AIPIS 208 - US Taxes Create the Demand and Value for the Dollar with Mike Norman

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It's my pleasure to welcome Mike Norman to the show. You may know his name, he's been in the media quite a bit. He's been on fox for about 10 years I believe.

He is a currency trader and an.

Economist who is a proponent of mmt, that is modern monetary theory. Mike, welcome. How are you?

I'm great, Jason. Thank you for having me on your show.

It's our pleasure. Give our listeners a sense of geography. Where are you located? New York.

Yes, right in New York City, In.

Manhattan, in the Big Apple. Good stuff.

In the Big Apple.

Well, tell us about mmt. What is mmt?

MMT stands for Modern Monetary theory. And I wouldn't even really classify it as it is. It is a school of economic thought and really a description of how our modern financial system and monetary system operates. And not just, it's not just applicable to the United States monetary system, but most of the industrialized world. And what it says or what it explains is that the governments, the states, the authorities, which are the governments, are the creators of money. The money is not linked to anything. There's no gold standard, there's no fixed exchange regime to some other currency. So basically governments are the issuers of money. And the non government, which is us, the public, we are the takers of that money. And the government is not constrained in any way in its capacity to issue that money. I mean, we might put political constraints on ourselves like things like the debt ceiling. And if you want to talk about that at some point, I will. But the government has the power to issue money. And the question is then what gives the money? And we call it fiat money. Right, Money by decree. Congress just decides, hey, we'll raise the debt ceiling or.

We'Ll give 700 billion to the military. Boom, there it is. What gives the money value in a system like that? That would be the obvious question because people would think, well, if you're just, you know, printing money, which is not really an accurate term, but if you want to use that term, printing money, then the money basically would have no value. What imparts value to the money. And MMT explains that when governments levy taxes in any form, it is only. It only accepts their currency, their money, for the settlement of tax liabilities. I mean, you could read, you could look at a dollar bill. It says right on there, you know, for the payment of debts, all debts, public and private. It's really the public. The word public in that statement that's important because everybody knows, you know, if you have a debt to the government, let's say you owe taxes, you have to pay that. If you don't pay that, bad things can happen to you. So that creates a demand for the money. Also things like, you know, fines and fees and licenses, that also creates demand for the money. But basically, taxation is what imparts demand for the money. But let's understand that because the government is the issuer, it does not need to collect taxes to spend, but there has to be taxes in some form in order to create demand for that money. So that. That's basically.

You said it. That's a very interesting thing that you said. The tax system is required to create demand for the money. Can you. That's a fascinating statement. Can you smoke that out a little bit more for us?

Yeah. So, for example, you know, when the government levies taxes and, you know, we have a tax liability that we need to pay, we can only satisfy that tax liability in the government's own currency, in dollars. Right. If you went down to the IRS with, you know, a sack of gold, or if you went down to the IRS with a bunch of euro or a bunch of yen, the IRS would tell you. Or you went to the treasury, let's say the treasury would tell you. That's really nice, Jason, but why don't you go cash that gold in for dollars and give us the dollars, because that's all we accept.

Yeah, go sell the gold to Peter Schiff and give us the dollars.

Exactly.

So what happens is then the demand, and even if there may be some in the society who don't have tax liabilities, but the fact that most of us do in one form or another, it creates a demand for the money. The money is ubiquitous. It is used for transaction. Right. And everybody holds a certain amount of it. And that is, you know, basically how the system functions.

So, yeah, that. That's the way the taxation imparts the value into the money.

Yeah, that's fascinating. So, so as a thought experiment then, Mike, like, if. If we had. If we had the. The system we have now where the government, you know, issues the currency, and there's, you know, there's a central bank and they do their thing together. That they do. And we didn't have an irs. Would it not work? I mean, it seems like it would still work.

It would still work to a degree. But without. Without the government, let's say, draining away some of that currency in the form of taxation or in some other form, then you'd have. The value of the currency would lessen, okay? So when taxes are levied, it creates that demand, and that demand keeps the value of the currency relatively stable. Now, of course, things could fluctuate, but it's within the control of the policymakers of the government as to really the value of that money. I mean, higher taxation generally causes the dollar to appreciate, all right, because it becomes harder to get. Less taxation basically allows the currency to circulate more freely in the economy. You ordinarily have usually a stronger economy. Under that condition, people have more money to consume and invest, and so it can be regulated in that manner. I know a lot of people who are critical of this type of a system. Let's say people who would like to go back on a gold standard or some sort of a fixed exchange rate. The trade off in a system like that is under a gold standard, your money is finite. There is a finite quantity of money. In effect, how does a gold standard work? It limits the quantity of money. You need to have physical gold to back your money. So under a system like this, which we have had, you know, various times throughout history and basically which has never really held up over long periods of time because of the finite nature, you get people who are powerful, connected, influential, who tend to be able to accumulate larger amounts of the money. So when you have a finite. Think of a pizza, you only have a certain number of slices in there. You know, maybe the bigger people get more and the smaller people get less. Under a system of fiat money, the government has the ability to make the national investments and spend in the public purpose to the degree that it wants. I mean, if you think about some of the great things of our country, take the interstate highway system that was created under President Eisenhower, that was financed through deficit spending, and that created real wealth. I mean, the roads and the highways of the nation. Everything that you have, everything that anyone has came to them in one form or another over a highway or a road. So, you know, that's real wealth, that's real capital that brings us the goods and services that we need to consume and use in our everyday lives, which define our level of our Standard of living. Very important to make those investments as a nation. When you have a fixed monetary system, it becomes a little bit harder. You know, under the old system of the gold standard, the government needed gold to back the issuance of money. And if it did not have that gold. What we saw during the period of the 19th century was with such regularity, rolling depressions and recessions almost like clockwork every 10 years just because there wasn't enough money, there wasn't enough money in circulation, there wasn't enough liquidity to keep the economy sustained, to keep people employed. And you had these crashes and these sort of boom and bust cycles with unbelievable regularity during the 19th century when we were on the gold standard.

So are the cycles less severe or less regular now than they were back then? I mean, were they. Because. Because back then you had this fixed system, this kind of closed system, if you will, and we don't have that anymore. So was it, was it worse? I mean, people would complain that there are cycles now and it's bad, but was it worse then?

It was, it was much worse then. It was much worse then. I think between, you know, the early 1800s till about 1913 with the establishment of the Fed, you know, we probably went through a dozen or more major.

Depressions. Really, I mean, we can't even really call them recessions. They were major depression. What's interesting too is that if you look at, I think it was might have been 1907, the panic of 1907. And at that time it was the pre Federal Reserve. And we'll get into talking about the Fed in a second. But that was the pre Federal Reserve. When we had that panic, some of the big financiers of the time, like JP Morgan and some of the bigger banks here in New York, they got together in concert to kind of support the economy, to pump liquidity into the economy. So in effect, even when we did not have the Fed, we saw the big actors in the financial system come together and behave almost like a central bank.

It was like a natural instinct to.

Do that, to be a lender of last resort.

Right?

Yes, yes.

Yeah, very interesting. So this seems like a good argument for big government and, you know, more government intervention in the economy. And it maybe it's not so. So please correct me if I'm wrong there, but if it is, then it seems like, you know, why isn't Bernie Sanders out there talking about mmt? You know, it seems like it would support his position more than it would support like a Reagan position, for example.

Well, Bernie Sanders, you know, he was quite close to the MMT line. As a matter of fact, his, his chief economist, who I know this lady by the name of Stephanie Kelton. She's a professor at University of Missouri at Kansas City.

And that's like a hotbed of MMT teaching and thought. I mean, she was his chief economist. You know, Bernie went only so far with the MMT proposals and ideas. But yeah, he went off course. I mean, he did talk about, he did say things, unfortunately I thought, which, you know, we're not correct, but things about, you know, he wanted to do like let's say free education, but if we give it too much, it's going to bankrupt the country. I wanted Medicare for All, he's still proposing Medicare for All, which I think is a fantastic idea. And I think that's what most people in America want. But you know, you don't say things like it's going to bankrupt the country because that's just patently false. You cannot. I mean, when you talk about a currency issuing nation that spends in its own money and where all of its obligations. And by the way, what is the obligation when we talk about debt, the United States debt, what is that? Right. People don't really have an understanding of what that is. The only liability, the only obligation, the only promise that the government makes to you, to anyone, is that it will accept its own currency for the payment and settlement of tax liabilities. And that is a promise that it can always keep. All right, that's not like a promise of, well, we will pay you back in gold. Because if that, under those conditions, there could arise a situation where the government was insolvent or had an inability to pay you back in gold. But the only true promise, the only true debt that the government makes to anybody, is that it will accept its own currency as the payment for the payment of taxes for the settlement of tax liabilities. And that's a promise that it can always keep. You know, when we talk about the national debt, it is not a debt in the sense that most people think of debt. Like, you know, if you have a debt to the bank or whatever to a creditor, you are not an issuer of currency. You need to get that money or whatever it is to satisfy that debt.

All right?

You have to physically have that to satisfy the debt. The 20 trillion that we hear all the time that's thrown around, that is the sum total of all the spending of the United states government since 1789, since our creation, minus all the money that was taken away in taxes. So like whatever the government spent over that, whatever, you know, 228 years or something like that, minus what was taken away, 20 trillion is held by the citizens and people around the world. So that is not what we owe. That is what we own, okay? That's money we hold on to right now, which has not been turned back in for the payment of taxes and it might never be turned back in.

For the payment of taxes.

That is part of our wealth. That is not a debt. And that wealth is held in the form of a government security simply because the government security. What is a government security? What is a Treasury? A Treasury is a US dollar that pays some interest. They're interchangeable, all right? So we. It's like, it's like if you have a checking account at the bank and you want to earn some interest and you switch it into your savings account to earn some interest, a Treasury is like a savings account of the US government denominated in its own money. So the debt. That's why all these people, these doomsday predictors, people like Schiff who you mentioned, have been talking for so many years, years and years.

And it's why it's never happened, okay? The reason why it's never happened is because it is not a debt in the sense that everyone thinks it's a debt where the government has to go get that resource to pay it back. It is the monopoly issuer of that resource and it could never be insolvent in its own currency. So basically it's $20 trillion that people hold here and around the world that is part of their net wealth. That is part of their financial wealth, right?

So does this only work for the US having a reserve currency or does it work for every. Can every country do this simultaneously? Because it seems like the US is obviously in a very enviable position. You know, when you talk about the Treasuries, I mean, other countries have our Treasuries, so China has our Treasuries. And.

You seem to be saying, well, we never need to default in our own currency because all the treasury is is that instrument that says we'll turn it into dollars or it is dollars really to pay interest. I mean, how does it work on a global scale?

And you know, this is another thing that we hear all the time that, oh, China's financing us and this and that, or Japan, they hold all our debt. You got to understand, like, you know, what comes first, the chicken or the egg? You can only buy a Treasury with dollars, okay? The dollars have to Exist first.

Before anyone can buy a Treasury.

Try to understand this concept. You know, it's not that hard to understand, but it's like filling up a swimming pool. If you want to drain a swimming pool, you got to fill it up first. Right? So if you want to sell Treasuries.

If the government wants to sell Treasuries.

The dollars have to exist first to.

Be able to buy them.

So the fact of the matter is, China is not financing the US by buying Treasuries. China, we are literally financing China by buying their goods, which causes them to earn dollars. And then they take those dollars and just shift them over into an account port called a Treasury. So the dollars have to exist first.

How do the dollars exist? The government spends the dollars into existence through its spending activity. Okay.

When the government spends, it literally creates.

The dollars in the system, and those are the dollars that are used to buy Treasuries.

So it's not like, hey, what if.

Nobody bought our Treasuries?

That could never happen, because the dollars.

Exist before the Treasuries can ever be created and sold. So somebody's going to buy the treasury because it pays an interest rate. Right.

There's always an entire.

The Treasury. It's better for them to own the Treasuries than the dollars because they're going to get greater interest on the Treasuries than they will on the dollars.

Get a little bit more.

Exactly.

Okay? So the dollars existed first.

You understand that? All right, this is very important because.

This is actually a simple concept, but it goes.

Most people don't, you know, go. They don't. They don't get it, or they don't.

Think about it first.

And the same thing. Let's say this, too. The same thing with taxation. Like people say, well, it's my tax dollars that are paying for everything.

Okay?

Like Social Security. It's my tax.

It's not.

Because, look, you cannot. And let's go back to the very original concept, right? You cannot even pay your taxes until you have the dollars to pay them. Right.

And where did the dollars come from? The government has to spend the dollars.

Into the economy first.

Has to create the dollars for you.

To even have the dollar to pay your taxes.

Yeah, yeah. It's draining the. You got to fill the pool before you drain it. I get it. That's it. This is a very interesting theory, Mike, I gotta tell you. Or maybe not theory, as you say, but actual description. Yeah, fair. That description is a better word. But it just makes me think, well, why don't we just raise taxes more and why don't we just spend more money into the economy and everything will be even better?

No, no, it's getting into ideology, it's getting into belief. It's getting into politics. You know, let's face it, Jason, and.

I'm sure you would agree with me.

On this, Most people, they're going to listen to me talking to you, and.

They'Re going to say, this guy Mike Norman is crazy.

He doesn't know what we're talking about. I write out a check to the IRS every year and I pay my taxes. And that's what is the government is using to spend this. Mike Norman is an idiot. He's crazy. So you see what I'm saying? It's a belief system.

This belief system.

Goes back to the days when we were on a gold standard, on a go under a gold standard or a fixed exchange regime where like, we. Our money is fixed to some other currency at some rate of exchange, and.

We need to have that currency all the time to sort of backing our own money under those conditions which have existed for a long time over history.

All of the things that we fear.

Like going bankrupt and insolvency and not having enough money, all those things could happen, okay? But we went off of that. I mean, in 1971, we broke up. We really got off of that. In 1933, FDR took us off the gold standard domestically. But the mentality is still there. You know, I'll tell you about a.

Very interesting exchange that happened.

I think it was back in 2005 when Ron Paul, congressman, the father of Rand Paul, he was still in Congress. He was in a hearing with Alan Greenspan, who was the chairman of the Federal Reserve at the time. And Ron Paul, you know, he's a big gold bug, this Ron Paul. He's always like, we got to go.

Back on the gold standard. We got to go back on the gold. So he asked Greenspan, don't you think.

We ought to go back on the gold standard? And here's what Greenspan said. He said, no, I don't think so. Because anyway, we still behave as if we are. You get that?

We still act even though we have unlimited capacity to make the investments, the national investments. We rebuild our infrastructure, right? Do health care.

Education, basic science and research, all the things that make a great country and a high standard of living. We have the capacity to do that. And by the way, none of that is inflationary, because when you're creating new capital, when you're creating real things, stuff.

A new supply, a greater supply of things, you know, then the prices stay level. I mean they don't go up. Right. If you create more output, even if you, even if it takes more money, if more output is created at the same time, right. The supply grows, the price is not.

Going to go up.

Everybody understands supply and demand. If there's more supply, whatever, bananas in the supermarket, what happens? The price goes down, it doesn't go up. Right.

So we have that capacity. But you asked the question, well, why don't we just do it? We don't just do it because our deeply held beliefs, most people, and I'm sure if you go around and you.

Ask people, and people are going to.

They'Re going to comment on this interview.

They'Re going to write in, they're going to call in whatever and they're going to say this guy Mike Norman's crazy.

But they're going to say that because they're still stuck sort of in that.

Gold standard mentality when they think, you know, we're digging our money up out of the ground and hey, if we're not digging our money up out of the ground, then we're going to end up being Weimar Germany or Zimbabwe. And both of those analogies are completely inapplicable to our situation. I mean you're talking about very rare.

Rare.

You want to know something? Look at Japan. You asked me before, you know, do.

You have to be, yeah, Japan's got mountains of debt, right.

And it's, it's all yen, right.

Japan has literally printed quadrillions of yen. Not even trillions quadri, you can't even imagine the number.

And they're dying to get a little bit of inflation. They're like, we want some inflation, why can't we get. Because they're not, the money's just be just piling up in the banking system. It's not really being spent into use. Okay, same thing. Like remember what happened here in the financial crash in 2007-2009 and the Fed started to engage in all these extraordinary monetary operations.

You know, they started Operation Twist and.

QE and all these people like Schiff.

Again and everybody else and even, let.

Me tell you, even some very, very.

Well known, you know, economists, they were predicting inflation and even hyperinflation. And at the time I said it's never going to happen, it's never going to happen. Because what the Fed was doing really was a gigantic asset swap, right? They were, they were taking these high yielding assets, Treasuries out of the economy they were buying it for themselves. So they were stripping away that income and they were replacing it with reserves in the banking system which earned nothing. And you could actually see in that period of time that income, interest income plunged way down. And it was not an insignificant amount. It was like 200 billion was sucked out of the economy, taken away. That's like a gigantic tax. So when people thought, oh, there's going to be hyperinflation, they didn't understand that what the Fed was actually doing was like a gigantic tax on the economy. And that's why we never, even with.

All that stuff, trillions that they printed.

Whatever you want to say, we never even got economic growth above 3% annually. We kind of crawled along the whole time, you know, because that's exactly what happened. And now when they're going to do the reverse and everybody's freaking out because, oh my God, they're going to, they're going to sell their mountain of treasury. No they're not. They're going to replace those high yielding assets back into the economy, take away the low paying reserves. So this is actually going to be a little bit more inflationary, or way more inflationary, I should say, than their activities and their operations from 2007 until what, 2015.

Yeah, very, very interesting. You know, Mike, just to kind of wrap things up, first of all, you have a YouTube channel. Where can people find that?

Yeah, just YouTube. Michael Norman.

Okay. Michael Norman, it would seem like your view of the future, I just got to ask you what you think is like coming next. You know, your view of the future sounds pretty optimistic, I'm thinking, right? I mean, you believe in the system we have and it seems to be serving us well, it sounds like. Right.

Well, monetarily I would love to see policy move or embrace MMT where we're not there. And I think in spite of all of our efforts in the MMT community over the years, we still have a long way to go to get it into higher policy circles. So from an economic or a monetary standpoint, we're moving slowly in the right direction, but it's agonizingly slow from a geopolitical standpoint.

And we could have a whole other.

Show on this, but I'm very concerned because, you know, the wars, the Russophobia, which I think is just insanity and.

Dangerous, the deep state situation that we have going on here, I mean, that's a whole separate worry. But from an economic point of view, I'm frustrated. Let me be honest, I'm frustrated because these are not hard concepts to Grasp.

And I thought after the crash, you.

Know, we'd start to see more of this, infiltrate into the policy level. But it's been a, it's been a tough slog, you know, and I do everything every day to try to get these concepts and these ideas out there and I'm not going to stop. And I appreciate, you know, you having me on the show to talk about it.

Yeah, fascinating talk. I mean, you know, few of my guests have anything really kind of new, new to say about this stuff. It's kind of like we're rehashing the same thing over and over and, you know, they all have a different take on it and so forth. I know you're not a, you're definitely not a gold bug. Neither am I. You're probably not a cryptocurrency guy, neither am I. But stop me when I'm wrong about any of these. What do you think of, like Harry Dent, for example? You know, he would have said the Japan problem's a demographic problem. You know, for example.

Yeah, his thing, his big thing is demographics.

Right, right.

You know, I don't. What, to me, the Japan problem in a nutshell is that they have sort of embraced this junk western economics where they have convinced themselves that, you know, they're out of money. You know, it's a fascinating thing to watch. I mean, here is a monopolist sovereign currency issuing nation which has all the power and capacity and ability in the world to lift itself up. It's been what, 25 years in this kind of perpetual recession. And all they want to do is try to create inflation. You know, you want growth, okay? There's a difference between inflation and growth. That's another thing. Like these economists, they're like, they're like begging or, you know, so desirous of inflation. You want growth, okay? You don't just want prices to go up because they're down now. You want prices to stay down, but you want growth. There's a difference. And Japan has the ability to do that. But you know, if you listen to their leadership, if you listen to their leaders, both in the, in the central bank and also, you know, all their prime ministers, Shinzo Abe, now it's like, okay, we're going to spend a little bit more money, but we're going to raise taxes at the same time to pay for it. Like they don't understand, like, that's zero. Okay, if I'm the government and if I spend, spend $10, but at the same time I'm taking $10 away from you. In taxes, what is the net increase? It's zero. Zero. So this whole thing. And by the way, you asked me, am I sanguine about the outlook, am I optimistic? You know, I happen to think in this country we're going to make the fatal mistake, and I see it coming. We're going to make the fatal mistake of passing a balanced budget amendment. And basically a balanced budget amendment will put us, that'll make us like Europe with the euro, where it will, it will.

Preclude our capacity to spend and it's going to make it really tough for a lot of people, ironically, probably a lot of people who think it's a good thing. It's so against their interest.

Right, right. You know, I would argue that those who are, and I used to, to be, when I didn't know much in favor of a balanced budget amendment. And like, conceptually, you know, I would say, well, I think the government's spending too much, you know, which you, you address that already. Right, but I, but I would say that, right. Irresponsible government spending, I would be one of those people. But if, try a balanced budget amendment in your own life, you know, and, and see if you can buy a house without going into some debt and, you know, taking some risk, that's what helps you grow. Grow. Leverage is a great tool. Of course, it needs to be respected, not abused. But it's a phenomenal tool. I mean, you can do, you know, you can do things 10 times faster if you get 90% leverage. Right, right. So, you know, it's not all bad. That's growth.

And none of us, by the way, not only is it not all bad, it's good, as you pointed out. In addition, none of us, when we go into debt, we don't issue our own money. So we don't have that, that additional benefit of the monopoly issuer, the issuer of the money, the government. So they're in an even better position. And by the way, it's necessary just because again, if they're going to levy taxes on us, they have to create the dollars for us to be able to pay the taxes. If not, then you have massive unemployment, you have a finite amount of money, but then you have people who have tax liabilities. What happens, you get kind of this cannibalistic economy. I mean, it's almost, you can almost see it happening right now, like with the, you know, it leads to this kind of very acute income inequality that we're seeing now. It leads to mal investment. Like, what are we doing now? Like, I can't even drive my car here in New York, the roads are terrible. But yet, you know, there, there's Wall Street's going crazy. It's all paper transaction. We need the real stuff because that's the stuff we live on. Okay? The stuff we consume, the stuff we use every day. That, that is the definition of our standard of living. I mean, you know, trading stocks, you know, it's nice to have a stock market, but to raise that up as the focal point of the economy when a lot of the rest of the economy needs attention, needs investment, you know, we're basically reducing our standard of living vis a vis the rest of the world, at least vis a vis other countries that are making those investments.

Interesting discussion. Very interesting. Well, I can't wait to check out your YouTube channel and learn more about MMT. Mike Norman, thank you so much for joining us today. Really appreciate, you know, some, some truly new ideas here. I mean, at least new for my show because the people that come on are either on the side of I hate the Fed, be a gold bug type type philosophy, and that one never seems to really work right, or the other side of that equation, which is, you know, spend, spend, spend, and then you have an interesting approach. I really like this MMT stuff. I want to learn more about it. So thank you.

All right, Jason, thanks so much for having me on. It was a pleasure. I really appreciated talking to you.

Yep, pleasure was all mine. Thanks, Mike.

Thank you so much for listening.

Listening.

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