Examining Modern Monetary Theory

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One of the impacts of the pandemic is the multi-trillion-dollar increase in the U.S. federal budget deficit. And for many people, federal budget deficits are a terrible thing that cause all kinds of problems. Well, there's an economic school of thought called Modern Monetary Theory that says we need to look at government budget deficits from monetary sovereign countries like the U.S. in a different way. MMT tries to show that in most instances, federal deficits are good for the economy. And the way that we have thought about them and treated them is often incomplete or inaccurate. And today's guest says, quote, rather than chasing after the goal of a balanced budget, we should be pursuing the promise of harnessing what MMT calls our public money, or sovereign currency, to balance the economy so that prosperity is broadly shared and not concentrated in fewer and fewer hands, end quote. Hey everyone, I'm Steve Sandusky for Barron's Advisor, and welcome to Actionable Intelligence. My guest today is Professor Stephanie Kelton of Stony Brook University. Professor Kelton is a leading scholar of MMT and the author of the bestselling book The Deficit Myth. Now, I know there are some strong opinions on this topic in the financial community, but we're not going to shy away from bringing you important conversations on this show. So let's get started with Professor Stephanie Kelton. Professor Kelton, where I'd like to start here is just to make sure that we all have a common understanding of what modern monetary theory is. So could you take a moment here and just describe what is modern monetary theory?

The place to start is to say that MMT— I'm going to shorten it, I'm going to truncate to the acronym MMT— explains how a sovereign currency works. So then you say, okay, that's great. What's a sovereign currency? How do you define a sovereign currency? And that's really the core sort of set of tenets of MMT. Begin by recognizing that countries that operate with what we call a sovereign currency have expanded policy space. So what's a sovereign currency? Well, we're talking about countries that choose their unit of account. I mean, there is no such thing as a dollar, right? It's a unit of account, a yen, a pound, right? So country that chooses the a unit of account, imposes taxes, fees, fines, and other obligations in their own unique unit of account, in dollars, in yen, in pounds, issues the currency that answers to that name, issues the dollar, issues the British pound, issues the yen, denominates any other obligations that it chooses to issue, government bonds, in its own unit of account. So governments that do those things have what we call a sovereign currency. They are issuing a non-convertible fiat currency. So we're not on a gold standard, we're not on a fixed exchange rate regime, issuing a currency that they don't pledge to convert into something that they could run out of, like gold or another country's currency or something like that, okay? So that's the nature of the monetary system that gives a government broader expanded policy space. So what does it mean? Well, it means you can never run out of your own currency. Now you can never quote unquote run out of money. It means that you can afford to buy whatever is available and for sale in your own unique unit of account. It means that you are not financially constrained the way a household, a private business, or even state, local provinces and so forth are, right? You are not financially constrained means you never have to borrow your own currency from anyone in order to be able to spend. And it means that you can set the interest rate on any obligation, let's say government bonds, that you choose to issue. Okay, final point, that doesn't mean there are no limits. I said that the government is not financially constrained, but there is a constraint. When I say the government can afford to buy whatever is available and for sale in its unique unit of account, I am defining the policy space, right? That is the limit. What is available? What are the real resources that have not been taken up for use by the private sector, right, that are lying around? Think unemployed, idle resources. The government can afford to employ those resources to put them to productive use.

So MMT is one of a wide variety of frameworks that are out there to try and describe how the macroeconomy works. So we've got Keynesian economics, we've got Austrian economics, we've got MMT, we've got a variety of others out there. And so MMT is something that I think maybe in the past 25 years or so has really been more formulated, more rigorous academic research has been done in this area. So what I want to talk about here, you came out with a book called The Deficit Myth, bestseller. And in the book, you talk about 6 myths as it relates to the deficit. So we're not going to go through all 6. I want to just touch on 2 or 3, just get kind of a high-level overview of those. And then I want to ask you a few questions that go into some of these areas like inflation, like setting and pinning interest rates at a certain place, and what are the second and third-order effects of some of these things, and how does MMT deal with that, and how, as a political system here in the US, how do we deal with that? So let's just start with, with one of these myths. And you talk about that the government budget does not operate like a household. So tell me, what do you mean by that? What's the difference there?

Well, the key difference is really that I'm a part of a household, right? And in order to spend, I've got to come up with the financial resources. I've got to earn dollars. I've got to be able to borrow the currency from somewhere if I want to spend more than I currently have access to in terms of cash flow. I might have to sell some assets that I have to liquidate to get cash. I am cash constrained. I face a financial budget constraint. I have to get the currency in order to spend the currency. The federal government is different. As the issuer of the currency, the government has to spend or lend its currency into existence before any of the rest of us can have it to either spend it, pay taxes, buy government bonds. So the government— we reorder or resequence the way that we think about finances. The household has to come up with the money money first before it can spend, the government can commit to spending money that it does not have. And so MMT is providing a descriptive framework, a descriptive analysis of how government finance works. So the mechanics of government finance are when Congress passed the CARES Act, it was effectively ordering up $2.2 trillion from the Federal Reserve. That's how the government always makes its payments. The Fed is the government's fiscal agent, its bank, and the Fed's job is in part to carry out any authorized payment authorized by Congress on behalf of the US Treasury. So in other words, there's no other way for it to work. Government spending always gives rise to newly created US dollars, always. There's no other way to do it. When the government spends, the Fed makes those payments by changing the numbers in a bank account in the upward direction to make the payments. And so that results in the creation of new dollars. It gives birth to new US dollars, if you like.

And then from a descriptive standpoint, MMT says we can't just do that to infinity in terms of creating this new money or changing, you know, adding another zero in a bank account somewhere. We've got this inflation constraint. So talk a little bit about overspending and inflation and what the potential constraint is there.

Right. So let's do the CARES Act. In the CARES Act, Congress said, we want to send almost every American a $1,200 check or prepaid debit card. They went out in different ways, right? Electronic transfer. Some people got a real check in the mail. Some got a prepaid debit card, $1,200. And then in the last bill, the $900 billion, they cut that in half. And they said, well, we'll send $600, right? So you heard people like Senator Rand Paul say, well, if you can do $2,000, why not $5,000? Why not $10,000? You know, I did an interview earlier this morning and what the interviewer said, why not $50,000? So this gets right to your point, Steve, which is there is a limit. Okay. So when the government makes these transfers, when they increase the spending power of most Americans by sending direct cash payments, people have the ability now to go out and spend that money into the economy. As Milton Friedman might might have said. They can go out and chase after some goods and services. Okay? So think of the economy as having a supply constraint. There is only so much productive capacity. Our businesses, producers, right? They can match higher demand with higher supply up until the point that they max out their productive capacity. When they're producing all that it's possible to produce with the workers they have, with the capital machinery with the factories and so forth. If you try to outstrip the economy's capacity to produce by handing people bigger and bigger and more frequent checks, at some point you're going to run into an inflation problem, right? So you heard former Treasury Secretary Larry Summers say, I have some concerns about these $2,000 checks that people were talking about. He said, I think that it runs the risk of overheating the economy. And then there was a lot of pushback against that saying, wait a minute, a one-off payment, you think, in an economy as depressed as this one is, would push us beyond our productive capacity with nearly 20 million people on recurring unemployment? Most economists, I think, did not find that credible, the inflationary threat from a one-off payment of $2,000. But surely there is some limit, right?

Yeah, and I really want to spend some time here talking about the inflation piece because I think that's the angle that really gets so many people up in arms. They believe that if we continue to inject more and more money into the economy, it's going to lead to inflation, it's going to lead to debasing the US dollar, and so on and so forth. So you may have seen this. This was in the New York Times, I believe it was on January 1st. What they were showing was from March of 2020 to November of 2020, if you compare the total personal income, in the US compared to a year before. So basically everything that happened during the pandemic compared to the year before, this data from the New York Times showed the personal income increased by $1 trillion. And then they had another graphic that showed spending decreased by about $500 billion. And so the net increase in savings for people in the US was about $1.5 trillion. And they had another interesting piece in there where they said the total wages and income in the US during the pandemic only declined by $43 billion, because there were a lot of lower-wage people who lost their income, and a lot of higher-wage people who actually made more income. My question is, how much is too much in terms of now, this $1.5 trillion, certainly some of it found its way into assets like stocks, like Bitcoin, like other somewhat scarce assets. So how do we control for these effects of we're trying to help people who really need the help, but because we've got this blunt instrument of sending people money, it's going to have some other side effects that may or may not be desirable? How do we think about that?

If you had the luxury of time, on your side in that moment, you could have put together a relief package that was, let's say, better targeted in many respects, right? And that includes the Paycheck Protection Program, the small business lending, all the way down, right? We've made tweaks to that along the way. But we didn't have the luxury of time. We needed to act and we needed to act quickly. And, you know, sending $1,200 checks to almost every American, for some people, was not the right way to go. Because people who didn't need the help and hadn't had their income negatively impacted from coronavirus and so forth, they were maybe working at home and doing well and hadn't suffered any kind of a pay cut or anything, they were suddenly getting a $1,200 check. Well, that's awful. Well, okay, but you know, what would you have done differently, right, if you had more time? There was no way to target relief only at those who like suffered losses. You had to go a little bit beyond, right? So you took people who lost jobs and we extended unemployment benefits to people who wouldn't have otherwise received them, gig workers and that sort of thing, Uber drivers, right? Now you had unemployment and the federal government topped up the state contribution with another $600 a week. That seemed pretty generous, right? And as you said, there were workers who for the first time in their lives were better off unemployed in financial terms because they had more money than they had when they were working. And so I heard people say things like, for the first time in my life, at the end of the month, I had a little bit left over. I could pay all of my bills and I had a little bit to save. They've never been in that position before. So you talk about the savings that's been accumulated and, you know, what happens, I guess, on the other side of this when the economy starts to more fully open back up and we get the vaccine rolled out out to more and more people, and you have maybe this snapback in terms of spending, and you've got a lot of consumers who are ready to go back, and they've got bank accounts with some cash in it. And I think your question is leading to inflation and the risk of inflationary pressure, if I'm interpreting your question correctly. It is a question of how strong that impulse is to quickly get back out, to unleash consumer demand in a robust way. Everybody wants to take a vacation in because I got my vaccine? Have we protected the hospitality and leisure? Are there going to be enough hotel rooms available? Are businesses going under? Restaurants are failing. So can you book a table at a restaurant? Can you get a seat at the theater when Broadway reopens? Can you get a seat on an airline because we've protected the airline industry? So there's going to be, I think, some pressures in parts of the economy when it comes to seeing some prices move higher inevitably, that's likely to happen, but then it will shake out. And I think, you know, as long as we don't allow the productive capacity of our economy to be permanently damaged, half of all small businesses fail, if we let entire industries, you know, shrink and downsize, and then that snapback comes, then there's much higher inflation risk, I would think, with a sharply reduced productive capacity.

So Fed Chairman Powell has said that the Fed is targeting like at least a 2% inflation rate, and they're probably going to let it run a little bit hotter. As you know, inflation is a tricky thing. I mean, it's complicated. This is a very complicated adaptive system called the economy, and we don't have to just worry about the US economy. We've got the world economy too. So how do we know when inflation is getting too high? How do we know that the Federal Reserve Board or Congress is going to be smart enough and has the right incentives to do what is necessary to prevent inflation from getting too out of control? Because you obviously know very well what happened in the late '70s, early '80s when we had really high inflation and, and Volcker had to dramatically increase interest rates, threw us into a big recession. So how do we think about that? What are the risks that we're running if we're letting inflation run a little bit hot and getting behind the curve in trying to do something about it?

I think that we need a lot of kind of work and humility when it comes to inflation and how policymakers think about responding, because you know this, right? First of all, it's supposed to be the Federal Reserve's job. It's central banks who are supposed to bear responsibility for managing inflation. And as you said, they pick an inflation target. Most central banks have targeted 2%. The Fed has now indicated, well, We're willing to let it go above our 2% target for some period of time. So when we say those things, like the Fed is willing to let inflation run hot, what we're really saying is the Fed is willing to lay off the interest rate button, to not start raising interest rates at the first sign of inflationary pressure. But built into that narrative is, I think, a presumption that the Fed's interest rate button works, that it's connected to something. And in MMT, we have for a very long time questioned that. You mentioned Paul Volcker. Volcker is a great example because Volcker is widely credited with breaking the back of inflation through the later '70s and into the '80s with his very high interest rate policy. And as you say, well, it triggered a recession, But people will say, well, he finally did it. He broke the back of inflation. And there are people who say that that isn't the case at all, that in fact, Volcker's high interest rate policies exacerbated and extended the inflationary pressure, that it fueled inflationary pressures as opposed to choking them off, and that it was actually President Jimmy Carter who deregulated the natural gas industry which then made natural gas more cost competitive with oil because the OPEC oil price shocks cartel had pushed oil prices up. And so it's complicated. What happened in the '70s is complicated. But this idea that central banks can dial inflation up and dial inflation down at will through 25, 50 basis point adjustments in the overnight interest rate, I think is just not borne out been undermined by the evidence over now many decades. You look at what the central bank struggled to do when Bernanke was Fed chair. Now we're talking about trying to hit your own 2% inflation target. This poor guy tried for almost a decade and couldn't hit his own 2% inflation target. You look at Japan, and you see a central bank that struggled for closer to 3 decades to hit its own 2% inflation target. And I think average inflation in Japan has run something like 0.4% over the last 20, 25 years. So it's just not that easy. And people thought QE was inflationary, and if you want to reflate the economy, you just have to do lots and lots of QE because it's money printing, and the helicopters will cause the inflation. It just didn't work. So the point is inflation is a complex and dynamic process. There isn't an economist on earth that you could invite to talk with you who could write down a model for you that would explain inflation in all places and times. There isn't one. So, you know, Daniel Tarullo, who served on the Fed Board of Governors for a number of years, when his term expired and he stepped off the Board of Governors, he went out and gave a speech and he said, look, I'll be honest with you, the Fed does not have a reliable model of inflation. We just simply do not know. So this is where I say humility and hard work. And the last point, and I'll just say very quickly, you know, to fight inflation, you have to know what's driving the inflationary pressures. You don't want a one-size-fits-all policy when so many different things could be giving rise to inflationary pressures. You have to get at the core, what's driving the inflationary pressure.

Well, you made a lot of good important points there. One of them that you said was we don't really have a great model for what causes inflation. And I think that's going to scare some people because they say, well, if the main constraint of the MMT framework is inflation and we don't have a great fully understood model of inflation itself, isn't that a little bit scary?

So we can agree, I think economists agree that you can have demand-pull inflation, which is to say demand outstrips the economy's productive capacity. That's on the economy's inability to keep up. So that is one point. Another point is when we're talking about Congress and government spending and so forth, we have to recognize that government has to share space in the economy with everyone else who wants to spend. And when the private sector is back in the game fully and the American consumer is— we're vaccinated, we're vaccinated and we're ready to go back out and we want to unleash the pent-up demand and so forth, we're going to want to place more of a strain on our economy's productive capacity. To allow that to happen, the government needs to withdraw fiscal support. So it makes perfect sense that at a moment when the private sector is not the one that's driving, right, that we are withdrawing, right, consumer demand and therefore businesses lose customers and they cut back on investment and so forth, government can step in and backfill. Temporarily fill that void. But through time, the composition of spending will change. The consumer will want to take more of the economy's resource capacity, government can take less. And so I'm just saying, recognize that first, all spending carries inflation risk, not just government spending, it's any spending as the economy approaches its full employment capacity constraint. The second point is in some ways more important, which is to say that inflation can arise because of things that happen on the other side, right, on the supply side, cost-push inflation. So when we were talking about the '70s earlier, that wasn't a case of demand-pull inflation, that was stagflation. So you had high inflation alongside very high levels of unemployment, a depressed economy. So the point is You know, let's take, for example, healthcare costs. Suppose the Supreme Court takes up the Affordable Care Act and they decide the Affordable Care Act is unconstitutional. They strike it down, right? So millions of people lose their employer-sponsored health insurance. They lose the protections afforded them in the ACA, pre-existing conditions. So now private health insurance companies are able to price discriminate. 'You got 100 million people with pre-existing conditions. I can charge you more now for your health insurance. I could charge more for pharmaceutical drugs, prescription drugs and medicines and so forth.' So you could imagine, and some people have said that if those protections went away, healthcare premiums could jump by 30, 40% in some cases. So imagine that happening. If healthcare premiums jump 30%, That's going to feed through into headline inflation. That's going to show up in the CPI. That's going to show up in the PCE. You're going to see that, and it's going to look like inflation, right? Because it's one important component of the price index that's gotten a lot more expensive. So my response to that would be, so what do you want to do about it? Do you want the Fed to raise interest rates to fight that kind of inflation? That doesn't make any sense to me, right? People can't afford their health insurance and their prescription medications. So we should raise interest rates? That doesn't make sense. Do you want the government to raise taxes to fight that kind of inflation? That doesn't make sense either. What would make sense to me is negotiating prescription drug prices, right, and doing something to bring down healthcare costs. Single-payer is an obvious option there. But the point is, to fight inflationary pressures, you have to know what's driving them. If it was oil price shocks, it turns out deregulating natural gas helped reduce that inflationary pressure on oil prices. If it's healthcare, there are things you can do to regulate or change the way healthcare is delivered to reduce healthcare inflation.

Does the MMT framework have a way of looking at the role of government? And hopefully I'll try and phrase this well, but we've got some people who say, hey, It's all about capitalism. It's all about letting the free market determine what the prices should be. And the less government intervention in the free market, the better price discovery we're going to have, and things are going to be good. And then there's another side, of course, that says, well, there are certain times when the government needs to step in, that we need to have certain types of regulations, and so on and so forth. How does MMT, or does it even address thinking about that framework or balancing? Like here, you just said, Well, maybe we should have price controls on prescription drug prices. Is that more of a personal opinion, or is that more like an MMT framework that says this is a tool or a lever we could use? We're not prescribing it per se, but we're saying it's something to be considered. How do we think about that balance between free market price discovery versus government stepping in here?

That is not a prescriptive part of MMT per se. You can say that it's a lesson that we should have learned from the episodes in our history, both here in the US and in other parts of the world, where governments took action to fight heightened inflationary pressure. So if inflation was running 5%, 7%, 9%, you can look at what was done in the UK, you can look at what was done here leading up to the Korean War. I mean, there were economists whose jobs it were to get together and to advise policymakers on ways to rein to rein in inflationary pressures. And I'm giving you one example of the kind of thing that was prescribed by economists in the 1950s, for example. So the point is you might use deregulation to deal with some inflationary pressures. You might use a form of regulation to deal with other kinds of inflationary pressures. You might raise or lower a tax. You might adjust spending in some way. You can have triggers in the budget. The automatic stabilizers do a very good job. They can be strengthened to automatically dramatically reduce certain kinds of spending in response to rising inflationary pressure.

So interest rates, you just mentioned, that's one of the levers that we can pull here. So let me give you an example. So if we go back to mid-2007, the 10-year Treasury was yielding about 5%. So if I had $1 million, let's say I'm retired, I've got $1 million, I put it in a 10-year Treasury, I get $50,000 per year of income, I get some Social Security, Maybe I've got some other investments spinning out some income, so I can live okay on that. Now, today, the 10-year Treasury is about 1%. And to get that same $50,000 of income from my Treasuries, I'm going to need $5 million in Treasuries instead of $1 million. How does MMT think about pinning interest rates, suppressing interest rates, combining that with trying to get inflation up? So, we want inflation higher than the interest rates so that we can lower the interest cost on the debt, so on and so forth. So is interest rates just one of the levers? Does it hurt savers by having the low interest rates? How should we think about that?

Well, so MMT does not target interest rates for the purpose of reducing, as you said, like the interest burden on the debt or something like that. That's not the purpose of advocating low, stable interest rates. For MMTers, it's more about I think understanding and respecting the work of someone like Hyman Minsky. So, you know, Minsky, I think, was one of the most important economists of the last century. And I've studied him closely, and I studied under someone who was his student, you know, wrote his graduate dissertation under Minsky and so forth. And look, I think that we basically believe that adjustments in the overnight interest rate are not the best way to try to fine-tune the economy, and that they lead to all sorts of distortions. And you've got entire industries whose job it is to sit around and try to parse the latest speech from the Fed chair, you know, which way are rates headed, and did Janet Yellen wear the brooch on the left side or the right side, because that's going to tell us whether rates are going to stay, you know, where they are or move higher. We just do not think, first of all, that interest rates are a very powerful and reliable tool. And it's a problem because we have relied for decades now on central banks to basically take the economic steering wheel. You drive is what Congress has said to the Fed. You drive. You have a dual mandate. Your job is to give us a good economy. We want an economy with high levels of employment and low levels of inflation. Go get 'em, tiger. And tiger has this one tool,, right, the overnight interest rate. And somehow by moving this one price in the entire economy, they are supposed to be able to steer the economic ship through turbulent and good times. It doesn't make sense. For another reason, we think that it's quite possible that the interest rate transmission mechanism doesn't work the way almost everyone thinks it works, which is to say When the Fed wants to slow the economy down, they raise interest rates. When they want to heat it up, they cut interest rates. Well, do we have good evidence that that works? Look at Europe, look at Japan, 3 decades of leaving interest rates near zero, negative interest rates at the policy end, the 10 years at zero because that's where the Bank of Japan wants it. Where is this robust boom in capital expenditure and so forth? What are low interest rates doing? Conversely, We think raising interest rates is the way to bring down inflation. I mentioned earlier the Volcker period, and there was a belief then, and even in the 1960s with high interest rates, people believed that the high interest rate policy was itself fueling the inflation problem. Why? Well, for one thing, when businesses borrow to finance their productive enterprises, they have borrowed money that they have to repay. If the central bank is raising interest rates, rates and firms are rolling over debt at higher and higher interest rates, they may raise prices to compensate for the higher cost in the same way they would raise prices if wages were going up to protect their profit margins. So raising interest rates can feed through into higher prices as firms raise prices as a form of a markup over the costs. Another thing is that interest results in the payment of interest income. And that's what you were talking about. What about these savers who used to get $50,000 a year and now they're getting $5,000 or whatever? What about them? Well, think about that. If the interest rates are going up because central bank's raising rates and government is rolling over bonds and now borrowing and paying higher interest rates, that's higher interest income to someone. So if you look at the amount of interest interest payments that the government makes annually, $350 billion, $400 billion, that's all income to bondholders. So to the extent that bondholders spend out of some of their interest income, it's another way to fuel spending and add to inflationary pressures through higher and higher interest rates. So I know it's a long answer, but the point is, we are so accustomed to thinking that that higher interest rates are the way to fight inflation. And what I'm saying is MMT thinks about the transmission mechanism to allow that higher interest rates might actually push inflation higher, at least in some cases. Low interest rates do the opposite. They deprive bondholders of as much income. And so you could actually slow spending through that channel. I think the bottom line is, what is the public purpose of allowing people to convert their dollars into interest-bearing dollars, which is what government bonds are. It's an interest-bearing government obligation. It's an interest-bearing dollar. There's no risk. There's no default risk associated with these. So you get a reward, you get return, but you don't have to take risk. So what is the public purpose in offering an alternative financial instrument, government securities, and compensating bondholders with risk-free return. Maybe there is one. Maybe there's a good reason that we do it so that people can have access to safe assets and diversified portfolios and have some income support and so forth. Maybe, maybe, but it's complicated.

It is. I mean, if you decide we're going to get rid of government securities, then there goes the whole bedrock of, you know, portfolio theory and based on the risk-free interest rate and so on and so forth. But the other thing that happens too when we have we have these really low interest rates, as you well know, is that feeds into these models for stock prices. And when interest rates are so low, the models say, oh, well, we can justify much higher stock prices, much higher multiples. And so then that has a second or third-order effect of the people that own those assets get a lot wealthier than the people that don't own those assets. So does MMT— is there a normalized interest rate? Because we know, what was it, a couple of years ago when the Fed tried to raise interest rates, the stock market coughed up and dropped about 18% or 20% in a short period of time. So, do you ever see a point where we will have higher interest rates again, or will we foresee 0% to 1% interest rates for infinity?

I think that central banks really hope to be able to raise interest rates. I think that the narrative has been the central banks have conditioned market participants to expect rates to remain low. For some period of time. That's clear. We don't expect to see rates moving higher through 2021, through 2022. By 2023, we may begin to see liftoff from zero, that kind of a thing. They definitely want to do that. The bottom line is, well, a lot I've said before. They want to lift off. Why? Well, they want to lift off in part because it does something they call normalizing. It doesn't feel normal in spite of the fact that interest rates have been at or very near zero for about a decade. We got away and now we're back again. At what point does something become normal? How long do you have to live at zero if you're Japan before zero is normal? But central banks want to "normalize," they want to push rates up. Why? Well, so that they have room to cut if the economy begins to sputter, and they have something that they think can be effective against that in the future. It's going to be very complicated. I do not know whether we're going to get significantly away from zero in my adult lifetime. It might well be that central banks eventually arrive at a position not unlike that of MMT and say, look, there are a whole lot of other things that we can do as policymakers with monetary policy, with a different and expanded set of tools, that the overnight interest rate isn't our only option, and maybe it's not the best option. And so if we're not moving that thing around as our primary policy lever, then maybe that's okay. And maybe rates at the very short end stay low, but we have an expanded toolkit. And, you know, I didn't say eliminate Treasuries, but if we did, as you say, you know, we have talked about things like you could allow central banks to issue the securities. Instead of having Treasury do it, let the central bank do it. And then they could set rates across the yield curve. You could park your money in very safe Fed accounts that the Fed manages and sets the interest rate on. So there are other ways to think about policymaking going forward.

Trey Lockerbie: So one other topic that I just want to touch on here and be respectful of your time is is with interest rates so low and with MMT as a framework, basically saying there's a lot more policy space on the fiscal side, as long as we don't have inflation, some people would certainly argue that with the cost of money so low, that the hurdle rate for businesses to stay in business is not very high. And so we end up with a lot of zombie companies. And I think maybe we've seen this in Japan, Japan. We've got some here in the United States. So how is that constructive and productive for our economy if we let these zombie companies just limp along because the cost of capital is so low, and we don't really allow creative destruction to take place? So how should we be thinking about that in an MMT framework?

There are other ways to regulate the availability of credit as well. I mean, you can say we're going to— then we're talking about private credit, right? So I want to build a giant high-rise in New York City with, you know, luxury apartments or condos that are multi-multi-million dollar, and I'm catering to an elite group of Russian oligarchs or whatever, right? But that's my investment. Now, might we say that that is not the best use of the economy's real resource? I'm not even talking about the financial resources here, right? I'm talking about the use of real resources, the land, the raw materials involved in the production of all that and so forth. So look, you can decide at some level what you're willing to backstop in terms of the financial market with lending and so forth. So you can say there are certain types of loans that we're going to get more aggressive on. They're going to be higher interest loans. If you want to engage in this kind of speculative thing or that kind of a thing, you could do that during the run-up in subprime. We could have done those sorts of things in commercial real estate and the savings and loan crisis and so forth. So there are ways to apply pressure when you see activities taking place that you think are not in the interest of serving the public purpose or something, but you're not going to eliminate, I think, all entrepreneurial activity that results in speculative endeavors and zombie—

Well, Professor, is there anything else that you want to share here that we haven't talked about? I know I could talk to you for hours. Hours about this stuff.

I'm just thinking forward-looking, you know, and I think that we touched on it just a little bit about how much more, let's say, fiscal support Congress is going to end up providing. We've all heard the soon-to-be president talk about how the last relief package was a down payment and that the expectation is that now with, you know, Democrats controlling both the House and the Senate, that they're going to come back and they're going to do another probably relief package because I think the expectation is that by March, some of the support will again start to expire and probably the economy is not going to be where we want it. And so we're going to have to come back in and help those that remain unemployed and that sort of a thing. But beyond that, beyond just the immediate relief, is the talk of, you know, the recovery spending. How do you lay a foundation for a sustainable recovery? Because, you know, what we had in place over the summer was this thing that a lot of economists were describing as a K-shaped recovery, this very uneven, bifurcated economic recovery that was leaving tens of millions of people behind, and indeed their conditions were deteriorating while others were, you know, doing fine and in many cases doing extremely well. So what is that what does that recovery package look like? And can people sort of breathe through the moment as we see the deficit remaining large, as we see the increase in the national debt? Will we be able to learn the lessons, I think, of the last economic downturn, which were that we pulled fiscal support far too early, and as a result, we ended up with what you started the conversation with, talking about a very anemic, long, sluggish recovery. Can we do better this time, right? Can we overcome the deficit myths and allow ourselves to really commit to providing the fiscal support to get a good foundation in place so that the private sector can recover and it can be an even recovery, right? Not uneven, but a more inclusive recovery and then at that point, you will see the fiscal support just automatically start to fade away because the necessity will disappear. So that's what concerns me, and I'm optimistic that we'll do better this time.

Well, Professor Kelton, thank you for taking some time here to be on the show. I appreciate it. And your new book, The Deficit Myth, of course you can find that anywhere at your favorite bookstore or online, and would encourage all of you to check it out.

Well, thanks very much, Steve. Thanks for having me.

My key takeaway from my conversation with Professor Kelton is the importance of monitoring inflation and trying to understand what causes it and what you can do to prevent it from spinning out of control, because keeping inflation at bay is central to MMT. And if you get sideways with it, then this budget deficit is a much bigger issue. Now, there's so much more we could we could have talked about here. But what I hope is that this conversation sparked your interest to go out and get her book, The Deficit Myth, so that you can learn more about this framework and what it means to government policy and ultimately to the growth of the economy and the financial markets. All right, that's all for today. So make sure that you like and share this podcast through your favorite social platform. And for more great podcasts, visit us at barons.com/podcast. Podcast. Take care and be safe.

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