitting on top of it, the debt ceiling can ruin the whole game. So don't come back to us. If, if in June, the debt ceiling hits, and there's no there's no resolution and crap hits the fan. That's a political decision. They could do it if they want to. It will completely derail the economy. But, you know, I don't have that crystal ball. But if that turns out to be a non issue, then yeah, I mean, it's spent spending superstrong still and and, you know, we could continue to see a growing a growing economy.
Ryan Benincasa:I mean, I have to say on the and I'm curious to hear your thoughts here. But I'm like this, these jobs, data and unemployment and inflation rolling over like, Biden has a very, very strong card. When as he goes into these negotiations to be like, Listen, you Like, you're you're, why would I make concessions, like my economy is, is absolutely roaring? Like what right? What's his kind of like? Why would he be? I mean, Janet Yellen has has not declared the the trillion dollar platinum coin to be illegal. She thinks it's, you know, she doesn't like it. She thinks it's a gimmick, but she doesn't say that. It's illegal. And Jay Powell acknowledged the other day that the Fed acts as the fiscal agent to the US government, which, which essentially, is saying, like, they don't make, they're not supposed to pick and choose or make political decisions. They're supposed to take orders from the government. And, and, and execute as, as the government says, so I don't really see, like what would be Biden's incentive to, to, to make any sort of concession right now? Right.
Adam Rice:And I think it's different from you know, 2011 when we were dealing with an economy that was stagnating, and there was at least, you know, the everyone was wrongly blaming the national debt for the reason that the economy was stagnating. I don't know what they could point to if the economy is in good shape. I don't know what they can point to, to really, you know, prevent the debt ceiling from getting extended. It'll be interesting to see how it plays out. I liked Douglas I liked the point that BS you made on your one of your streams. When he basically said this is a time we can be thankful that politicians are so influenced by the private sector. There's no way they're going to stop issuing treasuries. Right. I thought that was great.
Douglas Padgett:I know at the start, what are your guys's I think was your first stream when you went to the new name of applied m&t? You guys were talking about the kind of the superstructure that sits on top of the US Treasury market? Right. And so I would assume I'm naive, nope, no clue to this case, actually, I'll probably be having Warren Mosler onto our stream soon. So I'll have to ask him about this. But like, the bankers know that, that what you know what they what they see as liquidity, which is this, this pristine collateral of treasuries is vitally important to their balance sheet, right? Like they get this and that politicians know the bankers know this, right. It's like the it's like the Star Wars Attack of the Clones meme, right? They all know this, right? They all know this. And, and hopefully, hopefully, Anakin doesn't turn out to be Darth Vader and this and this story. And in fact, everyone is aware that it's vitally important that if these treasuries don't get issued, not only for the private sector savings aspect of this, right, the sectoral balance aspect of this, but also, the financial sector, for better or worse, is completely dependent on a steady flow of these treasuries hitting their balance sheets. I gotta imagine, everyone's aware of this fact, and that the bankers will go tell the Republicans look, you do this for more than a couple of weeks, we got to shed assets from our balance sheet. And those assets are going to be the riskiest of assets, because we have regulatory constraints that we have to fit into, and we can't hold risk assets without the necessary collateral, and you've taken that away from us. So, you know, then, but maybe that's what Republicans want. Right? I mean, maybe that is the way the Republicans win here. So it is a it is a game of chicken. And unfortunately, the you know, the main streets, the main street is going to be the loser no matter what if the Republicans decide to kind of go the whole way here. But yeah, the key to this whole discussion, on the short run will be the issuance of the of the debt being that it is the kind of the collateral that the rest of the financial structure is built on. Yeah, it
Ryan Benincasa:sort of just like greases the wheel of the global financial system. Yep. Yep.
Douglas Padgett:But we'll see. I mean, we'll see I, you know, I don't have a crystal ball. And, and, you know, games get played, hopefully, once and for all i, you know, I, obviously, the trillion dollar coin is, I mean, the whole thing's a gimmick, right? I'm not saying it's really the trillion dollar, I mean, go all the way back to the debt ceiling. It's all one big gimmick, it's all one big misunderstanding of what money is, and isn't how the monetary system actually functions. So what's the difference? You know, let the only discussion that should ever be had is, do we want to enact certain spending programs or not, and that's a political discussion, and then it should just be done at that point. And then you mark mark the accounts throughout the year, once you agree that that's what you want to do. Right now, that's
Ryan Benincasa:very succinctly and well said, kind of kind of building on that. Douglas, so I think I was listening to one of your streams and You know, you had mentioned maybe arguments or something that you've had with people or debates, you know, on ideas about like, exogenous versus endogenous money. And, you know, those sorts of topics and where, you know, who has the actual power to issue money doesn't come from banks or the government. And is that is that is that is my characterization, right? Is this something that you've
Douglas Padgett:had debates with? No. Yeah. Oh, yeah. Yeah. So
Ryan Benincasa:what's so what? I'm just curious, like, what is it for my own sake? And for like, audience sake, like, what, what is the argument? That yeah, you've heard that? Yep.
Douglas Padgett:Okay, so these names are, I mean, they're just the names of economists gave to this. Right? All right. But let's start with exogenous money, exogenous money is money that effectively is MMT would would understand it's money that the government creates by spending that it has complete control over when it spends, it creates the money, exogenous ously, right? Endogenous and then you could see that I think they would call that they would call that vertical, they would call that vertical money, endogenous money. Horizontal money, was money that gets created when banks loan out that money. So in the in the banking structure, and then in the banking system, if you go in to get a loan, whether it's a business loan, or a loan for a home, the bank's not going into the vault, they're going into someone else's deposits and saying, okay, you know, here, here you go, we've got some, you know, we've got some on the balance sheet know, what they're actually doing is they're, they're both creating the deposit and the life of the loan and the liability at the exact same time. So the loan becomes the asset of the bank. For you, it's a liability. And then the deposit then becomes the asset of, you know, whoever it is that selling you the goods, or the house or whatever. So that's how the banking system works. And those are two different systems at play. There's different dynamics that are playing out, when when those systems play out. And in a, in a nation state, like the US and you know, what you call generally of a free market, fiat currency system. These things are both at play. And they both have a certain dynamic now, what? What monitor is believe, and you'll get this a lot when you see this, and it gets very confused. It's so confusing. Because there's so many people just have this idea that what's actually happening is, it's only the exogenous level. I'm sorry, it's only the industry. So yeah, I get confused. Right? It's only it's only the endogenous level, right, that it's the banks of bank money. Okay. Yeah, that is the banks that are loaning the government money and creating these loans. And that's why you get all these various models that come out and say that, well, you know, the government's, the government's stealing potential growth from the private sector, you know, they're stepping in and, you know, the banks are loaning them this money. That's not That's not how it works. The banks, as it turns out, have all the money the government spends as deposits on their balance sheet, and then they go and buy the bonds with those deposits, right. So that's how I mean, that's how it works. And we know it works that way. Because we have accountants that can add all this stuff up. I mean, it's not, I mean, that part's not rocket science.
Ryan Benincasa:I will also just add, you know, I mean, early for a bank to be pardon the tautology here, but in order for a bank to be a bank, it has to have a bank charter. And nor have a bank, like you have to be issued a bank charter in the US. It's the Office of the Comptroller of the Currency, which is a department within the US Treasury that issues bank Trove. So you literally cannot issue bank money deposits, by law, unless the government and douse you with the authority to to to issue the government's currency. So it's just to me, it's just not even, it's not even like close in terms of the debates like Why Why are those banks allowed to issue you know, money to, you know, the government's currency as is because the government, you know, essentially enters in into a franchise relationship, where the banks essentially act as like government money for franchisees. It's a good way of putting it Yeah, yeah. Well, there was a whole there's a phenomenal paper written from the Cornell Law School, published in 2017, called the finance franchise that sort of lays all this out.
Adam Rice:Wasn't that wasn't a Robert pocket. Yes,
Ryan Benincasa:yeah, exactly. But yeah, and it's sort of like, okay, like why? I mean, the very fact that US banks issue deposits denominated in dollars, it's like, well, why dollars? Well, because we decided that in the coin act of 1792, that that the dollar was going to be, you know, the monetary unit of account for, for the currency United States. You know, I mean, there's, it's, it's, and the Constitution explicitly states that, that the Congress has, has the, the authority to coin money. So it's just not really, like when I, I've gotten into debates with online pupil before, and it's like, really, like you think that that banks just sort of exist, they just sort of popped out as almost like, like a scene out of inception, they just kind of are where they're always and it's like, no, they, they had to, they had to become a, you know, a chart, they had to they need a charter in order to become a bank. And why, you know, I make the point to like, why would the Italian banks no longer issue lira now issue the euro? Right, if it's a free market decision, or whatever, then why is the why do they issue your own and not lira anymore? So it's just it's just, it's so clear, that it's, you know, it starts, you know, it's that money is a function of, of law, and our sort of legal and institutional structure. And that, you know, the banks obviously play a really critical role in that, but, but to say that they are the original source of funds, I think is is is wrong.
Douglas Padgett:So, I know Warren Mosler will point out the court, you know, and I'm quite persuaded by this, that banks are agents of the government. And I like that idea of the franchise. I've never read that paper. But that's a really good idea. Because oftentimes, people say, Oh, no, no, no, no, they're private banks. They're not they're not agents of the government, which I don't maybe don't want to. I mean, I don't need them to have believable agents of the government. But you wouldn't say, well, that's not a McDonald's that's owned by you know, Bob Smith. It's actually it's actually a Bob Smith restaurant, no. Big M on top of it, and it sells cheeseburgers and french fries, and they all taste the same. And they have the same special, you know, special sauce and all that sort of stuff. It's a McDonald's, it's not Bob Smith's restaurant.
Ryan Benincasa:Exactly, exactly. But McDonald's has has a has a monopoly on making big, Big Macs. And yes, just
Douglas Padgett:like the Yeah, just like the years ago, yeah. So it's good. I'm gonna 100% Agree, 100% agree. And to kind of add to this point, but also add a complete wrinkle into this point, there's this other part of the world called the shadow banking system, which is really just the rest of the world, the global financial system. And I like that goes by a lot of different names. But there's this, there's this thing called the Euro dollar system. Now, this is where things get really weird. And this is also where the the control of the Federal Reserve goes away. And actually proves this, this whole story will eventually prove that US chartered banks are, in fact, agents of the agents, the government, but this, this Eurodollar system, so let's say, let's say you go, you know, you buy a laptop from some Chinese, Chinese firm, or you buy a car from some German firm, those dollars, eventually find themselves on the balance sheet of the Bank of that, you know, German car manufacturer, right, and now all of a sudden, there's dollars that are on deposit in a bank outside of the US. And back in the 50s 60s timeframe, it's not exactly well known, eventually, this thing called the Euro dollar, because it started off, the phenomenon was understood in Europe began where those international banks started lending out those dollars, not endogenously, but with almost an exogenous style lending or actually not even an exogenous style lending, but it was much more of a money multiplier, right? Where were they were, in some sense, reserve constrained. So these these loans would become to eventually became what are called Euro dollars, Euro dollar loans. That's what the LIBOR is, right? So you have this massive system of dollar denominated debt that's being issued that's not being issued from the US Chartered Bank. And Perry Merlene who's not an MMT er, but he's certainly got a much better take on money than you know, then your monetarist will has a great series online that he teaches at Columbia and it's well worth watching if you want to understand the dynamics and the functions that take place in the Eurodollar system. But, you know, prior to the great financial crisis within the The world of the Eurodollar system and the global financial system, people didn't know what was really the real dollar, right? What really was the thing of real value? You know, the yields would always step in at the exact same rate and all that sort of thing, right. But during the great financial crisis, it was very clear what the real dollar was and what the real dollar wasn't that these Euro dollars were fake effect that fake but I mean, they were being created by banks that had no backing by the US government. And the spread between the Euro dollars in the actual US dollars and treasuries just blew up for three months or something like that, right is the worst that great financial crisis said, and it's because it was just it was a system that wasn't regulated that figured out, they could loan these things out, and created the effectively the wet dream of an Austrian and it was a terrible, I mean, it turned out to be a nightmare for the banks that were involved in this, because you didn't know if the person next to you had any liquidity, and there was no one that was going to come save you when the bank runs occurred. So we, you know, we got a test of it. And it was the great financial crisis. And yeah, as it turns out, you really want to be holding the dollars that can directly trace their origin back to the federal government and have a backing of the federal government, not the ones that are in this global financial world. And it's still to this day, that Eurodollar system has these hiccups, and, you know, five out of the last six kind of hiccups or financial hiccups, we've seen post great financial crisis, really all have their genesis in this in this Eurodollar market.
Ryan Benincasa:Yeah, you know, the whole Euro dollar thing is, is definitely, it's definitely interesting. I mean, and and my understanding was that the Fed actually originally set up its foreign foreign bank swap lines during the financial crisis. Yeah, to alleviate the bank runs that were happening.
Douglas Padgett:Yeah, so the Fed eventually did step in. And I mean, it's, it's a more solved situation now. And the Fed will provide the liquidity now for the world. Which I don't know if that's, I mean, I don't know if that's a good thing. I mean, it is, but for the countries themselves, I wish they just get off the Eurodollar system and start issuing their own their own their own currency back that, as opposed to allowing the system to continue on, I think it'd be better for each country, but yeah, system in place. Yeah,
Ryan Benincasa:it, you know, that is a that is an interesting point. You know, in the United States, actually, it's we all everyone knows that it's illegal to counterfeit, you know, a US dollar, but it's also illegal to counterfeit any foreign currencies. And this guy, Morgan, Rick's, who I've mentioned before, who wrote a phenomenal book called the money game. You know, he makes the case that we should essentially set up almost like a, like a, like a basil, you know, resolution equivalent, and, you know, basically tell these other countries that we, that we trade, engage in trade with, that, they should sort of enforce a similar rule and, and, and say that, like, you're not out your, your domestic banks are not allowed to issue or create, you know, another country's currency. And just and just leave it up to, you know, the other countries to essentially make it illegal to enforce that. Yeah. And, and, and enforce that in a similar way that like, you know, the Basel rules get enforced, and I think that would, that would make a lot of sense. And it's sort of like, why don't you do that already? I mean, we know that. Yeah.
Douglas Padgett:Sovereignty. Yeah. Yeah. You know, what's funny about that is I got a I got a tweet from a guy the other day to check out there's a currency group that's trying to start in South America and so I watched this hour long thing I didn't I couldn't make heads or tails out of what the guy was saying is evil, the US is because dollar hegemony, yada yada, yada, you know, dollars, though, the US isn't shoving the dollar down anyone's throat. I mean, this is this is a, this is a sovereign choice of every single one of these nations to be doing what it is they're doing and to not, I mean, you want your currency. Here's what it really boils down to actually get it a little closer to finance. Here's what it really boils down to. The truth of the matter is, you want your currency USD, you want your currency also depreciating. Right depreciation means this is gonna there's gonna freak out people but depreciation actually means it's being used. It's being created domestically, right. And yeah, you want it circulating. You want the people In your country to be making debt in your currency, because that can then drive, right that economic growth that will come out of that and then drive the ability for the state to continue to provision itself and for the, for the cause of that, of that of that country. But this, this is backwards thinking that currencies need to be stable, and you can never have a depreciating currency. It just completely neglects the functions of how economies work, it's not the it's not the currency that you want to have value, what you want to have value is the life of the person that uses the currency. And that is what is the value and and to tie back to a little bit of the the discussion on the Euro dollar, the Euro dollar situation and, and just just currency in general. You know, what what happens? You know, what happened in September, October with the dollar. It plummeted, it plummeted. What started up in September, October November, the economy again, right? Well, why is this? Why is this it's because all of a sudden, we're seeing the engine of credit expansion start to happen again, both in the Euro dollar market and, and here in the US, that's, that's when we started to see things bad. And we started to see the actual economy, the credit impulse, whatever you want to call it start to take off at that point. And the side effect of that is and that the observable, I guess you could say the observable evidence of that is that the dollar gets pushed lower, because more dollars are being created, loans are being created. And the opposite side of that is going to be the downward pushing lower. So the dollar going lower isn't necessarily a bad thing, it's probably a good thing. It's usually an indicator that we're having economic expansion. And so it's no surprise to me that a couple of months after the dollar drops that we start seeing, we start seeing economic indicators start to turn up, we start seeing the market start to turn up. That's what you want. Now, if the US did everything it could to fight that, right. That's gonna be I mean, that's that will be a problem, because that will stay me there will stay Munich economic growth. So when it comes to when it comes to currency, when it comes to all those discussions, it is so misunderstood that it's impossible to go digest kind of popular finance stuff, and have any clue what anyone's talking about. Because no one talks the right language, assuming assuming that a government spending is spent on productive means, right, increasing real output activity, right, you have a zero rate policy and you don't issue debt that's denominated in some other currency, assuming that's the government policy, you want your currency pushing lower, because that means it's being used. And that means you're getting real output out of out of the use of it, not the other way around. And all these countries get it backwards. All these countries get it backwards. And for their sake, they The unfortunate thing for their sake is it's the West, it's the US that ends up gaining, gaining power and value because of it, and I think we could all have that prosperity, if people could understand MMT.
Ryan Benincasa:That's a great point. You know, one of the cringy theists you know, things I'll see online or hear people say something was like, oh, you know, the dollar has lost 99% of its value or what? Or whatever, since, you know, some some date like 93 or something. Yeah, yeah. Bars the Fed because look at Yeah, appreciation. It's like, well, we'll do you know, okay, so let's assume that I don't know, the steps off the top of my head. But let's assume that you're kind of you're like, an Amazon worker, let's I think, what, what's their minimum wage, like $15 An hour or something? So let's assume $15 an hour, working 40 hours a week, that's$600 a week. You could use there are a lot of things that you can do with $600. In this day and age. I mean, I just, I was just in Mexico last weekend, for a Belize way you could fly to Mexico and back. Right? Do you think that you could fly to Mexico back for like, you know, an average, you know, weak salary back in 1913. I mean, it's just, it's just like insane for people to like, like, stop looking at the valley. Like, you have to look at real living stand real
Douglas Padgett:wages, real wages, you know, real. That's what it all that's what it all boils down to. And I don't want to give a pass to the Fed. I don't want to give a pass to the monetarist who have led economy from you know, post World War Two today, but I will tell you this much. What you don't want is you don't want a government whose focuses on ensuring their currency is appreciating, appreciating in value, right? Because the other thing that does too is that dissuades investment that dissuade spending that that encourages savings, right and when you Save that someone else's income that you're denying to them. And why do we save? Or why is there a need to save? Well, there's only a need to save because the government isn't supplying the necessary savings via the spending via the spending channel. And I know if you're not an MMT, or some of this stuff doesn't make sense, right? And I know our instinct is to save for tomorrow. But the question is, where's that savings happening? Right? Where is that? Where is the where's the channel that that savings is coming from? If you're hoarding dollars, that is not economic growth. Economic growth is is the real stuff that we get the experiences that we get to have the, you know, the houses that we can build. And I mean, that's, that's the promise of MMT. And, and if you're, you know, if you're a small government person realize that it is extremely hard to keep a currency, constantly increasing in value, it takes a very big government to go get some asset to back it by to keep to keep a currency appreciating over time, right? You have to build massive infrastructure to go get gold out of the ground and go put it in your vault. That's big government, right? If you want true small government, the best way to do that is to allow the economy to run hot to make sure everyone's employed, then all of a sudden you get small government, or at least government that its genesis is from the individual and not from just a couple autocrats up at top you no dictating how things should be. So I will even push back on the people that say, well, it's just big, big government spending. No, no, no, no, no, someone's always got to be doing the spending. If you want an economy to run a monetary economy to run, someone's gotta be doing the spending. And it is it is a much better world. When when that spending is done through a democracy than it is through, you know, just a handful of private entities.
Ryan Benincasa:No, it's very well said. I mean, you know, it takes two to tango, right? So one person savings is another person's Exactly, exactly.
Adam Rice:I liked Douglas, I don't know if you've read this on big news blog. But I was taking a look at his blog recently. And I'll just I'll read the passage, because it's very short. He said capitalism, as Marx conceived, it was a fiction, it was important because people believed it to be a reality. And well, before marks, when people act as if it is real, then we have a cause of great suffering for the many MMT is a reality that people believe is a fiction, it is important, because when people act as if MMT is a fiction, then we have a cause of great suffering for the money. I thought that was extremely well put. And it's a great, it's a great system. Amazing.
Ryan Benincasa:Yeah, amazing. Yeah.
Douglas Padgett:I saw that. I saw that post go up. I haven't read it yet. But yeah, that's really good. That's good.
Adam Rice:Yeah, that's, that's the whole post. I mean, it's just those two, you know, short paragraphs, but I thought it was very well done. And it's really true. It's just, you know, if you don't, first of all, I think everyone is flying blind. If I don't know how anyone can, can try to forecast the economy, if you don't understand MMT. My sense is that most people are kind of flying blind. And we really are denying ourselves from political from a public policy perspective, if if you don't understand MMT, as well. It's kind of amazing.
Douglas Padgett:I saw one of the big Twitter guys, I forget his name. He's got Yeah, one of the people on the podcast circuits and all that sort of stuff. And, and the tweet was, and this is a guy who was expressed, uh, seems to be an understanding of the basics of monetary policy, the basics that the Fed is in there that the Treasury isn't borrowing from the private sector and, and the podcast headline that he had was, the Fed still has a lot of work to do. And I gotta tell you, if your listeners get confused by that sort of stuff, and they see people that seem to be in the know, that seem to understand this, and they, you know, they put headlines out like that, just just realize, I stop and scratch my head, because I don't have the slightest clue what he's talking about. What does he mean that what, what is the Fed, the Fed can do one of two things, they can buy assets off of balance sheets, they haven't been doing that, obviously. The other thing is they could raise US interest rate, which is just a literally a price function for some sort of channel of extra money. Right, and then maybe ties into the valuation of assets. Right. Which is, effectively me. Yeah. I mean, on the on the short run, I mean, I think that's part of the the repricing of stocks over 2020. But but at the very least, we know what the you know, the end of the end is I don't know what he's talking about. Right. I think what he means is that the Fed needs to continue to hike, hike interest rates to maybe stop inflation to stop employment so hot, but that's not how it works. There's there's no model out there that that empirically shows that that's how it works. So I see this stuff and I'm in complete agreement with you. Every once in a while I'll get worried. I'm like, Oh my God, I've got the secret. I've got these models. like they are really, you know, like, I've got some alpha here, they're all everyone's everyone's gonna figure this out, Doug, you got to get this out, you got to get this out, you got to get this out there, you know, so they're all gonna figure they're not gonna figure it out. I mean, it is, it is so ingrained in the minds and in in the vocabulary and in the way everything is set up. That unfortunately, I have this kind of the unfortunate side is that it is going to take a lot a lot longer than I think I originally thought this would all just be solved by now. But it is it is really just a function of decades of people being taught one way to look at things and there's various views of that one way, right? I mean, you have your right wing view and your left wing view, but it still is all one way. When it the entire time, right. Yeah, if Ptolemy thinking, you know, these epicycles are right, you have you know, whatever, you know, whatever astrologer these epicycles are right, you know, as it turns out, no, we're not the center of the universe. There's something else that's happening here. And it's actually it's actually astronomy that we should be studying. Astrology, and when you when you start to see it from that angle, it starts to make sense. So yeah, the good news is I think MMT if you are a trader and investor, if that is your thing, and you're trying to view the markets through that lens, I think you've got a good 1020 30 years of some some rich elf to harvest. Because these guys just don't get it. They just don't get it. And and, you know, and you guys, I think you said you both work in finance. I mean, there's there's two types of finance people there are the finance people that kind of like you and I were we just really had a curiosity for how things work, right? You get into this and you're like, I just want to figure this out, and then you have the Grifters and finance is still about 80% Grifters 20% people that really just want to figure this thing out. And it doesn't benefit the Grifters to go off the you know, the company line, right? I mean, they need, they need the company line to continue, because that's how the grift continues. But there are quite a few of us who are waking up and saying, holy cow, this thing functions in a way that we truly didn't understand. Right. And there's, you know, there's there's some money to be made there.
Adam Rice:So what I'm curious about, and I would love to hear both your guys's thoughts on this is, you know, let's say the rate hikes continue, it looks like they will. And we keep seeing growth as a result of the interest income. You know, what is it going to take for people to say, maybe this, maybe this we have this backwards? You know, will they admit that? Or is that just going to be? Is there going to be, you know, an alternate theory proposed?
Ryan Benincasa:I don't know. I mean, it within the finance community, maybe. I don't know about people that speak on, on matters related to public policy and stuff, you know, you know, people would up opinion columns in the New York Times and The Washington Post and, you know, kind of political economist. I, they may, it may take like, essentially, you know, another generation, you know, for them to essentially go away. You know, and make room for the kind of, you know, these new heterodox school schools of thought. I definitely think it's conceivable that, that the, you know, the broader finance community starts to get this. But I don't know how much I'm skeptical as to how much that will translate to, you know, the public discourse, which, you know, obviously, we're trying to do our best to to change that we're doing this.
Adam Rice:Douglas, do you have any thoughts on that?
Douglas Padgett:I mean, this is the million billion trillion dollar question, right? Yeah. If we end up in a trajectory, right, let's say we have no exogenous shocks that all of a sudden hit right. We don't, you know, obviously, if World War Three starts up, obviously, if you know, an asteroid is going to hit the Earth, right? I mean, that that'll be some sort of shock, that just resets the system, right. And then rather than scraps, but let's just say we get a decade like we did from the great financial crisis up until COVID. Right? If we have that sort of trajectory for 10 years, and inflation just keeps pushing higher, and we just have this super hot economy, what happens? That's a great pitch a great question. It's a great question. I am scratching my head because you think at some point there would be a level at which rates could cause the valuation of stocks to be hampered enough that maybe enough layoffs happen but already we've kind of tested the waters there and it doesn't look like that's what's gonna play out. So I think the way in which talked about this on our live stream, because you really did a great job modeling this out. But what's going to happen if we stay on this trajectory is you're going to have the higher interest rates Act is an attractor for, for the wealthy and a repeller at the same time for the poor. And so what you'll end up getting is, it'll look insidious, too, because the way the monitor is to look at this is that oh, look, the wealth of the rich is getting lower. But that's the nominal wealth, right? That's not the real wealth. The real wealth is what you can get with your paycheck throughout the year, right? When the real wealth for the poor is only going to get stretched thinner and thinner in this environment. And it's, it's, this is the scary part from a main street standpoint is is this this attractor, repeller dynamic will continue at every kind of cycle hire to punish the bottom 50% and benefit the asset owners, which again, I don't think we should be encouraging. I know this is coming from a guy who's buying tons of stocks. And that's what I like to do. And I have fun doing it. But it doesn't benefit anyone to constantly be shoveling my savings into stocks. But it is a good life lesson. Look, the way the game is set up today is you buy assets. And that's how you get wealthy. Okay? Is it a bad game? Yes. Is that the game that is put in front of us? Yes. So do what you can to get assets also do what you can to fight to change the game. So we all could just live a better life because of it. But I think that's what's gonna happen, I think you're gonna see the potential negative effects continue to kind of punish the poor, the positive aspects punish, benefit the rich, and then eventually there will be some breaking point where the system just just gets in, you know, kind of some sort of phase shift dynamic that takes place at some point. But I think we could have a screaming, screaming path, assuming the current trends that we're on, stay that way, of course, any shock to the system could happen debt ceiling could happen all you know, I mean, there's a million variables that could all play out that change that, but I think we could just we could see a bizarre, bizarre trend play out and then and then the question is, what are policymakers make of this? What if What if you know, what is what are the academics think of this? What does the finance people think of this? I think the finance people will be the first ones to pick up because they'll have the tools to run the statistical models to run it to make sense of the work that I'm putting out there and say, okay, yeah, there's real alpha here. I don't I don't know if I fully trust it, but it's there. That's probably where it will start. And then hopefully, that can be you know, sent over to policymakers and, and they can start making, you know, the proper decisions with a better framework. And we can we can get somewhere but they have those are my thoughts.
Adam Rice:Awesome. Well, that's great. I think this is probably a good place to cut it. So Douglas, thank you so much. Do you want to repeat where the listeners can find you?
Douglas Padgett:Yeah, YouTube, MMT, macro trader Twitter MMT macro trader? What are those two places you'll find the other and then Patreon as well. patreon.com/mmt macro trader, check us out and drop by the live stream say hi, if you do and, yeah, have some fun with MMT and can understand all things markets and MMT. So yeah. Awesome.
Adam Rice:Douglas, thank you so much, and thank you everybody for listening.