KEVIN MUIR: I wish I had come across MMT before I'd fallen for the Bill Gross kind of German boon short.
ROHAN GREY: I wish the problem that we had today was that it's the politicians who are running the economy too hot. I think what you're seeing around the world is the opposite, actually.
KEVIN MUIR: The main tenets of MMT, the descriptive part about how a modern fiat money based system works, are correct. What you do once you understand those things is a political decision.
ED HARRISON: All right, I'm Ed Harrison for Real Vision. And we're actually going to be talking about Modern Monetary Theory. About a couple of weeks ago, we had an interview on Real Vision with Warren Mosler, who I would describe as the progenitor of Modern Monetary Theory. And there were a lot of questions about that.
So I have two what I would call interested parties in Modern Monetary Theory to talk to us today. So first, we have Kevin Muir, who is the author of The Macro Tourist newsletter and a market strategist. And we also have Rohan Grey, who is a doctoral fellow at Cornell Law School and the president of the Modern Money Network.
So thank you both for coming and talking to us today. Really looking forward to the conversation. Actually, I want to start with you, Kevin, because one of the things that I found really interesting was that Warren Mosler-- actually, when he thought about Modern Monetary Theory, he thought about it as monetary operations. And really, the genesis for him was about understanding the money system that we're in and making money as a result of that.
KEVIN MUIR: Right.
ED HARRISON: So one of the things I wanted to ask you is, you're somewhat sympathetic to MMT. What kind of trades-- what kind of investments are you seeing right now that you think MMT is good at informing you in terms of being able to profit from?
KEVIN MUIR: Well, there's a whole host. Warren highlighted the fact that on the JGBs, which was the killer trade that got the most macro traders, they shorted the JGBs for years and decades and lost lots of money. He said the MMT guys had basically avoided that trade. I think that I wish I had come across MMT before I'd fallen for the Bill Gross kind of German boon short. Because it's kind of ending up being the same trade over and again.
And what I mean by that is the fact that Europe is currently doing an extreme monetary madness with fiscal austerity. And the MMT guys will tell you that that is not going to work. You are not going to get inflation. Yet all the old money guys that are kind of using old textbooks would tell you that, no, it's going to come. This is a great trade. Bill Gross, it kind of knocked him out of the game.
And so there's a perfect example of something that you can avoid. And by understanding MMT, you avoid falling into that trap. And not only that, you know what to look for in terms of when that will turn. And namely, that is once Europe starts spending and once the governments kind of abandon this idea of doing fiscal austerity, that is the point you should be buying European equities and shorting boons. But until then, stay away from it.
ED HARRISON: Well, you mentioned inflation. So Rohan, tell me a little bit about this, because that was one of the big questions that commenters had on the Mosler video, that inflation eventually is going to be a problem. That is, is that at some point, politicians just can't get enough of a stimulus. And they are going to run the economy beyond. It's a real resource constraints.
ROHAN GREY: I wish the problem that we had today was that it's the politicians who are running the economy too hot. I think what you're seeing around the world is the opposite, actually. That most politicians are needlessly engaging in austerity to the point that we're seeing huge lost output, huge lost productivity, and a lost generation of people my age and younger who have no prospects in an economy that is drastically undershooting.
So I'm not so worried about this inflation bias of politicians, other than politicians aren't likely to try and push the interests that they represent. So we see huge tax cuts for certain demographics. We see corporate subsidies for certain industries. We see certain kinds of corruption in grift that we should be dealing with. Those problems are problems that undermine the way the economy should work.
And if we want to deal with inflation, what we really need to be doing is investing in productivity-enhancing investments that include full employment, that include the kinds of technologies that are going to get us to address the climate crisis we're in, things like the student debt cancellation proposals that we've just seen come out today from various politicians in the United States, that are attempts to actually rebuild the base of any productive economy, which is its workers, its people, and its social fabric.
So I think there are ways to deal with inflation. And more importantly--
ED HARRISON: What are those ways?
ROHAN GREY: Well, in order to address it, we need to know what the actual underlying causes of inflation are. So on one hand, there are sources of excess demand-led inflation. But in order to know whether that's a problem that is caused by, and therefore best addressed by, excessive government spending or an excessively loose government budget, we need to look at all the other sources of demand in the economy.
So every time a private bank makes a loan, nobody's standing outside going, what about the inflationary impact? What about the inflationary potential there? Even though that might lay claim on real resources that otherwise could be employed in other ways. When people invest in speculative investments or create new forms of financial instruments that increase balance sheet net worth in ways that could be distortionary, we don't complain about that. We call that innovation.
So if we want to deal with the core causes of price increases, we need to first diagnose where they're coming from. And that could be quite different in different contexts. There are contexts where certain people have too much spending power. We could reduce that. One way to reduce that is through taxes. Another way historically is through savings policies, either voluntary or involuntary savings policies.
Another way is through things like credit guidance and credit controls. We're seeing right now, in places like the United Kingdom, central bankers and politicians are proposing forms of credit guidance that reduce our investment in fossil fuels and increase it in other forms of sustainable energy. So that's an example where we are transforming the direction and scope of private credit and private investment, rather than presuming that everywhere and always, inflation is a result of too much government spending.
Now when it comes to too much government spending, one of the questions we look at is, who thinks certain spending is too much? I think certain spending might be too much on the military or tax breaks for certain demographics. Now, that is a political question, and that's why it needs to be resolved through political processes.
KEVIN MUIR: What Rohan is talking about, in terms of the government is going to go and spend more and that these are political decisions-- back to your first question about how do you go and make adjustments to your portfolio, what does this mean to me as a trader or as an investor-- as more people begin to understand MMT, the nature of your portfolio should change.
One of the things is that we have been stuck in a kind of an environment where we cannot create inflation. And I think it's because we don't understand it. It's because we keep trying to do more and more monetary stimulus instead of understanding that the government does have a role to play. And I think that as MMT becomes more popular and as it gets adopted, you should be adjusting your portfolio, and you should be selling your bonds, and not holding those kind of things, and hopefully, investing in more productive things, like the real economy.
I like to say that maybe we're going to move from an environment where instead of our financial economy going well, we'll have our Main Street economy going. But I'm probably a little bit of a cynic. I've been on Bay Street and Wall Street for too long to know that when politicians figure out that they can spend, I suspect that we are going to spend too much and that eventually, inflation will be a problem.
But having said that, I don't use that as an excuse to not go down these roads. And one of the things that I push back against-- and one of my friends told me this. He says, when a doctor tells you that you should go out and do exercise every day, it will make you a healthier person, nobody goes and says, well, if I go and I do exercise, I'm going to run for 40 kilometers. And I'm going to not drink enough, and I'm going to dehydrate. And it's going to kill me.
Well, the reality is that we need some balance. And just like the exercise in moderate quantities is good, MMT in moderate quantities is good. So I guess that, just, I'm a little bit more of a pragmatist when it comes to that. And I just think that we're going to see a situation where MMT will have effects on financial markets, but they're not all bad.
ROHAN GREY: Yeah, I mean, I could certainly see a world where we move from the major risk being deflationary to one where the major risk is inflationary. I don't think that's necessarily a problem. And I also don't think that necessarily means that the inflation risk is going to manifest or that it's going to lead to sort of hyperinflation and collapse of the dollar. Now, whether 5% inflation in a sustained way, or even 10% or 15% that's stable, is a problem, people might disagree on that, depending on how the underlying structure is set out.
I don't think, for example, that certain politicians, when they choose to make tax cuts, think about the impact on the deficit or inflation. They get what they want for their constituency and then work out how to deal with it on the backend. So for me when it comes to a moderate amount of MMT, I, first of all, don't know if you sort of have to apply MMT itself, rather than apply insights that come from MMT.
But if we're going to go that way, I would call maybe not having the heat death of the planet be a pretty moderate stop. So whatever investments are necessary to transform us to a green economy, that would be a moderate position that I would be happy to stop from. And then we could talk about perhaps where the extremity is on the other side. But let's transform a global economy now, and then let's see where we are on the other side of that, perhaps.
ED HARRISON: And Kevin, you talked a little bit last time when you were talking to Tony Greer on Real Vision about the concept that you look at MMT as separating between the prescriptive and the descriptive. For you, you're much more focused on the descriptive side. Tell me a little bit about that.
KEVIN MUIR: Well, so there's a whole bunch of identities and kind of explanations about how a modern fiat money based system works. And when I started investigating MMT and started to understand what their theories were calling for, I kept saying, boy, that seems to make a lot of sense. I can't find anything wrong with this. I can't find anything wrong with this.
And I've yet to find somebody who said to me, no, this doesn't work. You go look at a lot of the kind of people that push back against MMT, the Steve Keen's of the world, they'll say, yep, that all works. I have some problems with this. But the reality is that the main tenets of MMT, the descriptive part about how a modern fiat money based system works, are correct.
Where I have a little more trouble-- I'm quite not the convert that Rohan is-- is that the next part-- and it's like what you do once you understand those things is a political decision. As a trader, I don't argue what should be. I focus on what is.
ED HARRISON: Right.
KEVIN MUIR: And that's, to me, what's really important. So I love using MMT as kind of helping me understand what is and how it works. And I don't have as many kind of strong feelings as Rohan in terms of what should be. I'll adapt and I'll move my portfolio as those kind of policies get implemented.
ROHAN GREY: And you hear this a lot in debates over MMT. I sort of take a slightly different tack. I understand how you could divide it up that way. But for me, the act of describing something is itself a political or a subjective decision. I could describe you as a sort of middle-aged man who's sitting in a place in New York, or I could describe you with your name and talk about your family and your job. And those would be very different descriptions that would have very different effects.
Now if I described a fire, if I said there's a fire going on right there, that might cause people to change their behavior. So the fact that I'm choosing to emphasize certain things in my description into my presentation has effects that I need to be responsible for.
There was a great line that Joan Robinson used to say that one of the most powerful things you can do in economics is not to change the answer, but to change the question. So to go from, for example, debates about theories of value to what the price of a cup of tea is. And that's a descriptive question, but the act of changing from one question to the other changed the course of economics in the 20th century.
And so I think with MMT, what it does is it asks the right questions that then leads to a different conversation than we've been having. And that's necessarily going to have impacts on the way that we think, the way that we make policy, the way that markets act. And when it comes to the kinds of things that we're talking about here, when you know that gravity exists, that might change your relationship to jumping out a window, right? When you know how climate works, that might change your relationship to engaging in rain dances. So the descriptive also comes with an inherent reshaping of what you consider the possibilities and the merits of doing so.
KEVIN MUIR: But Bill Mitchell always-- or no, it wasn't Bill Mitchell. It's Reynold Ray always says that how our society chooses to behave once we understand that is a political decision. So you've gone and said you believe that we should spend money on the Green Deal and that that is a political decision based upon your morals about what you think we should spend it on. Somebody else might say I think that feeding every hungry kid in America is more important. So aren't those political decisions that are like-- I find too often, MMT is trying to tell us how we should behave politically, instead of focusing on the economics of it.
ROHAN GREY: So I think there's two things. So one is I ascribe to the view that when it comes to the production of ideas, the point is to change the world, not just to interpret it. So we're not just studying this stuff for no reason. There's a reason we're not all here studying snails. It's because the things that we understand here have an effect.
Now people can disagree, and I think this is what Randy and others, without wanting to put words in their mouth, mean when they say it's a political decision, is that we can agree that this is a table and think that there are different uses for that table. But it's important that we all start with the idea that it's a table.
But that doesn't mean that, for example, there might not be things that make sense logically or are more powerful as a result of accepting that descriptive understanding. So for example, if you believe unemployment is something that is a creature of the policy regime by design, any monetary system where you have property rights, contracts, some central authority that excludes people from the ability to subsist on the land without interference, that they are forced into a situation of unemployment and that the sovereign has the ability to generate employment by simply paying people money to do things that are considered valuable, then unemployment has to be seen, then, as a policy choice.
You could argue that we should keep people unemployed. But that's a very different argument then there's no choice but to keep people unemployed. And that is where the difference comes. So when it comes to the Green New Deal, for example, my point of view is if we want the planet not to burn, we have to have a solution that meets the needs of the transformation implied by the science of climate change. We can disagree on how to do that. But either we care about the heat death of the planet, or we don't.
And what MMT shows us is the constraints there are not financial. The constraints there are our political will. They're our capacity economically. And then the question is, do we want the planet to burn or not, or do we want to force people to stay unemployed or not? So I think there's a range of prescriptions, but that the framework itself sets up a very different sort of chessboard than otherwise.
ED HARRISON: When you talk about framework, the interesting bit for me is-- Warren Mosler, in February, he was talking to Bob Murphy, who's an Austrian economist. And in the interview at some point in time, Bob Murphy mentioned something about fiat currency and whether that's a good regime, and warned, without even being prompted-- says he's not so sure it is actually a good monetary regime, his preferable regime.
Two questions fall out of that for me. One is, is it a preferable regime? And two, is MMT even applicable in other currency regimes? Like the gold standard or Bretton Woods as an example.
ROHAN GREY: So I think that the gold standard and Bretton Woods are actually both examples of fiat currency regimes. I think that fiat currency is a system where there's a central legal authority. And so I sort of follow Keynes where he said that money has been a creature of the state for 4,000 years. And the word modern in Modern Monetary Theory is not 20th century or 1971 onwards. It's 4,000 years since we've had a large social system where we have institutions, legal and political institutions, that govern our relationships beyond face to face or kin relationships.