L. Randall Wray - Modern Money Theory: Intellectual Origins and Policy Implications

Welcome to the international and comparative Law Center seminar series 2015 we're absolutely delighted today to have with us Professor Randall Ray not only professor of Economics at the University of Mississippi Kansas City but also senior scholar at the Lei in uh economic Institute of Bard College uh has a lot of accolades from the past you can go on Wikipedia if you would like to find them today he's going To be talking on money market theory intellectual Origins and policy implications and I would encourage you if you're interested in that you can find that in the

Paul grave dictionary as well as check out his uh primer on money market theory that came out in 2012 and I believe got reissued in 2015 so without further Ado Professor Randall Ray okay well thanks for the invitation and for you coming out I guess we first Started talking about this four years ago it took a long time to arrange uh to make it here and what I uh circulated was an entry I wrote for the new Paul grave dictionary of Economics the idea is to sort of summarize modern money Theory uh for a general

audience um not uh strictly for economists and first I'll just tell you a very brief personal history of this approached economics uh it began in the early 1990s the when uh the internet was relatively new I get we were talking earlier uh Al Gore had invented the internet as you know um a discussion group uh online was created maybe one of the first maybe the first I don't know it was called post keian thought and post canian economics follows John mayard KES and it's what we call a heterodox approach to economics it's outside the mainstream

but all the the top heterodox economists around the World were on this uh discussion group and this guy came on and he started saying things that um on the surface seemed very strange very bizarre but I as I read his comments and thought about him I I could see that he was just using different terminology that a lot of things he were he was saying existed in various branches of heterodox economics and so online uh he would say things and most People respond this is crazy and then a few of us sort of started catching

on say oh yeah that sounds like okay I and Minsky that sounds like George Frederick KN and so on and so he started communicating uh with us and one of the ideas he had um that became very important uh to opening up this new approach to economics is he was a hedge fund manager who specialized in trading bonds and sometime in the early 1980s he said you know the FED sells bonds we Call it monetary policy it's called an open market operation and the treasury sells bonds we call that borrowing we say it's part of

fiscal policy he said functionally they are identical they're the same operation by the government just two different branches the central bank branch and the Treasury Branch but for the non-government sector the impact is exactly the same okay and so when he wrote that it Just opened up our minds we say we've been looking at government Finance wrong okay and virtually all economists have got it wrong so I'll come back to that explain uh why this was so important uh he wrote a little p well a thick pamphlet called Soft currency economics that was the first

publication that started to lay out this approach to um economics and specifically to government Finance and and um then I wrote the book that uh John mentioned understanding modern money in 1998 that came out and so that was the first academic publication of this approach to economics and I we used to meet every year uh with Warren and we would say how many people Now understand what we're talking about you know it took about 5 years to get up to the fingers on one hand and 10 years we were up to we had To use

both hands okay uh it was very rough going very slow um until the blogosphere now just when you go home tonight Google modern money Theory you're going to get literally millions of hits there are thousands of people around the world most of them not in academics okay uh vast majority not economists who could give a pretty good summary of what modern money theory is all about so and there actually are political movements now that call Themselves modern money Theory okay for example in Italy there actually are several rival political movements that all call themselves modern

money Theory um which reminds you of Monty Python right so anyway when I saying it's just it it took off with the um blog of here and uh 2012 I uh wrote a book I call it the primer so it's a modern money primer where I tried to explain it to a non-academic audience and uh that has been updated in for 2015 and I'm told The book is out I don't have a copy because they mailed them all to Kansas City uh but I think it is now for soale let me first summarize the basic

conclusions then I'll very briefly go through what we call history of thought that is the intellectual origins of the ideas uh because actually most of what's in modern money theory is not new it was just forgotten it was lost it was lost over the past 40 to 50 years they got lost uh and then finally the policy Implications so I don't remember how many points there are but I just these are the conclusions where the theory takes us the first is that Sovereign governments issue their own currency and this makes a big difference a sovereign

currency issuer uh can behave much differently from a sovereign currency user you guys are all Users okay Uncle Sam is the issuer it makes a big difference whether you're a user or an issuer The Sovereign government chooses the money of account in the United States called the dollar okay in Canada confusingly they call it the dollar in Australia they call it the dollar in the UK they call it the pound and so on the unit of account The Sovereign then issues a Currency denominated in the same unit of account so in the United States confusingly

we call little green pieces of paper dollars okay we use the same term well one is the currency the other is the unit of account um they impose taxes in the same currency okay so you owe dollar taxes they accept their own currency and payment of taxes okay in the old days you actually would deliver the currency to pay your Taxes nowadays mostly you do it electronically or maybe you write a check prices generally are denominated in the same money of account maybe not all prices but most prices okay most of the time uh contracts

are written in the same money of account and enforced in courts in that money of account usually not always um when you have a sovereign currency there is a spectrum of exchange Rate regime that you can choose them on and what we argue is that a floating exchange rate provides the most domestic policy space you can manage your exchange rate which is what China does and that might reduce your domestic policy space you can Peg your exchange rate which many countries do they Peg to the dollar that further reduces policy space you can adopt a

foreign currency as your Own currency some countries have dollarized so Ecuador adopted the US dollar that severely constrains domestic policy space you can adopt a gold standard uh you can adopt the Euro okay those reduce your domestic policy space so if you want to have maximize your domestic policy space you adopt your own currency and you float okay that will provide a maximum uh domestic policy Space the um problem with fixing your exchange rate is that you need the foreign currency that you have fixed to or if you're Ecuador you actually need to get US

dollar that constrains your domestic policy space space because you have to operate your economy in a way that ensures a flow of dollars into your economy usually this means what you want is a trade surplus if you want to trade surplus you Usually have to adopt some form of austerity you have to keep wages low you have to keep domestic agre demand low so that your population won't buy imports because you're trying to run a positive trade balance that's why it reduces your domestic policy space now a country like China today has an unassailable foreign

currency Reserve $3 trillion of foreign currency even George Soros will not attack them okay and part of the reason why they've accumulated That amount is because George Soros attacks countries that Peg and don't have enough foreign currency Reserve uh George Soros brought down the United Kingdom one guy brought him down they had to abandon their Peg okay um so that is the danger and that is why your domestic policy space is reduced you can't pursue things like full employment policy because full employment could lead to your wages rising and could lead to your population importing

which Reduces your trade surplus someday China will float their currency someday China's trade balance will turn around probably a lot sooner than what most people believe why because they they are allowing their wages to rise they actually have a policy of wage increases and so they're not going to very long be a lowcost producer so they will float their currency in order to protect their domestic policies SP That's a prediction of course and the Inc coms are often wrong but I I think that that is what we're going to see all right uh finally final

topic on Sovereign currency if you issue your own currency you can't run out Uncle Sam can't run out of his own currency he never needs to borrow his own currency and in fact if you think about it borrowing your own currency would make no sense it would be like you've Written an IOU to your neighbor I owe you a cup of sugar and you find out you need another cup of sugar are you going to go try to borrow that IOU back from your neighbor in order to get another cup of sugar no you're going

to write another IOU okay so I'll come back to this but Sovereign countries don't need to borrow their own currency in fact there's no balance sheet operation that you can show me in Which someone borrows back their own I you okay and this is was a Warren Mosers brilliant observation Bond sales are not a borrowing operation there's something else entirely so I'll come back to explain what that is now sometimes countries borrow in foreign currency okay uh and you can borrow foreign currencies again the problem with borrowing foreign currencies is that you have to pay

back in the foreign currency And so that will constrain your domestic policy space so I would say almost always it's a bad idea for governments to issue debt in a foreign currency because that is similar to adopting a fixed exchange rate you're going to have to operate your economy in such a way that you can get the foreign currency to service the debt so it will constrain your policy space okay the second Point taxes Drive the currency this is a Shorthand way of saying that that Sovereign government that chooses a money of account and issues

a currency in that money of account needs to create a demand for the currency the way they do that is by imposing an involuntary obligation on the population the citizens or subjects depending on whether it's a democracy they impose the tax or some other involuntary obligation in order to create a demand for the Currency okay historically the main obligations were fees and fines but from the 19th century forward taxes have become the most important obligation that you have to pay in your nation's own currency from inception if the government announces we're going to have a

new currency we're going to call it the dollar and here I want to buy something from you with Dollars you would ask but why do I want the dollars okay govern says Ah because you have to pay taxes at the end of the year okay the obligation is necessary from inception in order to drive the currency to create a demand for the currency now what we say is that taxes are a sufficient condition they might not be a necessary condition sufficient condition means that if you have to pay the tax in Dollars you will demand

some dollars to pay the tax so it will create a demand for the currency at least up to the amount of the tax obligation taxes might not be necessary to drive the currency okay we can be agnostic on that uh you might be able to come up with another explanation for why people would demand a currency even if there was no obligation that they had to pay in that currency I haven't heard Any the typical answer I get is the dup a dope well I accept currency because I think uh Buffy Bob will accept it

that's dupid dop I think I can pass it along to someone dumber than me I'll accept the currency that's the typical uh explanation for why people accept US Dollars we can dup dopes with it okay that's not satisfying to me I think the reason we accept dollars is because a lot of Americans have to pay taxes in Dollars um but we can say that I taxes at least are sufficient and they might even be necessary in order to drive a demand for the currency um from inception you can't pay your dollar tax unless the government

has provided some dollars what this means is the government needs to spend the dollars so that you can pay taxes in other words the logic tells Us that the spending comes before the government can collect the taxes because you can't pay your taxes until you've got the dollars if the dollars come from government spending the government needs to spend before you can pay your tax so logically the government doesn't spend taxes logically the government spends so you can pay taxes the spending has to come first what that means is taxes Actually don't Finance government spending

okay now of course if the government has has been spending for years and years and years a lot of dollars can accumulate in the hands of the non-government sector okay and so that you have accumulated dollars that you can pay taxes with however they all came from the government spending originally so once we've developed a Monetary economy and there's lots of dollars in circulation then the um this logic becomes less apparent you say hold a second I have a lot of dollars I can pay my tax I don't need to wait for the government to

spend but the government had to spend from inception in order to get the dollars into the economy so that taxes could be paid The Sovereign government that issue oh third one The Sovereign government That issues its own currency cannot be Revenue constrainted because it issues the dollars as it spends if it wants to spend more IT issues more currency it can't be Revenue constrainted um it can't run out of its own currency it does face constraints the main constraint it faces is the resource constraint can run out of resources to Buy it can push up

the prices of resources so too much government spending can cause inflation as people have long argued but it can't cause insolvency it can't cause insolv of the government it can't cause the government to run out so the fourth point is there is no solvency risk for a government that issues its own currency there is no possibility of bankruptcy when President Obama tells us That the US government has run out of currency he is misinformed can't happen the US government can always issue more it's not possible to run out there's no chance that running budget deficits

spending more than tax revenue is going to bankrupt the United States government can't happen because we can always issue more we can always make all payments as they come due the um uh second kind of constraint Is that the government can put constraints on itself the United States has a very bizarre constraint the debt limit okay no other country that I know of has one of these uh so Congress imposes a debt limit on uh the US government and we've had this since 1913 whenever we came up close to the debt limit in the past

Congress almost always really without debate raised the debt limit so it never was an issue it Was a constraint that was never constraining okay uh a few years ago the Republicans decided to make it an issue to try to enforce policy changes that they want by saying we won't approve an increase of the debt limit so it became a big political football and we're going to hit it again okay very soon and so what I'm saying is you can impose a debt limit constraint you can refuse to raise it and you can force the government

to default on its promise to Pay interest on the outstanding government bonds and other promises it can be forced to break its promise to Social Security recipients say sorry we hit the debt limit we can no longer write the checks for your Social Security but that's a self-imposed constraint we can remove the constraint anytime Congress can either uh raise the debt limit or just get rid of the stupid debt limit altogether and say that was a bad idea okay and it was a bad idea and Most other countries haven't imposed this kind of constraint so

what I'm saying is you can impose constraints okay but the market doesn't do it okay there actually is no no reason why the US government can't continue to spend and meet its commitments pay interest to the bond holders and pay social security payments to the retirees uh simply by issuing more currency fifth Sovereign government Doesn't need to borrow and in fact really can't borrow its own IUS um some people uh think that the reason that the government is borrowing is because it needs to finance its deficits but actually the bond sales come after the government

has deficit spend the deficit spending creates the what we call high powered money which is currency plus reserves that is used to buy the government bonds so this was the inside of Warrant Mosler everyone knows that the reason the FED sells bonds is to drain reserves out of the banking system okay this is not controversial everyone accepts this okay it's in every money and banking textbook an open market sale is to drain reserves from the banking system so Warren is sitting there and he's but hold it what happens when the treasury sells bonds it drains

reserves from the banking system exactly the same they are Identical operations just by different branches of government and once he realized that he said then Bond sales are not borrowing operations has nothing to do with borrowing it has to do with draining reserves why do you need to drain the reserves because deficit spending means the government has credited more bank accounts than it debited when the government spends it credits bank accounts nowadays When taxes are paid the government debits bank accounts that means if the government is spending more than taxing it is net crediting bank

accounts it's increasing the recipients bank account and that bank's Reserves at the FED get credited excess reserves in the banking system Drive the overnight interest rate toward zero excess reserves Drive interest Rates down the reason the FED sells bonds is to drain the reserves out so it can keep the overnight rate fed funds rate on target so the purpose of bond sales is to allow the central bank to hit its interest rate target and it doesn't matter whether it's the treasury or the fed the problem for the FED is that normally it has a very

small stock of treasuries if the government is deficit spending over the course of the year it Will be adding dollar for dooll reserves for every dollar of deficits if you think back a couple years ago the budget deficit was $1 trillion a$1 trillion budget deficit will increase Bank Reserves by a trillion dollars dollar for dollar in normal times Banks held about $50 billion in reserves adding a trillion means a massive amount of excess reserves you have to train them out you do that by Bond sales okay so this is Why the FED has to coordinate

with the treasury and say we need you to sell more bonds because we're running out so the treasury will sell bonds uh that drain the reserves out of the system because the central bank doesn't issue bonds okay we get envision different ways of draining the reserves you could have your central bank issue the bonds rather than the treasury the point is it's not a borrowing operation it's part Of monetary policy is to allow the central bank to hit its interest rate target notice the logic here again is the spending comes first then the bond sales

spending goes first then the tax receipts the source of the currency is the government the currency has to come first before you can collect the taxes or sell the bonds in order to drain the currency out of the system um next Point central banks are never Really independent they have to coordinate their operations with the treasury okay there are several reasons for this one I've just gone through every Monday morning the fed and treasury talk okay the FED has a projection of what it thinks will be added to Bank Reserves okay and this depends on

how many people are going to cash their checks from the treasury how many welfare recipients and Social Security recip recipients will Cash their checks this week because that will lead to reserve credits and how many taxes will be paid this week you can imagine the week before April 15 a lot of taxes are paid okay that means a lot of reserves will be drained out of the system you might have to put some in okay which means the FED will buy bonds instead of selling bonds anyway they have to coordinate their operations because the federal

government is by far the largest Economic entity in the United States its impact on Bank Reserves is by far the largest of any entity okay and if they didn't coordinate their operation the FED would be stuck with either adding or draining reserves to offset the treasury by massive amounts every day hundreds of millions of dollars every single day in order to make sure banks have the right amount of reserves um the FED is the treasury's bank modern treasuries don't spend by Bringing wheelbarrows of C cash up to buy the stuff that they're buying from contractors

they don't deliver wheelbarrows of cash to your home if you're a social security recipient they use the banking system okay so the FED is the link between the treasury and the entire banking system the FED makes and receives all payments for the treasury the FED is the treasury's Bank okay and for that reason it can't be independent this idea that Somehow the FED will prevent the treasury from deficit spending by saying no sorry no money in your account today we're going to bounce your checks is not going to happen never has happened never will happen

if the Central Bank started bouncing treasury checks because of insufficient funds the president will call in the Fed and tell them stop doing this you're messing up the payment system okay The credibility of the US government it Doesn't happen so because they are responsible for making and receiving payments uh from the treasury they can't be independent they have to accommodate the treasury and they always do that and the um uh final reason I already went through has to do with the bond sales so they got to coordinate the bond sales and possibly Bond purchases with

the treasury treasury doesn't buy bonds but it retires bonds which has the same Effect as buying bonds has to coordinate with the treasury to make sure banks have the right amount of reserves the only real Independence that central banks have is that they can set the overnight interest rate target without political pressure okay they can't be called into Congress and told what interest rate to set I mean they can be but they are not Congress has given them that Independence so they are free to set the uh overnight interest rate and then the uh chairman

of the FED has to go to Congress sometimes and answer questions about it Congress if it wants to could pass a law and say from now on the FED funds rate will be 1% forever and this is what the FED must do they can do that but they're not likely to do that so they they've granted them that amount of Independence but that's all there is to It okay and I think uh two more points um for every Surplus there has to be a deficit if you think about an economy that just has me and

you if I spend more than my income by accounting identity you must have spent less than yours okay if we look at the uh economy we're actually in for uh because income in the Aggregate has to equal spending in the aggregate it must be true Again by identity that all of the surpluses of households firms and governments are equal to all the deficits run by other households businesses and governments okay so it's very convenient to divide the economy up into sectors and we can divide them up any way we want you know we could have

blond haired people and redhaired people and Blackhaired people and brown haired people the deficits of one of those sectors got to be matched by surpluses of the other ones okay that would be a silly division so what we normally do is we say let's take the private sector households and firms taken together let's take the government sector all levels of government taken together and then let's take the rest of the world okay all other countries taken together okay that's a Convenient um uh breaking up of our economy again this must hold true if one of

those sectors runs a deficit at least one of the others must have a surplus the normal situation for the United States is the private sector taken as a whole runs a surplus spends less than its income and that makes sense why because households generally want to save for the future they're saving for kids college education they're saving to buy a house they're Saving for retirement so nor normally the private sector runs a surplus the government sector taken as a whole almost always runs a deficit okay you can go all the way back to 1789 uh

the US government has run a deficit in all periods except for seven very short periods in which it ran surpluses all other periods it's run deficits okay and the federal government deficits are big enough to more than than offset the surpluses that are Typically run by uh lower levels of government okay so that's the normal situation for the United States and uh for most countries our rest of world sector runs a surplus against the United States since the days of Ronald Reagan okay you you hear about this as a trade deficit and we run a

trade deficit with the rest of the world uh more technically it's the current account deficit our current account deficit is Offset by the rest of the world's current account Surplus they run a surplus against us so take these three things together it balances identically okay I can show you a picture it's a mirror image the surpluses Run by the private sector um as well as by the rest of the world are matched by the deficits of the US government okay since 1983 before that we actually ran current account surpluses but they were pretty small you

can pretty much ignore Them what this means is that it is impossible impossible from accounting for the US private sector to run a surplus and for the US government to run a surplus can't happen okay it could only happen if we ran currently out surpluses but we don't and we're not likely to in the in the not even the near future in the Foreseeable future we're not going to run current GES so if we want our private sector to save which almost everyone thinks is a good idea we must have our government running a deficit

must as I said we've only had seven periods where the US government did not run uh deficits the first six of those were followed by our only six depressions the seventh was under President Clinton followed by a severe recession and then by the Global Financial collapse so I'm not a depression but bad enough deficits are very bad for the US private sector because we achieved them by having the private sector spend more than its income for 10 years the United States uh before 2007 for 10 years the US private sector was spending more than its

income Going deeply into debt okay and in my view this is why we had the collapse the last time the US private sector ran deficits was in 1929 followed by the Great Depression private sector deficits are really hard uh they're very destabilizing so for every Surplus there has to be a deficit um The we can think of it this way the federal government deficit provides the uh private sector service in the United States and in most countries some countries run current account surpluses they are able to run a balanced budget or even a government surplus

without having their private sector deficit spending but countries that either run Balanced trade or current account deficits need their government to be running a deficit that provides the savings for the private sector to accumulate net Financial assets those net Financial assets take the form of currency and government bonds okay so you know in Time Square there used to be this debt Clock they moved it a little bit off Time Square I'm not sure why uh you've all seen it Right you know when I'm talking about the the numbers are just flipping like this it's showing

the outstanding US federal government debt it's supposed to scare the heck out of you okay because it's increasing every minute of every day right except dur years uh you could just as well say here is National savings over our private sector okay uh because the government deficit is creating the private sector savings and so it's not debt it's wealth Government's prad uh creating our net Financial wealth in in the safest form there is us treasuries what the whole world wants that's what our government is doing for us last Point um if you've got your own

currency you can't run out of it you can always afford to spend more this means you can always afford full employment you can always afford to hire The unemployed to create jobs for the unemployed so one of the policy implications of modern money theory is full employment is completely affordable you can't run out the potential danger is it could be inflationary okay so we need to deal with that issue but affordability running out of money as President Obama's claims we ran out of money we would like to do more okay during the global financial crisis

we had a Stimulus package that lasted only two years President Obama said we would like to do more but we just can't afforded we've run out of money the piggy bank is empty this is false could have done a lot more we could have rather than having 25 million people unemployed we could have put them to work we could afford okay so now let me just quickly give the um intellectual foundations of modern money Theory I'm not sure how much this will interest uh you you know Uh dead economists um contribution that they had made

that were forgotten um so the uh the areas that uh modern money theory has adopted are um work in the uh past in the areas of credit credit money What's called the circuitstudio um functional Finance Financial instability hypothesis uh and the state theory of money so just very briefly I'll talk About um each one of those and the the main contributors that we drew on so the um first is uh George Fredick nap uh who wrote a book the state theory of money so so what he argued is that we need to um look at

the role of the state in um choosing the money of account and issuing currency in that uh money of account this was picked up by uh John Mayor Kees before he wrote the general theory he wrote a two volume work called the treaties on money 1930 and uh in that book he explicitly credited nap uh but he also long before that uh nap wrote in German it wasn't translated till 1924 but long before this KES was the editor of the most important economics Journal even though he's a very young man at the time uh The

Economic Journal Uh he wrote a review of two articles published by uh written by the um Queen's Ambassador uh to Washington uh guy named Mitchell inis uh who wrote a book on uh imprisonment called martyr martyrdom in our times he's very opposed to uh using prison to punish and uh beekeeping for the queen I I guess it was her interest uh his only other two Publications but he wrote two articles On money that were published in a banking Law Journal they are the two best things ever written on l in in my opinion clearer than

that KES reviewed the first one 1913 in The Economic Journal in 1914 he said we might quibble with some of the arguments here but the overall argument seems to me to be correct and what inis did was he started off his article saying here's what econom here's the story economists Tell about money and it's the very typical one that is still in every textbook and if any of you took an economics course you heard this before you have Robinson cruso in Friday they're on an island they're bartering fish for coconuts it's very inconvenient so they

decide to use seashells as a medium of exchange so that's supposed to be the story of the origin L and it says that that this is all completely false okay there is no evidence for this and It's completely illogical okay so instead he presents a very different story of money that heavily influenced canes uh in uh the late teens in 1919 uh canes had a perod called his Babylonian Madness investigating what they knew at that time about the development of money in Babylonia okay and uh it is very similar to nap story that it had

to have come from the Authorities so Cain spent this period studying the the earliest money units and he was sort of surprised to find that the earliest money units all of them that we know about always were weight units and they always were grain weight units uh so the Mina the she call every early uh money the pound the L uh the term always was a weight unit and so the hypothesis was that these came out of uh recordkeeping by the Authorities okay uh and so anyway uh kaines picks this up and he says uh

I'm going to quote just very briefly uh the state therefore comes in first of all is the authority of law which enforces the payment of the thing so this is what I'm saying the taxes which corresponds to the name or description in the contracts but it comes in doubly when in addition it claims the right to determine and declare what thing corresponds to the name and to vary its Declaration from time to time when that is to say it claims the right to re-edit the dictionary the right this right is claimed by all modern States

and has been so claimed for some 4,000 years at least so kees is pushing the origins of money back 4,000 years at least into the hands of the authorities not Robinson Cru on Friday okay not it did not come out of markets it wasn't a Replacement for inconvenient barter okay it had to do with authorities who want to move resources to themselves okay um and the uh our understanding of the origins of money is better today than it was in K's time because we've had more work by historians and by anthropologists and uh if anything

canes was um uh too conservative and only pushing it back 4,000 years it looks like it goes back farther than that okay it goes back To before writing in fact now the historians of the development of writing think that writing was invented to keep track of money okay all the earliest writing is about debts and so we're never going to discover the origins of money because we're not going to find you know the record so right today I invented money this is how he did it and so on because money already existed before writing so

There is speculation involved in it but it certainly looks like it came out of the authorities the the best uh explanation that uh uh I know of comes from greerson who was the most uh famous uh expert on coinage coinage by the way is not old coin age only goes back to about 700 BC so money existed long before coins um he argued that it probably came out of the tribal practice uh that in the Case of Germany is called ver Guild and that is the payment of fines so in tribal Society if you injure

somebody you owe the family and there's enforcement of the payment of the fine so the hypothesis is that gradually over time the authorities wanted to get some of that payment of the f and so now we say you pay your debt to society what does it mean you pay the government right you don't pay the victims anymore you pay the government All of this is in inis it's part of this is a critique of imprisonment anyway uh but what does that mean it means money didn't come out of the market it came out of the

penal system it came out of punishment it came out of fees and Fin and then taxes taxes are punishment for what original sin you're born guilty okay so what do we always say you can escape everything except death and taxes right uh there's a lot more you can say about That okay it's all bound up in religion almost all the terms everything everything that has to do with money and debt comes out of religion the first authorities almost certainly were religious religious authorities that enforced these um payments um to themselves so anyway going back to

M what is it it's recordkeeping what is that green piece of paper it's a record what are wooden tally sticks Which is the way most Kings of Europe spent they issued a tally stick it's record keeping it is the the debt of the issuer and this is what inis made very clear all money is debt it's the debt of the issuer okay what do they promise you when they issue debt they promise that you can redeem yourself in payment of that debt back to Them the issuers of debt must take it back okay that is

the promise of every issuer of debt they must take back their own debt in payment so what is currency currency is the debt of the government the government must take it back in payment to the government what is a bank deposit a bank deposit is the uh debt of your bank they must take it back in payment of any debts you have to the bank so you repay your loans with Bank Debt so the same is true for all money what is unique about the state's money is the state can put you into debt okay

you owe them taxes then they say oh here here's my I you you can use this to pay your debt okay so only The Sovereign can put you involuntarily into debt uh in all the other cases you are more or less voluntarily getting getting inent and you can say but hold it I really needed that bank loan right but uh there is at least some voluntariness In you choosing to become indebted to the bank you don't have a choice whether to be indebted to the government you owe taxes so the um uh State's money is

the state's debt coins are the debt of the treasury uh paper money is the debt of the fed and the government H has agreed to accept it back in payment to the um government itself skip over some of these Things when we go around the world today and we go back uh Through Time Kane said 4,000 years at least but probably now we can push that back to 6,000 years ago um the typical case is uh as Charles goodart who worked at the bank of England at and at the treasury at one point um put

it one nation one currency rule this is good heart Rule and it's almost always true when you go back in time you will find that each Nation had its own currency when you go around the World you find it's typically true when the Soviet Union broke up into pieces each piece chose its own currency which is also typical you will find historically exceptions to the rule where countries adopt a foreign currency for domestic use uh you will find today a huge exception to the rule euroland okay so euroland is a big deviation from what we

see around the world and also back uh through history um but these are exceptions to The general rule that um usually we have the state issuing its own currency from inception um in modern economies the state doesn't directly spend the currency as I was saying the Central Bank um stands there to make and receive payments for the treasury so it really will be reserves that are created which are the liability of the FED rather than Green paper notes which is the liability of the fed the Central Bank um stands ready to supply and drain reserves

in order to keep its uh interest rate on Target and this uh idea was adopted in the endogenous money approach from the uh late 1970s uh postans were arguing That central banks can't control the money supply and what they mean by that is the money that is created by Banks they argue That when banks have good customers come in that look creditworthy that want to take out loans what the banks do is they credit their demand deposits which is the bank liability and that the idea that the central bank can constrain that by constraining reserves

is just wrong it doesn't understand the way the central banks actually have to operate if they want to hit an overnight rate Target they have to supply the reserves that The banking system needs if they want the payment system to function um smoothly they have to supply the reserves the banks need for clearing so actually Banks can't con constraint central banks can't constrain the quantity of reserves they need to supply It On Demand in the80s when postan was writing this um this was very much against the mainstream in which the the main mainstream argue Central

Bankers uh can And do control the quantity of money there's something called a deposit multiplier so the banks can multiply the quantity of reserves but the central bank can always control it over time this view That central banks actually can't control the money supply has come to be accepted by um virtually everyone who studies Central Banking and by Central Bankers themselves so for example last year the bank of England put out a piece that says central banks Cannot control the quantity of money what we do is we set interest rates so out of the various

heterodox approaches that modern uh money theory was built on um this piece became widely accepted uh within the past 20 years the other piece is not so widely accepted the uh next um uh early precursor is Aba learner who developed what he called the functional Finance approach and he counterposed this to the Sound Finance approach the sound Finance approach basically sees the government budget as being similar to a household budget and this is you know widely uh accepted you hear politicians all the time saying if I ran my household the way that Uncle Sam runs

his budget I would go broke which is true okay households cannot continually deficit spend okay they will go bankrupt um abaar said but this doesn't Apply to a sovereign government issues its own currency it cannot go bankrupt and in fact it should not run it budget the way a household runs its budget because its interest is the public interest okay and balancing the budget the government budget has no obvious public purpose to it okay the the government can and should um run its budget differently okay and this is what he means by it should be

a functional Finance approach Try to pursue the public interest well what's the public interest Ober said that the two uh most important things the government can do is to pursue Full Employment and relative price stability okay and what that means is that you use the budget in order to achieve full employment if there's unemployment either taxes are too high or spending is too low so you need to adjust those Need to increase spending um and reduce taxes in order to move the economy to Full Employment of course if spending is too high and taxes are

too low you go beyond full employment you get inflation so the solution to that is to uh reduce spending and raise taxes so this is functional finance that is his fiscal policy recommendation his monetary policy recommendation is that if the public has too much Money then the government ought to supply more bonds if the public doesn't have enough money the government ought to supply fewer bonds you can see that this is very similar to what I was arguing before the purpose of bond sales is to drain excess reserves out of the banking system okay the

purpose of bond purchases is to put reserves into the banking system so this is exactly what of a learn was recommending for monetary Policy in other words you want to hit an interest rate target and you make sure the banking system has the right amount of reserves um Beardsley ruml which is a a great name uh was the uh president no sorry the uh name of the office in uh the 1940s was chairman of the Federal Reserve Bank of New York we changed it they're now presidents the chairman of the Federal Reserve Bank of New

York and He's also the father of income tax withholding uh wrote two interesting papers at the end of World War II in 1946 one of them was titled um taxes for Revenue are obsolete the purpose of taxes is not to raise revenue for the government okay he says in the paper World War II has taught us the government doesn't need tax revenue to spend okay how did it teach Us that because during World War II the budget deficit was 25% of GDP okay that's five times bigger than it is now has a percent of GDP

the government was 50% of GDP the government debt ratio was 100% of GDP okay he says we learn in World War II we don't need tax revenue to spend okay um taxes serve other purposes you can use taxes to fight inflation you can use taxes to punish bad behavior you can use taxes to change Behavior you can use taxes to uh Reduce the income of the rich but taxes are not for Revenue okay this is the chairman of the Federal Reserve Bank of New York uh Heyman Minsky uh who was my dissertation advisor uh was

famous for financial instability hypothesis so this is also Incorporated um within modern money Theory the most famous line from Minsky is stability is destabilizing So if the economy appears to be operating in a very stable manner the problem is that people will change their behavior they will assume that it's safe to take more risk as they take more risk the stability disappears and you get a financial crisis okay so in one sense that's the the theory and so by using the the understanding of sovereign currency okay which came from nap inis good heart and so

on uh we were able to to beginning in 1992 uh to write about the coming crisis in Europe land that the way that the Euro was set up by trying to divorce fiscal policy from The Sovereign currency as each country adopted a foreign currency called the Euro we said that um this system will not be able to deal with its first serious financial crisis and then following Minsky we said aha we have our chairman Greenspan and banki famous for eliminating risk okay when Greenspan was The chair of the FED we said oh there's the greenpan

put in other words you can go ahead and take all the risk you want because you know that no matter what happens greens span won't allow anybody to fail Bernan even wrote a paper called the Great moderation Central Bankers know what they're doing now you can trust us therefore there is no risk anymore Financial crises are a thing of the past we're not going to have them anymore Okay so we said you know this is exactly what Miss was talking about the stability will create the instability so we said we're going to have a major

financial crisis compounded by the Clinton budget surpluses that put the private sector so heavily in debt by the deregulation pushed by Greenspan Larry Summers Bob Ruben um we're going to have a massive financial crisis which the US will be able to deal With because we're a sovereign currency euroland will not be able to deal with it they will face a crisis they cannot get out of and so in addition to the creation of the blogosphere being right about these two things you know also um increased The credibility of the um modern money Theory the the

last piece uh in the um uh history of thought that led to the development of modern money theory is the idea of employer of Last Resort so Abner says if there is any unemployment at all it can be eliminated by the government spending more now the problem is that you can get inflation learner thought you get inflation only when you get go beyond full employment now in the 60s he changed his mind on this but writing in the 40s his prescription was just spend more okay the problem is we get inflation long Before we get

to Full Employment and so the government has to cut back its spending raise taxes slow down the economy before we ever get to Full Employment so hman Minsky who's known for financial instability in the 1960s worked to develop a proposal of employer of Last Resort so he argued that only the government can afford to hire all the unemployed and so it must be the government's Responsibility in order to maintain Full Employment and we do that with what we now call a job guarantee you called an employer of Last Resort so what you want to do

is design a new deals style jobs program in which the government takes workers as they are pays them a wage which will become the minimum wage throughout the economy hopefully it's a living Wage and then finds useful things for people to do just as the New Deal jobs program did I I know that you're all young and maybe you don't know too much about this 13 million people were employed in the New Deal jobs program the biggest was the WPA which employed 8 million people uh you can still see the out out put of these

workers all over the country they built thousands of schools they built probably tens of thousands of bridges hundreds of Thousands of miles of Road they uh built public buildings all over the United States they brought a country that was a developing nation into the 20th century it's not an exaggeration to say that they developed America they made America a developer Nation the the New Deal jobs program so this is what Minsky had in mind uh when he talked about it I won't go anymore into the the you know tiny details of how you run the

program uh to make sure That it is not inflationary but Minsky argued this path to Full Employment will not cause inflation whereas just having to government spend more could be inflationary long employment so anyway those are the the foundations to just quickly conclude the policy implications are first we need to stop saying we can't afford things we can always afford them okay uh there probably are a lot of spending uh proposals that are bad ideas okay so we We can always afford to spend but we need to to spend on things that make sense we

need to spend in in a way that is not inflationary um we need to leave enough of the resources for the private pursuit of private interests okay Americans like a small government so I'm not necessarily arguing for a a bigger government than we have now um we need to uh preserve a large private space but it doesn't make Sense to leave resources unemployed if the private sector doesn't want to employ them we ought to be employing them and there are things that the private sector cannot do um such as public infrastructure which is uh M

much of that is not profitable so this needs to be undertaken by the government um the second uh implication is you know we need to stop uh talking about the central bank as if it were um completely independ depent of government It's not and it should not be it's a branch of government uh it has um some uh Independence but every uh Department of government has some Independence we want them to be independent of you know the day-to-day uh uh political games that can be played and it's very good that we insulate our policy makers

from uh that but they are not independent of Congress they were created by Congress they're a creature of Congress and Congress can change the laws if they Don't like what the FED is doing um see else we need to um understand that balance is balance and it would seem like this is an obvious thing to state that at the agre level the Sur is have to equal the deficits but in 1999 there's a the front page of the Wall Street Journal I could show you uh if I had the PowerPoint on the left hand column

there's a graph which shows the Uh government sector running a surplus and they the headline is isn't this great for the first time since 1929 the US government is adding to National saving by running a budget surplus they show the picture then on the right hand side they show the private sector okay and of course it's running a deficit and the headline is isn't it terrible the private sector now is running a deficit reducing National saving okay there's no Mention in either of the Articles to the other article that it's an identity you can't have

the government sector running a surplus without the private sector running a deficit okay so if we understood this a lot of nonsense um would disappear from public debates okay if you like private sector saving and accumulation of wealth then you love budget deficits okay because it's the other side of the coin it's the mirror image of the private sector Savety and so uh we would you know uh I think if people understood this we could change the nature of the debate about deficits and debt and whether government debt is a Bad Thing whether it burdens

the F future generations and all that because all based on not understanding that the balances have to balance that the deficits accumulate to private sector accumulation of wealth which most people think is a um good thing yeah I don't know what time is I have no kind No watch whenever you know well it might be good to take questions so why don't let's thank Rand Ray for so why why don't we do this anyone who needs to leave for a a class or has anything it can leave and we'll go for 10 minutes Randall and

ask whatever you want let's go till 5 till for anybody uh who wants to stay so we got about 12 13 minutes and then we'll cut the video and we'll go there I'm just and what I thought we could do is we could thank You sir we could just sort of like maybe have a few questions and then you could decide how to field it maybe I'll write them now all right does anyone so I've got I'm going to I'll one and then Gordon's got does anyone else want to ask one rich definitely will all

the old professors all of old old professors I'm going to just throw myself in there for feel good about myself so I just have here's here's my Question but we'll just go around so uh and this is speaking as someone who's I wouldn't even say a noice really just learning like for me this talk was beautiful and like putting a lot of things together in a nice package for me so first is one is well so just thinking in terms of you made a statement about a a state cannot go insolvent well what I can

imagine a situation where a state uh dissolves so the state literally stops being a state So that might be a way of talking about insolvency like and that could be due to political pressures that take the form of economic stuff like if if Greece had gone another you know something like that so I'd like to so that's my first question to you how would you engage that and then the uh the second uh the second question I have for you side of three the second is uh this seems like so logical you put this to

someone it's very difficult to think how someone Doesn't at least internalize a number of these points so what is it in the social social epistemology of Economics or something that's stopping people from doing this other than just sort of like humanist arguments of oh you know it's blind or oh it's just corruption or and then my third question for you is uh you talked uh about the idea of taxes as punitive for me just just blew me away to think about the theological nature of that and you talked about how there's a And we talked

there's a ranking of taxes and and the worst type of taxes and and like how that H would you be able to share just a little bit of of that conversation which is fascinating about thinking about how taxes would be levied thank you rord you're up uh how much of a misunder understanding do you think comes from uh well intentional misunderstanding uh I unfortunately or Fortunately sometimes I begin to think unfortunately read a lot of history and I haven't seen much indication uh that people in power really give uh much uh concern to Little Folks

uh they tend to give most of their concerns gaining more wealth and power and uh given the fact that uh you know beginning very early with the Pharaohs claiming to be God Kings and owning the entire Land Of The Nation just wondering really uh how that plays into what you See going on in the current economic uh debate because I'm quite suspicious uh that folks uh who are shown things that are so univocally uh true and obvious and refuse to acknowledge them have got some other motive mine's the World War II example cuz I I

I keep thinking about the third person you're talking about the government surplus and the private sector you also say there's the in the National the rest of the world you know as you mentioned China has this three trillion Surplus so I go back to World War II but for the fact that every other economy and world was destroyed during the war thereby allowing the United States to operate on a tremendous Trade Surplus was if there hadn't been a war theoretically all that debt that we acquired could couldn't you reach a point where a country that

depends on Imported goods to function no longer has a currency that other country will receive and therefore is the equivalent of insolvency because they can't buy no matter how much currency they issue they can't buy the things necessary to continue to function doesn't I mean that third party is is what concerns that's it okay all right I guess I'll try to go in order um so currency sovereignty is only one Dimension of sovereignty right so yeah governments can lose legitimacy and um uh dissolve and disappear um so uh we need uh to have many other

aspects of sovereignty right and currency sovereignty is just one of them it's a very important one because it's the way that States move most of their resources to Themselves there are other ways to do it the draft is one uh and uh charity is another um we you we've used both in the United States uh the draft wasn't too popular and the charity doesn't work I mean every time you file your taxes you have a chance to reduce the government's debt you know I don't know how much the government gets from that I think it's

hilarious uh and I think probably most people do too they never check it and They never contribute anyway so um yes governments can disappear and uh too much spending could be a reason uh so too much spending will cause inflation I don't think that that actually explains the hyperinflation so the the story is always about Weimar and Zimbabwe are that the problem was the government caused hyperinflation I think this is completely false and there are Several good analyses of both of these situations that show that that actually was not the CA the Hy inflation it

will be true that the government will be printing a lot of money and spending a lot why because all the prices are rising really fast and the deficits will be pretty big but that's an effect of very high inflation not the cause of the inflation in both of those cases but government can spend too much uh government can spend on the wrong things Uh taking resources away from the private sector bidding against the private sector causing inflation so that could be a big problem and it could be the reason why they lose legitimacy and maybe

get overthrown or invaded and once you're overthrown or invaded yeah probably the currency is going to be valueless which by the way is uh part of the story of gold standard my uh view is that the the Reason why we went through this period when governments issued gold coins uh was yeah um because it was the the era of um Conquest so getting the gold uh of fighting each other of hiring mercenary armies who were not going to accept IUS because you're fighting for a country first you really could care less about them but second

they could well lose in which case currency would have no value so you demanded gold coins which Couldn't fall below the value of gold so it all made sense right um so anyway yeah if you if you're worried about the the state surviving you're not going to accept I uh well there's less Inc the the study of the Confederacy actually is really interesting because you would think uh that as the Outlook got more and more dire the um uh Confederacy would have had greater and greater trouble issuing Currency and having people accept it and turned

and bonds too turned out not to be true so patriotism may you know offset all that second um obvious yet it seems and I'm not just putting down economists there's a reason for it it seems more obvious to people who haven't studied economics and there's a reason because economics uh the study of Economics um changes the way you view the world and makes it harder to Understand what I'm talking about and so it's much easier to explain all of this to anyone who works in financial markets they're very easy you know they they see it

usually very quickly uh when you say bonds are Reserve drain you think about it for 10 seconds yeah you're right you know because they know they they know how the market Works um economis don't actually know much at all about the markets financial markets about uh Macroeconomics macroeconomics is not taught anymore in the prestigious institutions there aren't any macroeconomist if you um study macroeconomics and at Harvard or MIT your textbook in the macroeconomics course not the micro will be about the representative agent your economy has one guy in it and he's maximizing utility through time

that's macroeconomics now okay so they they don't actually learn any Macroeconomics they don't learn macro accounting and they don't learn balance sheets um it's a chronic problem when when I was Minsky student I would come to to him to try to discuss something and he would say hold a second he's said go go back to your office and go through all the balance sheets then come back and talk to me and very few economists can do a balance sheet it's funny if you uh watch them try to do it I'm talking about even post canian

Heterodox economist get up on the Blackboard put the assets on the right hand side and just it's hilarious um so I think that that is uh part of the problem um then I also related to your question there there probably also reason why they don't want to understand it so I think that that is a big problem um that uh so when you talk to policy makers um it seems Like the all the oper the top operations people at a central bank probably understand all this the in the US we have this sort of strange

uh way that we select the the head of the FED okay so a lot of times these people don't really know much at all about financial markets so you got Ben banki um who I think learned a lot on on the job but going in he didn't know much and it's a strange system where you Select a um uh someone from completely outside the financial sector to head head the head of the financial sector uh we've got um political appointees that are heading the fed and so I think that um they probably really don't understand

much but I also think that part of the problem is in how you explain it and I think that we're guilty for not always being good at explaining it so over 20 Years we've gotten better at explaining it and the um uh and it probably still can be improved a lot when I wrote the first book the understanding modern money book I said sent the draft to Robert H Broner who um I think sold more uh economics books than any other author very uh nice guy he called me up and I was trying to get

him to write a blur for for the book and he told me I can't write a blur for this book he said I'm not saying this wrong he said um you know money is the scariest topic there is and he said and your book is going to scare the hell out of everyone and he was being completely honest right when you hear the federal government spends by issuing currency and can't run out the first reaction from everyone is not oh that's Good we can afford full employment the first reaction is you know Terror let's not

tell anyone right please don't let them know because there's this great fear that the elected representatives will use that information and start spending like crazy okay I think this is completely wrong and it's not because I love politicians I just don't think there's any evidence for this whatsoever I think that the the thing they fear more than Anything is inflation because the population hates inflation and so I think that the knowledge that you could spend more is not going to cause them to go crazy spending more okay and and I'm not trying to argue that

they ought to be spending a lot more uh I think we do need to be careful about inflation and if we decide to spend more we always need to think about how might this impact the rate of Inflation because people hate inflation it it might be a largely irrational fear and so so we can work on that we can try to make people understand that uh actually inflation is not the worst possible um outcome that we could face that actually unemployed resources that lead to economic waste deteriorating families higher crime rates incarceration is much worse

than having inflation of 2 or three percentage points more than what we have Um but that's really not the way people are thinking right now so you don't want to scare and we need to be a lot more careful in how we phrase things depending on who you're talking to so that you don't scare them so they'll be open to understanding what you're trying to say um the about the the people in power um oh well I will come back to the the tax thing Um it's hard to be optimistic I have to admit and

it's very hard to be optimistic about uh the state of democracy and whether our elected representatives actually are trying to do things that benefit the people they represent um I I think you can see places where they are I I'm extremely critical of Obama in lots of areas but I think there have been some areas in which he has Tried to improve things and I think things have improved um I would say even uh from the 1950s when I was a kid to today there's vast Improvement in America I think there are lots of areas

where there hasn't been much improvement and maybe even deterioration poverty is worse today than it was in the ' 50s for example but uh the um socially things have improved tremendously the environment my kids Lived through school is completely different from what I lived through so I think we have improved um so it's not completely Hess I think policy makers have played a positive role in some areas anyway that's completely outside of what I do I'm not a political scientist at all taxes as um punitive well I mean you know nobody wants to pay taxes

um say taxes are the cost of civilization that's what people say I Would say you know if if you want a monetary system we need something to drive it and duping dopes is not going to work I mean if duping dopes will work Bitcoins will succeed because that is a system based strictly on duping dopes so if if Bitcoin succeeds which many people think it will and it will gradually take over and we won't use a dollar anymore okay then duping dopes will drive a monetary system I think This completely wrong I think the dupes

are going to lose um that system will not function uh so anyway we need something to drive the tax system now some taxes uh as we were saying at lunch I think are really bad taxing work is a really bad idea the payroll tax it'd be very hard to think of a worse tax it's not Progressive everyone pays the the same rate up to the cap and then there's no tax at all so if you're high income you Know you can start celebrating I guess if your income's high enough in March or April you don't

pay any more payroll tax okay so it's bad in that sense it taxes work but we want people to work so why are you taxing them it taxes employers who employ people but hold it you want them to employ people so why are we taxing them it favors moving jobs outside America and why would you want to do that it favors replacing people with robots why would you want to do That so it has lots of bad effects so that is a bad tax taxing corporations is a bad idea and you know I'm I'm almost

the only Progressive Economist who thinks that raising the corporate tax would be a bad idea everyone else thinks it's a great idea it's the typical progressive tax uh it's a bad tax again it causes corporations to move out of the United States stes or to cut try to cut special deals give me the tax break and I will build a factory in your Community we ought to just get rid of the tax level the playing field no corporate taxes instead uh if we wanted to we can tax the owners so we impute all of the

re all all the profits to the owners of the corporation and tax them as income okay um the income tax is uh probably not uh terrible tax I think there's better taxes okay uh so I like taxing bads so pollution Alcohol Tobacco uh maybe Financial transactions which is another popular progressive tax um those tax bad behavior ideally they eliminate the bad behavior so you should the goal of a bad tax is to get rid of the behavior so the ideal is to have no Revenue at all so you tax smoking out of existence then there's

no tobacco tax revenue at all okay um the uh ideal tax to drive a currency is a broad-based tax that cannot be Avoid it that's the idea taxing income won't work when you're trying to monetize an economy the European colonizers found that out they went down to Africa you impose an income tax nobody has income they have no incentive to get an income it doesn't work so they said ah we need to tax impos a tax they can't avoid so we have a Hut tax you tax the Huts they got to live somewhere okay it

will drive a currency It's very effective so we could Have a Hut tax or house tax and uh you want to make it Progressive so you make it square F feet you want to make it environmentally friendly you make it cubic feet because you got a heat and cool cubic feet of airspace so I think this is an excellent tax we should have a cubic feet of um housing tax to drive the currency you and finally uh you you don't want to um allow accumulation of family fortunes at least I don't uh dynasties so you

have Inheritance tax uh with a goal of essentially wiping out the inheritance so it should be very high um you you can have a exempt amount a million dollars or whatever but uh to get the high wealth so those are the kinds of taxes that I would advocate so you need to drive it but then again you also want to change of behavior and you want to be Progressive okay last um the rest of world so the you right now in the global economy we have a Handful of international Reserve currencies uh all the dollars

Canadian Australian and American dollars the UK the uh Japanese Yen and increasingly Chinese R&B so these are going to be the global uh currencies for the foreseeable future there is a huge International demand for all of these uh even though Australia is a tiny country you wouldn't think that it was uh an international Reserve currency International Global Pension funds decided to diversify to Include Australia okay and so suddenly there's a huge external demand for the Australian dollar and that makes it possible for all of these countries to import beyond what they export okay and China

is a net exporter but it will change change very soon uh it could be within a year they will change so um countries that face a huge external demand can run a current account deficit for how long as long as the rest of the world once at all okay how long will This go on forever probably not eventually China is going to want to stop net exporting to the US they'll probably that net import from the US uh luxury goods and so uh and vacations in the United States if we we could immediately get that

right all we have to do is make it easier for Chinese to come to America and we could have a start running a trade uh Surplus uh with China it's just a policy Decision um so it will gradually turn around the US will uh gradually move more toward a current account um balance uh are do we face insolvency or the rest of the world suddenly deciding to run out of dollars no we don't face that the the Chinese it looks like they're gradually reducing their accumulation of treasuries and maybe diversifying into some other currencies the

transition Will be slow first because the Chinese realize what will happen to the value of the dollar and to the value of their treasuries if they suddenly try to dump them so they're not going to do that they want to maintain a relatively strong dollar and relatively weaker R&B and that requires that they're very careful and how they unload um the treasuries the uh Dollar will remain the main International Reserve currency for longer than anyone expects that's my prediction the UK pound remained the international currency long after the US took over as the most important

country in the world and the largest economy in the world um the the dollar will remain the dominant currency longer than people expect but there we will come to the date eventually when the dollar will um uh be in demand Globally is that a huge problem no most Americans would think that's a good thing okay the rest of the world is going to want to buy stuff from the United States that's a good thing Americans might have to get jobs they might have to we might have to um you know start working and producing stuff

for domestic consumption I don't see that as a bad thing so I I don't think that we're going to you know wake up one morning And have a crisis I think it will be very gradual our trade um deficit will gradually decline our um uh trading partners standard of living in China and Southeast Asia maybe in India is going to be rising uh so that the um our wages won't be so high relative to theirs as their stand Li goes up so I think it will be a gradual thing the next financial crisis there's going

to be a huge run into the dollar again and I think that will be the pattern we're Going to see for a long time every time there's a crisis the run will be into the dollar not out of it so when we get scared the dollar will be in higher demand not lower demand so I'm not uh worried about a crisis um when the dollar is is replaced by some other currency people think people used to think it would be the Euro which was Laughable because first if you understood the problem with in the Euro

you knew that they were going to have a severe crisis which they could not handle but the the second reason is because for a currency to become an international Reserve currency the rest of the world has to be able to get it you can't get Euros because Euro land as a whole basically runs back balanc trading within Europe you have lots of trading so Germany is a huge Surplus and uh most of the Nations have huge deficits against Germany but taken as a whole EUR land runs small surpluses the only other way to get them

is to borrow them but borrowing the international Reserve currency is a lot less desirable than um earning it by selling uh there was a time when uh London was the international lender and so the the pound really maintained its International Reserve currency through Lending okay but now uh countries are um uh much much prefer to export to get the currency with um globalization of trade and bringing down trade barriers it's much easier to get Curr that way so Euro land is not a possibility China is not a possibility right now China doesn't want that role

I know that some Chinese talk about it and they're trying to get more of their trade denominated R&D but if you're the internation International the Primary International Reserve currency you have to behave in a completely different way when the crisis hit the FED had to originate 2019 trillion in loans 29 trillion 40% of that was to Europe okay is China going to do that no they're they are not prepared to be the international lender of Last Resort so Britain used to do that now it's the US responsibility and so because of that and because we

have a Fed that has Demonstrated its willingness to do it in spite of however much Congress might hate this uh uh you know we proved we will do it and so I think that also uh really strengthens the um place of the dollar as the international Reserve currency if the FedEd said no then maybe uh we could see a move to try to get out of the doll but we didn't do that and and the FED is is doing it again it's continued to do it as your Europe is needed dollars if F has said

Yeah we we'll open that that window again if we need to well I already have more question but let's do this so thank you everyone for being here uh Professor Ray Rand thank you for just taking the time to be with us uh you know Professor Ray's coming to us from New York with a newborn child and he's taking his time out to be here because he had promised a long time ago so it was just very special so so thank you again yeah and Let's