Bob Murphy, chief economist at Infineo and longtime economic maverick, challenges the conventional narrative by explaining why borrowing might be smarter than just printing money, how interest rates actually signal economic trade-offs, and what all of this means for the future of the US dollar.
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Transcript
Ben Nadelstein:
Welcome back to the Gold Exchange podcast. My name is Ben Nadelstein. I am joined today by my friend Bob Murphy, Senior Fellow at the Mises Institute, the Chief Economist at Infineo, and previous guest of the Gold Exchange podcast, debating Brent Johnson on the Dollar Milkshake Theory and how investors can think about the threat of de-dollarization. Bob, welcome back to the show.
Bob Murphy:
Thanks for having me, Ben. Yeah, I forgot about that. That was a good discussion we had. I think we really moved the ball down the field, as they say.
Ben Nadelstein:
Well, Bob, today, hopefully we can move the ball down the field on something called Modern Monetary Theory, or often MMT, and as well discuss gold for our audience. Bob, let’s jump right in. For people who haven’t heard of Modern Monetary Theory, the only thing they may know is that these people just want to print a lot of money, and don’t they know that, Bob, that’s going to create inflation situation. When you hear this argument or this critique against MMT, what do you say?
Bob Murphy:
I say, number one, I understand why that would be the reaction, and I definitely agree. That’s one of my main concerns and why I personally spend so much time to being the MMT folks is that I think they are leading the public to believe that, oh, because the government has access to this printing press, that solves a lot of our problems, and we can get all these nice goodies like a Green New deal and universal health care and all these other things that a lot of the progressive leftists want, and there’s not going to be pain. But having said that, I then caution the critics and say, be careful, because if that’s what you do, is go around saying, oh, money printer, go bur, and make it sound like that’s really all they’re saying, I think that leaves you open to looking like you’re misleading the public yourself or just you don’t know what you’re talking about because the MMT people will periodically really say, Now, hey, everybody, just to be clear, we admit the printing press isn’t magic, and there’s a real resource constraint. And all we’re saying is, they argue, that the government doesn’t need to find money to fund programs.
That’s not the issue. It’s just if they create too much money, then that might cause unacceptably high, they would say, inflation. I think you and I, Ben, would be clear and say, price inflation or consumer price inflation to be even more specific. So that’s the way I’d handle that. But as to say, yes, I agree, in general, that’s the vibe you get. But to be clear, the MMT people do occasionally say, hey, inflation is an issue. And so it’s not just that print money and nothing bad could ever possibly happen.
Ben Nadelstein:
Yeah, in general, I like Brian Kaplin’s use of something that he calls the Ideological Turing Test, which is, do you think you could accurately describe your debate opponent’s worldview to the point where someone of their own supporters, if not knowing that it was you espousing the views, would believe that you’re a genuine believer. I caution people and advise people to think about that ideological Turing test. Why don’t I be our classic MMT advocate and say, Bob, what you’re missing is, MMT is simply an accurate description of how our monetary system functions. I’m not necessarily pro or against. I’m just giving an accurate, neutral understanding of today’s monetary functions. It’s just not true that the government is constrained by some deficits or debt by any means. What is the problem is a real resource constraint. What do you think about the fact that MMT is simply just a neutral description of today’s monetary system?
Bob Murphy:
Okay, so I have a two-prong response. First, a more pedantic quibble is that, ironically, even though you’re right, Ben, that that is a standard MMT card, is they just say, Hey, this is just math. This is just accounting. I’m sorry that arithmetic bothers you guys so much. That’s a very good fallback to have. They say, Oh, you guys think that the world is still on a gold standard or something. Get it with the program. So that’s a very effective rhetorical move to make it look like we’re just obsolete, we being like hard money types. But the quibble I have, and then I’ll get into the more substantive objection to that framing, The quibble I have is that if you go read MMT, even their books, like Stephanie Kelton’s The Deficit Myth, which was a huge book in their genre, or you go watch their documentaries, or certainly if you watch MMT people out in the field arguing on Twitter and whatnot, not. They say things about this is how it works when the government buys things that’s just not true. For example, just for people, I’m not just attacking vague notions here. So Kelton, in her book saying this is what happens when the government wants to go buy a bunch of F-35s is that the treasury instructs the Federal Reserve to just mark up the accounts of Lockheed Martin or whoever the defense contractor is, and that’s how it works.
And so her point is, see, the government doesn’t need to go get the money from the public through taxing or borrowing. This is how it happens. And so my objection to that is, I mean, yeah, but that’s only correct insofar as when I go to the grocery store and buy things, if I slide my debit card, I instruct Bank of America to mark up the checking account of Walmart. And people would say, But only if you have enough money in your checking account, will they obey you? And I’m right, and that’s exactly what would happen with the Fed and the Treasury right now. So I don’t want to die on that hill because Congress could change the rules. But And it has been the rule, I think since the early 1980s, they codified it. So right now, if the treasury tried to spend more than was in the treasury’s checking account, the Fed is not supposed to authorize that. They’re supposed to say, No, you don’t have enough in there that check would bounce. Okay, so that’s the sense in which I’m saying the MMT people, when they’re sitting there just getting in the nuts and bolts, and we’re just driving the plumbing of how financial transactions work with monetary sovereigns like the US government, what they’re saying is wrong, or at least it’s very misleading.
Bob Murphy:
If you didn’t already independently know how it worked, you would read their account and walk away thinking the world was different from what it is. But again, that’s more of a pedantic thing because, again, economically, commerce could just change the rule, so that’s fine. My more substantive critique is free market economy Economists have known, since the 1800s at least, that there’s three ways the government can finance an expenditure. They can either tax the public, which is pretty explicit how they’re financing it. They can borrow, which is deferred taxation, or they can print money, which is, I would say, a hidden tax. And that’s the way economists often describes. What I just said, that’s Murray Rothbard goes over that in his 1962 treat as man, economy, and state. So this is standard stuff that’s been around for decades, at least, in terms of explicitly saying these are the three ways, and it’s all really about the real resources, and this is the three institutional ways that the government can get access to those resources. And so what does it mean to say the printing money is hidden legislation. Obviously, it’s just saying, yeah, if the government wants to build a bridge and they don’t tax people or borrow and they just print the money to do it, the public still pays for it in the sense that now prices are higher than they otherwise would have been.
So people who have dollars in nominated assets, that’s not worth as much. So the public has still been made poorer in order to divert those real resources away to go build a bridge, whether it’s because they taxed it and you saw your paycheck literally go down because the tax bill was higher or your paycheck was the same in nominal terms, you still got paid the same number of dollars, but now you went to the grocery store and those dollars don’t go as far. Either way, you’re still paying for the bridge. All right? So I’m saying the MMT is coming along and saying, Oh, no, guys, it’s not a matter of the government being able to to get control of those dollar bills. The real issue with government spending is if they push it too much, then prices will be… We already knew that. You know what I mean? It’s like a shell game. Anyway, so my point is that’s not bringing anything to the conversation. And like I said, so either they’re not contributing anything, and it’s just a waste of people’s time. But I think more insidiously, I think it leads the public to believe that, oh, now there’s this new reservoir of spending that we can tap that the fuddy-duddy fiscal Hawk economist didn’t know about or kept hidden from us, that we had this reservoir over here that we could use to finance the bridge that way, when no, we always knew you could print money.
And the point is, printing money doesn’t create more steel and rubber in labor hours.
Ben Nadelstein:
Another point that people in this camp make is, well, Bob, you don’t understand. When the government sells bonds, it’s not really going deeper into debt. It’s just changing the composition of federal obligations. There’s fewer Federal Reserve liabilities, which are called cash, usually, and more treasury liabilities. Isn’t this important if the general public thinks, Oh, dear, we’re going deeper into debt, when they don’t even realize that the cash that they have in their hand is also a liability. So isn’t that an important way to frame these questions?
Bob Murphy:
Okay, yeah. Great question. And that’s, again, Ben, I love your podcast because we really take stuff much deeper than it happens in other discussions. Okay, so just related to that, let me give another way that Kelton frames it. For folks to know, Stephanie Kelton is probably the leading academic economist representing the MMT camp. She had been an advisor to the Bernie Sanders campaign, I think two times ago when he ran. Again, she has books and so forth. The documentary, Finding the Money, she was the star of that for people who are familiar with that one. Anyway, a thing she did on Twitter in the last six months is she said that it’s ironic when people freak out about the government going deeper into debt because I say to them, all that’s really happening is you’re changing your dollar assets, you’re moving it from your checking account with the Fed to your savings account with the Fed or the treasury. Why is that a big deal? You’re just changing which account you’re holding your asset in. She did it like a dialog form, like me, saying that, and then them, we don’t understand what that means, and then her saying me, that’s the problem.
Anyway, so what does she mean by that is just like you’re saying, Ben, the idea is, oh, when the government, let’s say the government creates a billion dollars in new treasury securities. The treasury issues those, and how do people in the private sector get government debt? They have to give US dollars to buy it, right? You can buy anything. You got to use dollars. So that transaction in and of itself, where the treasury sells a new billion dollars of securities into the market, and then the people in the market hand over through their checking account transactions or whatever, a billion dollars in US dollars. Her point is that doesn’t change the total indebtedness of the US Treasury plus the Fed if you view it as a consolidated entity. And that’s a standard thing that the MMT people do is they link the Treasury and the Fed as one unified accounting thing, which is fine. And I was like, Okay, that’s fine on its own terms. Yep, that It’s true, but when we worry about the government going deeper into debt, if the government is going to, Oh, the government right now, the deficit’s whatever, $2 trillion this year.
What that means is the government is spending $2 trillion more than it took in. It’s not just issuing $2 trillion in new debt, getting that money, and then not spending it. It’s spending it. That’s the whole point. That’s why they have to float new bonds is to cover spending that they don’t have the tax receipts to pay for. So the analogy I use on that is if the parents are going through the mail and they see a credit card bill for their teenage kid, and they open it, and they see he took out a $10,000 cash advance last month. They’re like, Oh, my God, what did he do? And they run in, What are you doing? You’re $10,000 in debt. And a kid opens up his closet, and he’s got $10,000 in cash sitting there. He goes, No, what? It was just a swap. My balance sheet’s the same. And so, yeah, the parents would be relieved, and the kid would say, These people walking around worrying about credit card debt when obviously that doesn’t change my fiscal position at all. You could see, well, yeah, because when people worry about excessive credit card debt, they mean you charge things to finance purchase.
It’s not that you just accuse accumulated cash and sat on it. We agree, if that’s all you did, that by itself wouldn’t be so destructive. So, yeah, likewise, what the MMT people are proving with these cute little accounting demonstrations is if the treasury issued a billion dollars in new debt and then got a billion dollars in cash and didn’t spend it on anything, that actually wouldn’t change the fiscal position of the US government plus Fed. And I would say, right, but that’s not what anyone means when they say the government’s deeper into debt. So what happens is they would then spend the billion dollars because they have a deficit that year. So now the public would hold both the original billion in cash and now the extra billion in treasury debt. And so the treasury plus Fed is now a billion dollars deeper into debt than it was before, even given all of the accounting semantics of the MMT people. And also, like Keltin herself observed, when she says that stuff, she’s not clarifying. She has them, I don’t understand. She’s admitting that, yeah, when I speak like this, it’s mysterious to people. Then when it takes me 15 minutes to unpack the trivial observation that, yeah, if you borrow money but don’t spend it, you’re not deeper in debt on hold.
Your balance sheet is not worse. Okay, right. But that’s true in general. There’s nothing special about the treasury. In general, any entity, whether it’s a household, a Corporation, or the government that borrows money and holds the cash is not deeper in debt because of that transaction in a net sense, it’s gross debt could be higher, but its assets went up. There’s nothing, whereas the whole thrust of Kelton’s presentation, you would think there’s something special because it’s a monetary sovereign, when no, the actual accounting point is true in general. It’s a completely banal observation, but yet it seems real. Oh, and this is why we can get a Green New deal. No, it’s not.
Ben Nadelstein:
So, Bob, if someone was listening in our audience, they might think, well, wait a minute, why is the government even floating bonds at all. If the same people can just print the dollars to pay for stuff, why even go through the fun magical shell game of putting checking account and savings account and bonds and all this silliness? Why not just print the money and use that to do a Green New deal or to do some other form of expenditure? Why float bonds at all?
Bob Murphy:
Okay, great question. Here, Ben, going back to your ideological turning test, here’s where I think I’m actually a better MM tier than most MM tiers, because you’re right, the MM MMT people, many of them would agree with you that, Yeah, this is silly. They would say, At best, it’s a throwback. It’s like a vestigal thing back from the gold standard days where it did make sense that you had to borrow and you had to float bonds and whatever because the government was a giant corporation. But nowadays, many MMT people say, Yeah, there is no reason to float bonds. You can see that in that MMT documentary, Finding the Money, this was the infamous clip that went viral. People people may have seen where Jared Bernstein, they were asking him. I think it was actually Kelton off camera asking. I’m not certain about that, but I think it was saying, why is it if the government can print money, why do we borrow? He was going, Well, let’s see. They definitely buy bonds. It’s a hilarious people haven’t seen. It takes him like 45 seconds. He just keeps walking in circles, and it’s clear he doesn’t know the answer.
That was a good rhetorical point that the MMT or score showing that Jared Bernstein, who’s not MMT. He’s like Keynesian, doesn’t know what he’s talking about. But I think many MMT people concluded that, yeah, there is no reason, and that’s incorrect, even on their own terms. I’m not saying it’s an Austria. I’m saying even on MMT terms. The reason would be that, let’s say, yes, the government wants to spend a billion dollars on some infrastructure project. The public can’t afford the taxation would be too onerous right now that the public is really strapped, so they can’t just take get away from people directly. So now their two remaining options are they could borrow it or they could just print the money. And suppose also if they just printed the extra billion dollars, again, maybe CPI is running hot, and they realize, no, if we do that, that’s just going to push up prices. Eggs are going to be even more expensive gas and whatever, so we can’t just print the money either right now. So that would be a reason to have recourse to borrowing it. And so in a sense, you’re kicking the can down the road.
Just like on a gold standard, why would the government ever borrow rather than just explicitly tax? Because you might say even in that regime, why does the government ever borrow? If they have the power to tax, if they need to buy a bunch of tanks or something, why not just levy the tech? And the answer there is because that could be too onerous. Just like when you buy a house, if you take out a mortgage, that spreads the pain out over 30 years. If it’s a three-year mortgage, that principle still carries over even to public finance areas, where if the government levies issues bonds to pay for something and then pays the interest, plus knocks out some of the principle over the next 30 years. That in a sense, it’s still the taxpayers paying for it, but it spreads the pain out over 30 years. So that It will still work. It’s just it’s not voluntary, but the mechanics are the same. So likewise, even though the government has the ability just to print the money, if by stipulation, we’re saying there’s a scenario where price inflation is already running too hot and the public If they can’t handle that, then another way they can pay for the bridge is they float by.
And so that sucks dollars out of circulation from the public and channels it into the bridge. And so that’s why the total number of dollars hasn’t increased. So that’s why CPI doesn’t go up if they finance the bridge through borrowing rather than printing more money. But still, the public’s payment. Even there, if they just then monetize it slowly over 30 years, then the public’s payment, but you’re not making the CPI jump up all at once. You’re spreading it out. So that’s That’s what I would say, Ben, the answer. Some MMT, really sharp people, agreed with me on that, but it was hilarious. A lot of rank and file people argue with me like, No, Murphy, you idiot. You’re thinking a gold standard. Anyway, but that would be my answer to you.
Ben Nadelstein:
Now, Bob, someone can say, Okay, I think I can now understand why a government on a gold standard in a fiat currency system, why they would want to float bonds. It spreads the pain out over time. There’s a less onerous, sharp balloon in in terms of payments that need to be made, and that can be beneficial to people just the same way that a balloon payment on a mortgage can be beneficial versus paying all up front in cash. So now someone might be thinking, Well, Bob, maybe they need to tax to get money for these bonds. But wait, why tax at all? Why don’t we just get rid of taxation entirely? There’ll be no income taxes, and we’ll just have the government print up the money that it needs in taxes. What’s the issue there?
Bob Murphy:
Okay, so The way the MMT people handle it… So why do I do that? Because that’s easy for me to do, and then I’ll have to circle back and say, do the Austrians have a different perspective? The way the MMT people handle that is they say, you’re right. It’s not that we levy taxes in order to fund government spending. That’s a key pillar in MMT thought is to say you need to disabuse yourself of the idea that the government has to tax to get money to buy things. They say it’s the other way around. The public doesn’t have money until the government deficit spends it into existence. That’s a key thing. That’s why, going back to what we said at the start of this, Ben, that I personally tackle the MM the MMT people a lot is because I can see how their perspective, it’s intriguing. When you first hear it because they’re saying stuff that’s the opposite of what you normally hear. They can take it a few layers deep and show, Oh, here’s the accounting and how this is what we mean. And so there’s a superficial appeal of it. And that’s why it’s like, Whoa, this is totally and I can see why people, especially if you’re predisposed to want the government to fund all these goodies, to fix social injustice and take care of poor people and save the environment and all that other stuff, that this looks very appealing.
Then if the critics just say a bunch of nonsense and strawman, then you can say that can seal the deal. Yes, the MMT people are geniuses. Again, one of the ways they approach it is they say, far from the people supporting the government and having to pay and saying everything’s due to the taxpayer, no. How do Americans even have dollar bills to begin with? Clearly, that came from the government, and it couldn’t be that at step zero, the government spent a trillion dollars that it first tax. No, that trillion dollars didn’t exist. So they had to first spend money that wasn’t taxed first That’s a deficit. That’s where they’re angle. Then when they make that point, then they will deal with the obvious question, Well, then why do you tax at all? So that took me. That was a prelude to me answering your question. Their answer they typically give is to say, Well, if we didn’t have any taxation at all, the value of the currency would go to zero. That seems odd to a free market person. What they mean is you want the public to have to get, if we’re talking about dollars, there has to be some reason they are willing to work and toil or sell their valuable property for these green pieces of paper.
What gives it value? They’re saying, Oh, if people know every April the 15th, I have to turn over a set number of these things or else I go to jail, well, then that’s a reason. That’s how they motivated it, is they say that taxation is the way that puts a floor under the value of the currency, that’s what gets the ball rolling and why everyone ultimately… That’s what gives it value. That’s why they need to do it. Then another way you could see it, just more mechanically, day to day, is if price inflation is running too hot, then if they tax money out of the economy, that’s sopping up some of those dollars. That would reduce. That’s another way of seeing it in terms of accurate demand. But usually they stay at a more fundamental level, taxation provides the demand for the currency.
Ben Nadelstein:
Bob, someone might now ask, well, if taxes give the US dollar its value, how is it possible that when we lower the tax rate, we make that tax and less onerous, that the value of the dollar against other currencies, maybe not against gold, but against other currencies, can go up? Wouldn’t that fly in the face of this whole thing that taxes are what gives the US dollar its value? And if that’s true, what do you think actually does give the US dollar its value?
Bob Murphy:
Yeah, great question. So that is my response to that MMT talking point. And you can see how besides just us arguing in terms of the positive description of the world, there’s all these normative things underlying it, and that’s true on both sides, that they’re predisposed to want taxation to give strength to the currency because they like to have an activist government, Whereas an Austrian hard money type person wants to argue that or is predisposed to argue that no, money would have purchasing power even without the state, because we want to show that money is not an invention of the state. So I’m admitting the biases both sides have in this. But notwithstanding my bias, I do think it is correct to point out, like you said, great point that other things equal. It’s pretty clear that when there’s a large tax cut, the value of that currency goes up. You see this in the Reagan years, that there was a huge income tax rate cuts, 25% across the board, and when Reagan first comes into office and the dollar sharply appreciated against other currencies. That’s not mysterious. That totally makes sense. If your after-tax return is higher, you’d want to get into US assets.
And how do you do that? If you’re a foreigner, you got to use your currency to buy dollars to buy… You know what I mean? So that’s going to put… Duh. There’s that element. But then beyond that, too, we have all sorts of historical examples of a market money emerging, and that wasn’t because people were pointing guns at it. I wouldn’t say Bitcoin’s money right now, but it’s certainly valued. And why are people holding bitcoins? It’s not because somebody said, Oh, on this anniversary, you got to give me this many Satoshis, or else you get shot or go to a newer cage. That’s not what happened, right? And then there’s the famous example of the economics of a POW camp. So in World War II, I think the guy was British. He was in economist, like a trained economist who was in the war, I think he got shot down. I think he was in the Royal Air Force. Some of these details I might be making up, but the spirit of this is right. That he was in a German POW camp and cigarettes became the money. When I say money, I mean, they had chalkboards with prices in terms of how many cigarettes went for…
Because the Red Cross would give them rations periodically. So all the tins would come in with ham, and I think everyone got two cigarettes or something with each package. Even non non-smokers would trade their ham or shoelaces or whatever it was that somebody else wanted in the prison, and they would accept cigarettes, not because they wanted to smoke it, but because they knew, Oh, if you need to get something in this place, get yourself some cigarettes, and you will always find a willing seller because everyone knows cigarettes are valuable. Anyway, I’m just saying that that wasn’t because the guards were periodically saying, If we stop you, you got to be able to give us a cigarette or else we beat you. No, it was cigarettes were valuable because there were smokers, and that was the underlying thing, and then they became marketable for all the reasons that Carl Manger explained in his essay on the origin of money. That’s what I would say, that we can explain why money has purchasing power even in a world without taxation. Then what you’re saying, Ben, and we know in the real world, both from micro analysis and just empirical observation, when a government raises taxes, that makes the currency weaker, and when it lowers taxes, that makes the currency stronger.
So this idea that you need taxation to give value to your currency, I think, is nutty.
Ben Nadelstein:
I want to switch now to interest rates. So obviously, people in this MMT tradition have varying views on interest rates. But one common thread is that interest rates should be just set at zero forever because, they argue, interestingly enough, when you raise interest rates, instead of actually causing economic pain, this is actually giving a subsidy to people who hold bonds because the interest rate on these bonds in something like a 60/40 portfolio, has now risen and given bondholders an extra income, which they didn’t have before. What do you think about interest rates? Do you think that the economists in the MMT tradition are right, that interest rates should be set at zero forever?
Bob Murphy:
No, absolutely not. And yeah, this goes back. The first time I encountered that is I debated Warren Mosler, who’s arguably the godfather of MMT. By the way, he’s for folks at home. He’s not a trained economist. He was a guy, he was working in the bond markets, I think in the late ’70s, early ’80s, and just started noticing patterns and then started on a Reddit board later on, writing stuff up. And then it was a like post-Khansians or something. Anyway, that got formalized, and then someone called it Modern Monetary Theory, and that’s how it was born. But in any event, I debated him years ago. It’s got a ton of views on YouTube where people want to say, Robert Murphy versus Warren Mosler. It’s M-O-S-L-E-R. If you want to look at that. Anyway, he said that at one point in the debate, we were going back for it. It caught me off guard then. I didn’t realize that was his… I had read a lot of his stuff before that, but I did never encounter that particular tenet of MMT thought. His point was, because I think the way he motivated it was to say, because the marginal cost of issuing more dollars is zero now in a fiat world, then clearly, why should there be a premium on it?
It was something like that. Pushing it down to zero. There shouldn’t be some arbitrage on that or something like that. It was the way he motivated it. As opposed to, if you can get more wheat for a given amount of inputs, physical inputs, if you’re willing to wait five years, that could explain why there’s a real appreciation in wheat over time or something like, you know what I mean? He was contrasting it, but he was saying, with money, since now we can just create money, electronically, there’s zero cost, Why should you get a return to that from just holding it? I think that’s what his argument was. In other words, he didn’t think he was meddling with markets. He thought, given now the nature of money production and how we’re not digging up gold or something and stamp it into coins, given how money is created, this is the equilibrate. This is what economists should want. He was flipping it on me like I was saying something uneconomical, given the marginal cost of zero. Okay, so that’s how he was moving it. You’re right, Ben. I’ve seen a lot of MMT people saying that the high interest rates under Powell, when he jacked up rates, that, Oh, a lot of the fiscal austrian economists predicted a crash.
We, MMTers, knew that was It’s going to be a stimulus because now there’s all this extra hundreds of billions of interest income flowing into the economy. It’s just we, MM tiers, don’t like the inequality. Why are we shoveling all this money into the hands of bankers when regular people are struggling? Anyway, having said all that in terms of getting across what their position is, especially in the Austrian tradition, but I think even in more mainstream circles, the interest rate is conveying information, and it’s showing the trade-off, the real interest rate for sure is showing the trade-off between consumption now and in the future. That’s a real thing. That’s not arbitrary. It’s not just some social convention. And so, yeah, if you push interest rates to zero, I think that’s sending the wrong signal, right? Especially in the Austrian tradition. I’m speaking loosely here, but just to get the point across. The interest rate is showing entrepreneurs this This is the penalty for a delay in your project delivering its fruits. If you take some labor today in farmland and other inputs, and you mix them together in some recipe, and it’s going to give the goodies for your customer down the road, it matters whether we have to wait a year versus waiting 10 years to get that output.
The interest rate is showing what’s the social penalty on that. If people are more willing to defer gratification, they save more. That pushes interest rates down. That gives a green light entrepreneurs to engage in longer processes because if you apply the discount rate to your present discounted cash flow value, a project can be profitable at a lower rate if it’s an upfront investment and the returns are down the road, that thing. Given that framework, then, yeah, I think pushing interest rates down to zero permanently completely sabotages that mechanism. I guess that would be my response.
Ben Nadelstein:
I do want to talk about this fear of a recession that many economists and people in the news have been saying, there’s a recession right around the corner. We might already be in a recession. Many people in this MMT camp have said, no, with the bond stimulus, we’re far away from a recession. If anything, we actually have loose monetary policy when most people think we have tight monetary policy. My question to you is, who is right? Are we facing a potential recession? Are we in a strong economy? Most people who are in this fear camp are predicting their 15th recession of two, or is there something else going on entirely?
Bob Murphy:
Okay, so here, I’ll be a classic economist and try to give an answer that’s so all over the place that I’ve covered all my basis, but I do believe in what I’m saying here. I’m just acknowledging it’s going to be a bit nuanced, and people might think I’m trying to be careful and make it non-falsifiable. Okay, the primary thing that I’m focusing on is the yield curve. The yield curve had been inverted, it uninverted I think in December of 2024, and it stayed that uninverted. And so historically, since the 1960s, there had been no false negatives and no, I think, one false positive that even there was a borderline case of when the yield curve inverts, then a recession soon follows afterward. And again, the other way, too, that there were no recessions that lacked a prior inversion. So this has been virtually a perfect indicator. And if you just look at a chart, you can see what I mean. It’s really cut and dry. So the issue, though, is one of the things or the two caveats I would give to that. Let me back up. So having said that, then just looking at that, if history repeats itself, you would expect that in calendar 2025, a recession is going to start.
We might not know it in real-time. It might take until 2026 because the data comes in and it’s backward-looking. So before they clock it and say, Oh, yeah, you know what? It looks like the recession began in November of 2025. It’s not that as of November, we would know it was a recession for sure, but anyway, that’s the way those things work. So that’s what I would say just based on the yield curve stuff. However, the two caveats. One is I was thinking, if you go back and review some of my media appearances and writings over the last few years, I was predicting a recession would have started already. So it would look to somebody if I just keep moving the goalpost. But what happened is the yield curve this cycle was inverted way longer than it normally ever is. And so when it was still inverted, I was just using past history to try to say, well, usually it uninverts after this amount of delay, and then the recession kicks in. And so based on that, if I had to predict it, blah, blah, blah. But now we finally are out of that. It really has uninverted.
But even having said that, you could say, well, if this was the longest by far in which has stayed inverted, maybe the delay from the uninversion to when the recession starts also might be… I can’t tell you for sure that’s not true because this was a weird one. So there’s that a caveat. And then the other thing is the Trump administration, say what you will, and I don’t like a lot of his foreign policy stuff, but they’re doing some pretty radical restructuring of domestic policy that affects the economy that in a vacuum, I would think, would be very bullish, very conducive to stronger economic growth. And so it It may be ironic if the bears look at the yield curve stuff or say, Oh, a recession. And then their critics are pooh-poohing them. Then also a lot of those same people are going to be talking how great the Trump administration is, and a lot of the same critics would say, No, Trump’s a fascist, Nazi, blah, blah, And so it’ll be funny if those things cancel out. You know what I mean? We were right, but on net, the economy just stalls a little bit, but it’s not officially a recession because all of Trump’s income tax cuts and the DOGE cuts and all this stuff managed to…
Big picture. I still think there’s officially going to be a recession that hits… The history will show it started in 2025, but there are all these other things going on that this is a weird cycle.
Ben Nadelstein:
Bob, I want to bring us into a lightning round, so I’ll ask you a series of quick fire questions. Mmt, gold, economics. You can answer as short as you want or as long as you want, one word or 15,000. Let’s start. Mmt accurately describes our monetary system functions, but that policy prescriptions that they advocate do not logically follow from their tautologies. Do you agree?
Bob Murphy:
I definitely agree with that, except I would add to make it a statement I’m more comfortable with. I would say, MMT accurately describes the world using their definitions and accounting techniques which are extremely misleading. That’s why it lulls the public into accepting policy prescriptions which are bad.
Ben Nadelstein:
Which of these do you think gives the US dollar the most of its value? Taxes, the US military, outstanding debt, or something else entirely?
Bob Murphy:
Oh, I would say something else entirely. I think all those other things hurt it. The military one, I’m not sure with that one, but the others, if Certainly the taxation and the debt, other things equal, I think would make people less likely to want to use the dollar. I think it just historically, the US was a very free market economy relative to the rest of the world, and we used the dollar. When did we gain our dominance is when we were on the gold standard. Even in World War I, the US stuck to the classical gold standard way more than any other belligerent. So I would say, historically, the reason the dollar has strength is because it was tied to the most laissez-faire economy. Now, since the government is doing things to go against that, I think that’s why you’re seeing the dollar losing its global dominance.
Ben Nadelstein:
Which country do you think is most likely in the future to lose its monetary sovereign status?
Bob Murphy:
Okay, So for people at home, that’s referring to countries that can not only issue currency, but they can borrow in it as well. Zimbabwe issued its own fiat currency, but it wouldn’t be a monetary sovereign because people wouldn’t lend it large amounts to nominate its own currency. I think the US dollar has more to fall because it’s so dominant right now that when it does fall, it’s going to be a bigger drop. But I don’t know. I mean, it may be that some other country, like the Bank of Japan or something, the Yen They might get into trouble before the US does. So it would be hard for me to pick a particular country just because I’m not as familiar with the positions of these other governments. But I will say, I think 20 years from now, the US dollar is not going to be the global reserve currency. I’m not saying it’s going to be like some bricks replacement. It might just be splintering, and it’s a multilateral world, and there’s no clear dominant force. That might be what happens. So I do think that I’m just asking, but it’s possible that some other country has a disaster.
Bob Murphy:
I will say that. I don’t think it’s going to start with the US. I think what’s going to happen is Europe is going to get in trouble first, and the feds are going to bail out the ECB. But in terms of which country, it’s not going to be Germany. It might be some other European country that gets in trouble and then gets the ECB in trouble.
Ben Nadelstein:
People listening to your last response might think, Hey, that sounds a lot like the dollar milkshake theory, where other countries and other currencies face sovereign debt crises first. This pushes assets and capital flowing into the United States, which, of course, pushes up the US dollar, creates more problems for outside currencies. The cycle continues until the dollar is the last man standing and facing off against gold. What do you think about the Dollar Milkshake Theory, espoused by our friend Brent Johnson, and do you have any quibbles with it?
Bob Murphy:
If the dollar milkshake theory means what you just said, then I’m fully on board with it. It’s not like oppedictic certainty the way I think that, you know, tariffs for a small country caused dead weight losses or something. But I definitely think that’s how things could play out. That’s certainly plausible. If you force me to predict, I do think that’s going to happen, just like what I just said. I think there’s going to be a crisis first. I think the Fed has one more hurrah in it to bail out other countries and then the dollar will be the last to go, and then it’ll flip over to gold and Bitcoin or some basket of commodities of somebody, maybe it might be blockchain-based, some thing that entitles you to a basket of commodities or something. Maybe that is what’s to displace the dollar after the dollar crashes. My quibble with Brent and then also with George Gam, and I went to war with both of them on a similar thing here, is, and I don’t know if this is a critical component of the dollar milkshake theory, or this is just another position that Brent holds, is that they keep arguing that, oh, no, what you dollar bears don’t realize is the Euro dollar market, the fact that there’s all this dollar denominated debt held by foreigners, that creates a backstop.
And so in some ways of them trying to tell that story, they’re saying, even if foreigners, they see what the US authorities are doing to Putin and whatever, even if they want to get out of the dollar, there’s like some inbuilt mechanism Isn’t this going to force them back? And I think they’re just wrong on that. So again, just to be clear, if it sounds like I’m contradicting what I said two minutes ago, I’m saying if Europe gets into a crisis on its own and the Euro is in trouble, and the ECB starts bailing Greece and Spain and whatever, and then the Euro is in trouble, the Fed comes in and bails them out. That’s what I’m saying could make sense. Where I disagree, though, is I take Brent and George Gammon and people like that. I think what they’re saying is if people who have dollar assets want to get out of it and just diversify away from the dollar, reduce their holding of dollars as reserves, that because there’s other people in their country who have debt denominated in USD, that that somehow stops them from doing that. And I was saying, no, that just makes it easier.
The dollar starts fall, and then the people with the dollar debt then can extinguish that more easily because the dollar is weaker. There’s not a reverse thing that kicks in. That’s my quibble with that. But I don’t know that that’s a necessary component of the dollar milkshake theory.
Ben Nadelstein:
Brent and George, the friendly war continues. Okay, next question. Many MMT advocates claim that banks, just like your mom and pop banks, can create money regardless of the amount of reserves that they have on hand. If this is true, why aren’t all bank shareholders trillionaires?
Bob Murphy:
Yeah, great question, and it’s because it’s not true. This ties into when I see George, definitely George Gamm, and when I went back and forth with him a few times, our respective podcast, we were doing a wrestling, pretending we were really angry at each other when we weren’t. That’s a claim that he’s making. I don’t know if Brent goes so far as that, but yes, if you listen to a lot of people, so the RM people do it as well, they’re saying, Oh, yeah, these Austrian funny daddies, the other people, they think that it takes… They believe in the multiplier theory, and you’re right. They are acting as if banks aren’t constrained whatsoever and can just make loans. No, it’s the very act of the bank granting the loan then creates the reserves for another bank in the system. And like you’re saying, Ben, if that were true, then how come the banks just create trillions of dollars, and they’re all trillionaires? So clearly, something has to to stop that. And what is stopping it is the reason that a commercial bank right now… Yes, if they grant somebody a mortgage for $300,000, it’s not that they have to have $300,000 in cash in their vault or even have it on deposit with the Fed.
They can create money out of thin air in terms of the bookkeeping. That’s true. But they have to, in order for the public to accept deposits at City Bank on par with $100 bills issued by the Federal Reserve, the public has to believe they can convert the two costlessly and at par. You have to think, the reason when I go to the grocery store, and I swipe my debit card, and then effectively, I’m transferring a deposit at Bank of America to the checking account held by Walmart or whatever. The reason if it’s a $50 amount that I owe that I could either pay with two 20s and a 10 or swiped my debit card and $50 on deposit, the Bank of America trades at par is because Walmart thinks, If Bank of America says they owe us 100 grand, we can turn that into currency if we wanted to. If there’s any doubt about that, then that linkage would be broken. There would be a bank run, and that bank goes down. That’s the critical part. How do banks keep the public trusting that, Oh, no, in practice, day to day, you can go back and forth between actual legal tender money and IOUs issued by our institution, it’s because they have reserves that they can back people up.
That’s what I would say, that the reserves are there. It’s needed. Even in the absence of reserve requirements, legally. The banks still have to have that. There’s a whole like Seljan and White, I disagree with some of the places they take it, but they have models of so-called free banking. If the gold is the money and banks issue paper notes saying the bearer of this note can redeem it for an ounce of gold at any of our branches, even if the government has nothing to do with that, the reserve ratio is not zero. Because the banks, to get those notes to trade at par in the community, people have to believe, if you turn this note into any branch of the bank, they will give you your ounce of gold. That’s why the bank has to keep enough gold in the vault.
Ben Nadelstein:
Another question that MMT people often face is, why would there be any net or financial change when people in the economy swap their dollars for bonds? Isn’t this simply an asset swap? My question to you is, how should people think about the duration of the liabilities that they hold? Cash could be thought of as a liability with no duration versus a T-bill or a treasury bond. Do these durations matter? And if we have a central bank digital currency, will those durations matter less?
Bob Murphy:
Okay, so I won’t recapitulate the whole argument we went through earlier in this discussion where I said there’s a smoke and mirrors that if the government issues more bonds and then spends the money, and that’s why they’re issuing the bonds, is because they want a deficit spend, it’s a moot point that the public ends up holding both assets, the money and the bonds. There’s that issue. But in fairness, there were things like, for example, it was called a twist or something like it. It was during the Obama year.
Ben Nadelstein:
Operation twist.
Bob Murphy:
Yes, where they were trying to change. Because at first, they just started dumping boatloads of new debt. The Fed was buying up boatloads of mortgage-back securities and treasuries, and they said, Oh, instead of us just adjusting interest rates, let’s tell the public the quantity of assets we’re going to buy. That’s quantitative easing, That wasn’t working after a while. Then they said, Oh, well, the problem is we’re just pushing down short-term rates by this, so why don’t we go out and deliberately try to buy longer-term debt and push down long-term rates to stimulate that economically? There That is some of that issue with the maturity swaps and whatnot. I think that does matter, just like a corporation, even in terms of their financing structure. It would matter whether they have shorter term debt or longer term that could influence your decisions. Then Central Bank Digital Currencies. On this narrow point, I don’t know that that would matter so much in terms of if that’s just replacing cash. So there’s that element. So as far as what does it do, it would matter in the sense it would depend on the yield curve, right? That the government, the structure of the government debt, it just say, oh, It’s whatever it is, $35 trillion.
It technically matters, well, how much of that is in T-bills, how much of that is in 10-year, how much is that in the 30-year, especially if the yield curve moves around, then that could matter. For example, if I were advising the government, and I would say other things equal, if they do structural changes and they start having some positive, they have a surplus, I would recommend they start paying down the T-bills. Bills. And as we’re rolling stuff over to try to extend the duration, because that would make them less vulnerable to a sudden spike in interest rates. Just like as a household or something, if you wanted to move, so if you had a bunch of credit card debt that the rate could adjust monthly, you would feel better, you’d be more secure if you could go get a loan from somebody else. It was like a five-year loan with a fixed monthly repayment or something and pay off some of your credit card debt besides just the interest rate, but locking it into longer term makes you less vulnerable. There’s that element in terms of the fiscal position of the US government.
Ben Nadelstein:
Bob, we have so many more questions to get to, but I know we’re running out of time. Let me ask you one more fun one, which is, do you think it is even physically possible or economically possible for the US to pay off the national debt? If the answer is yes, do you think we should go about doing that in Trump’s term?
Bob Murphy:
It’s certainly possible. For one thing, the government owns a lot of assets, including offshore mineral deposits and things like that, they could sell off. I have dabbled with the idea of at some point we’re going to need to deal with the fact that, well, what if people start go harvesting steroids and things like that. So there could be, if they could come up with some mechanism by which to codify the rights to that or whatever, there’s various things you could come up with it. Maybe that would involve a stream of revenue. The tax code right now is so inefficient, I think you could change it that would allow for more economic growth without reducing revenue or the other way around. There’s all sorts of things they could do that, yes, I’m not predicting they will pay off the debt. I’m just saying it’s not impossible. They could do it. Another element would be, I think you could reform Social Security and do all sorts of things. Let’s say they started running a surplus, a cash flow surplus. They had 200 million dollars coming in from tax receipts over and above the spending that year. I think you could go to people who are 55 and tell them, Hey, if we give you the next 10 years, you don’t have to pay Social Security taxes, but you’re agreeing, you’re forfeiting all of your Social Security payments down the road.
I think you could do things like so that the cash would allow you in case somebody needed a lump sum payment to buy them out, like if they were older and they were getting close to it, they were going to start getting paid. I I think you could do that. And I’m sure in the beginning, you could do it like three to one. In terms of present discounted value, I think there’d be a lot of people that would say, Yeah, I’ll take that right now, because they’re not even thinking they’re getting their Social Security anyway, or that it’s going to be a huge haircut. So I think there’s ways that you could really In terms of the government’s books, by spending 200 billion, you’re actually reducing its total indebtedness by 600 billion, if you’re including the unfunded liability. I think there’s lots of tricks you could do like that. So yes. And I know it’s open in Pandora’s box, but I just have recently written on the Bitcoin strategic reserve. They did that, and it kicks off, and I think they should codify rules about Bitcoin. If they did start doing that and Bitcoin goes up, here’s the rules by which we have to sell it in to pay off the debt rather than funding new things.
So lots of stuff like that. Yeah, I think humanity is going to, because of AI and other innovations, blockchain technology, I think they’re going to increase productivity dramatically And so as long as the governments of the world, if they were operated reasonably efficiently, they could dig out of this hole. But that’s a different question from saying, do I predict that they’re going to operate efficiently? Because no, they’re governments.
Ben Nadelstein:
Bob, I had Mike Green on the podcast who, almost, I think, 11 years ago was at your debate with Warren Mosler, and he asked Warren about MMT, and I asked him what he would want to ask you in our conversation today. Mike wanted to know if you could choose, starting today, from scratch, knowing everything you know about current gold supplies, current fiat standards, would you choose gold as a monetary standard, or would you choose something else?
Bob Murphy:
I’ll answer this way. My first best The thing is that the governments just totally get out of it and let the market choose, in which case, yes, I think private mints would come to the fore, and the public would start holding gold coins, and that, I think, would I think in the beginning, people would still use dollars and euros and stuff. But I think over time, more and more people would use gold coins. At first, it might be like a novelty, but then as it caught on, I think ultimately a lot of people would switch to using gold. So I’m not choosing it. I’m saying my prediction is I think humans would go back to gold as the money of choice. Then if the question is, okay, but suppose governments are still going to be in charge of stuff, and should they link it to a thing? Historically, I have written with Carlos Lara, we had a proposal to tie the dollar back to gold. I was really into that for a period of my life, but I stopped pushing it. If some government wanted do that. Some Fed chairman wanted to do that, I would applaud it.
Like Judy Shelton is making the rounds with her new book talking about how great the gold standard was and everything. I do that a lot, too. I want to explain to people how awesome the classical gold standard was and how it worked automatically and blah, blah, blah. But the reason I’m not jumping up and down trying to urge people like, Hey, let’s have the US government go back on gold, is I think they would just abandon it the next time a crisis came along. I would go through all this, and then it would just discredit it. That’s why what I’m doing to the limited extent that I can influence a public debate is say, let’s try to get the people to be able to use whatever money they want and to try to get rid of the government roadblocks like capital gains taxes and stuff like that, that prevent that from catching on. Then I think I do predict people would just go back towards gold.
Ben Nadelstein:
Bob, this is a perfect segue. Tell people about what you’re doing at your day job.
Bob Murphy:
Sure. I am the Chief Economist at Infineo, and what we are doing is putting life insurance on the blockchain. And so that’s the elevator pitch. Of course, it’s much more nuanced when you get into it. But if you want to learn more about that, I would go to infidio. Ai to see what we’re doing. But yes, it’s part of the broader enterprise, what’s called the tokenization of real-world assets. So the way Bitcoin works is it uses a blockchain, but bitcoins are intangible. There’s a push now that is a lot more advanced or developed. I think a lot of people might realize with big household name institutions putting assets on blockchains because they are a public record of who owns what, and it’s pointing not to abstract bitcoins, but to physical things or other types of assets and so In our case, yet, we’re tokenizing life insurance policies.
Ben Nadelstein:
Bob, it’s been great speaking with you. Where can people find more of your work and see more of your MMT smackdowns?
Bob Murphy:
Sure. Thank you. I would point them to bobmurphyshow. Com. It’s probably a good place to go. That’s my podcast where you can see a lot of this stuff. Then on Twitter, I am @Bob Murphy Econ, and I also host a humanaction podcast. If you go to meesas. Org, you can find that, and that’s where you’re going to get a lot of this stuff.
Ben Nadelstein:
Bob, thanks so much for joining us on the show, and we’ll see you again soon.
Bob Murphy:
Thank you.
