MMT's Godfather Says the US Government Is Spending Like a Drunken Sailor

Joe Weisenthal (0:03)

Bloomberg Audio Studios, podcasts, radio, news.

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:26)

And I'm Tracy Alloway.

Joe Weisenthal (0:27)

Tracy, you know there's that theory, people say it from time to time about, in different contexts, different schools of thought, and kind of gets dismissed as a crankishness sometime, that higher rates can be a contributor to inflation.

Tracy Alloway (0:40)

Yes, yes, and actually, I'm hearing this more and more, interestingly enough. So you used to hear little rumblings of it every once in a while, but I swear, in the past two or three months, a lot of people have been talking about this.

And I guess the basic idea here is, there's always been some question about the efficacy of interest rates in the current inflationary environment. So if you think back to the 2020 period, the idea that we had all these supply disruptions, lots of snarls in transportation and logistics, what are interest rate hikes really going to do in that context, right?

Joe Weisenthal (1:17)

Yeah.

Tracy Alloway (1:17)

And some people even argue that higher interest rates are detrimental for that kind of inflation because you make it harder for people to build out capacity.

Joe Weisenthal (1:26)

Yeah.

Tracy Alloway (1:27)

But what's happening more recently, and I think you're hearing more talk of this, is the idea that higher interest rates in and of themselves can contribute to the inflationary impulse through the interest income channel.

Joe Weisenthal (1:42)

Yeah, absolutely. So right, there's a bunch of people that are on treasuries and then they get a payment, I guess, every month, and that is income into the economy and when you're fighting inflation. That's the more, I think that's one of the arguments for how higher rates can be inflationary. But then there is this sort of like, there is the more agreed upon view that you mentioned, which is that higher rates can constrain investment and contribute to less housing, and that has an inflationary impulse in a time of housing shortage. That seems to be a little less controversial. The connection is clear. But I think regardless, I think, okay, here we are in July of 2024

Inflation has come down a lot.

There are still many stories that could be told a lot about the last four years. And I don't think there are any really economists who have nailed this cycle with some theory or whatever that it's like, yep, they explained how it's all gonna work. There are many, this period, whatever we've experienced over the last four years, will be debated and argued about, and what role did higher rates have in bringing down inflation? Or why did the, will be debated by economists for like 100 years, probably.

Tracy Alloway (2:47)

I find this aspect of our life right now simultaneously exhilarating and terrifying. So it's great that we're learning about how the world works. It's also terrifying that we still aren't entirely sure how interest rates work and what impact they actually have on the economy. But I am very, very interested in digging in to more of this argument, the interest income channel here and the actual push and pull of higher interest rates on inflation. I think we should talk more about it.

Joe Weisenthal (3:16)

Totally. Well, I'm really excited. We do indeed have the perfect guest, someone we've never had on the show before, but he's someone who we get a lot of requests for on Twitter, on the Outlaws Discord, someone we probably should have had on long time ago. We are going to be speaking to a Warren Mosler. He's an economist, former investment manager.

He drives fast race cars in the Virgin Islands. Currently, he's on a bike trip in Croatia. A very cool life.

He is also the originator of what has come to be known as modern monetary theory. So Warren, thank you so much for coming on Outlaws.

Warren Mosler (3:55)

Good to be here and enjoyed listening to the introduction.

Joe Weisenthal (3:57)

How do we do that at all? How do we?

Tracy Alloway (4:00)

We're done here.

Joe Weisenthal (4:01)

Why don't you give us your? Yeah, thanks. That was great. Why don't you give us your summary?

So someone said people. OK, higher rates cause inflation.

I think there's even, you know, there's like a new Fisherian school that I think the Turkish president subscribes to. How would you describe characterize what that means or what's going on?

Warren Mosler (4:23)

Well, I look at what is OK, look at the numbers, I look at the data and I try and make sense of it just just like everyone else. And my narrative has been different from everyone else's, at least up until recently from listening to you.