#1 - Why MMT Matters

Ryan Benincasa: 0:16

The content of this podcast is for informational purposes only and should not be construed as financial or investment advice. The views and opinions expressed in this podcast are those of the hosts and their guests. They do not necessarily reflect a position of any associated employers or organizations.

Adam Rice: 0:33

Welcome to Episode One of the applied MMT podcast. I'm your host, Adam rice. A few years ago, I started a podcast called pocket change. The pocket change was focused on interviewing experts and explaining MMT basics to people who might not be familiar with the subject. If you haven't listened to it, it's a good place to start. If you're not familiar with the basics of MMT. Our goals with applied MMT are slightly different. We plan to talk about current events through an MMT lens. I'm joined by my co host, Ryan Benincasa. Ryan, it would be great if you could just give your background and why it is that you're so interested in MMT.

Ryan Benincasa: 1:08

Yeah, absolutely. And, Adam, thanks for taking the charge on this. I can't believe I didn't find your podcast sooner, frankly. But ya know, excited to do this. Yeah, so first of all, my name is Ryan Bennett Casa and I'm a finance professional I work in New York City. I started my career working at a global macro hedge fund called to the investment found by Paul Tudor Jones worked in a an operations role there. And my current role is as a research analyst at a motor Australia, Australia hedge fund called Phoenix Investment Advisor based in New York, and I found MMT basically,you know, following the events of, of March 2020, I was very confused withwhat was happening. And I wanted to understand the sort of the guts of the financial system better, because everything I had been taught up to that pointwas framed around this idea of what we might call the loanable funds theory of banking, and, you know, the business model of banking of banks is to take deposits, take in deposits, and then lend them outas, as serving as somewhat of an intermediary. And so, here I was March 2020. And the whole world is you got the Coronavirus and financial markets are in a panic, and there's all sorts of all sorts of problems. And you know, that my company, you know, we frequentlyhave positions both debt and equity. So, so publicly traded stocks and stuff,we have positions in companies that, you know, might be on the riskier end of, of the financial profile spectrum, right. So kind of high yield issuers, maybe, maybe companies undergoing some sort of financial stress. Andevery single company that I was covering at the time, was they also the same thing, they're all pulling down their, their lines of credit, right, they have, you know, a lot of will have in place, like some sort of credit line with, with a bank or with several banks, and they're literally all pulling their credit lines at the same time. So I'm like, Okay, this is a little crazy. How, how is that even possible? And then I'm, you know, I'm talking with my father in law, who's a small business owner, and he's literally doing the same thing. He remembers, oh, eight financial crisis, and not being able toaccess his credit line, he's just like, look, it's just, it's just, you know, there was this line that gets kept getting repeated out of an abundance of caution, you know, blah, blah, blah, blah, blah, we don't think we need it, but we're just going to pull our credit lines. So I'm just here thinking myself and I'm like, every business owner operator in America is probably every single one is calling up their banker and saying, Hey, like, This is crazy. I need to make sure I have sufficient liquidity to meet immediate funding obligations. So you know, I'm going to pull down my, my my credit line, my revolver asset back loan with whatever form it is, andit just kind of occurred to me, how, like, if there is if money is a fixed stock, right, as you're kind of taught and that sort of loanable funds framework of like, you know, you need the posits first and then and then you lend them out so there's this like kind of fixed pool forstock of deposits out there. And, you know, the banks sort of intermediate and allocate them as efficiently as they as they deem fit. And it just sort of occurred to me, how is it possible? A, that this doesn't start, like a full on financial crisis, panic bank run, right? Because if literally everybusiness in America is trying to is pulling down their credit line at the same time.How does that not? How can they all be available at once everything that we get taught about sort of the banking is that like, they're the money'syou know, it's not it's not there, necessarily. It's justthe banks are aren't according to that global funds, while they're not designed to, you know, send everyone's loans all out at the same time. And so, it just, it just was very confusing to me. And that is when I sort of started on this journey. And oh, let's just back up a sec. At the very least, let's say, you know, you understand that, that it's possible for, for everyone to pull their credit lines at the same time. Okay, fine, at the very least, like, like, what, Adam, what would you think would happen if you have this sort of fixed stock of money, and everyone's all trying to access at the same time? What do you think happens to the cost of funding?

Adam Rice: 6:59

Well, I think just based on supply and demand, you'd assume that the price of money would go up.

Ryan Benincasa: 7:04

Right, exactly. Your money is a scarce resource. And so if everybody demands money at the same time, right, you have this like, endless demand for it, and there's a limited supply, the price is gonna go crazy. And do you recall what happened?

Adam Rice: 7:21

I recall that that interest rates, if anything went lower, they went to zero.

Ryan Benincasa: 7:29

Literally went to zero. So it just it none of it made any sense to me. Right? It just seemed like every model framework that I had been taught up to that point, even going back to, you know, I was taught about QE Oh, well, you know, the Fed is, you know, injecting money into the banks, and the banks are going to take that money and lend it out. That's literally literally what you know, I, professional portfolio manager at a hedge fund probably gets paid billions of dollars told me it just became apparent that I had no idea what was going on, and how our financial system actually functions. And here I am, I'm supposed to be a finance professional. I'm supposed to be an analyst and under and, and I didn't understand money and banking, right? Because everything that I would have expected to happen, the opposite happened. Sorry, I, so I went, I just went out started going, like, deep down this route. I mean, it was kind of a crazy time. Like, I'm sure you remember, everyone remembers, like, your everyone was holed up. We didn't know we're trying to flatten the curve, and, you know, working remotely and everything else. And I spent, I mean, you know, not that it was part of, you know, what, what we at Phoenix do on a day to day basis, necessarily, but you know, I spent a lot of just my kind of personal free time, just reading up on different just just, you know, academic papers and alternative media, podcast, blogs, to try to get a better sense of all this of what's actually happening and how banks actually function. And I actually, I don't think I mentioned this to you before, like, I've read a book called, it was written by one of the chief economist at the IMF. It was called a collateral markets and financial plumbing or something is pretty interesting. And this guy is actually his name is like up, I'm gonna butcher it, but it's like modern man saying or something. Very, very bright guy. I've heard him on podcast before. And he goes into has this whole theory about, you know, quantitative easing is you know, functionally, it's not it's not, it's actually restricting the economy because it's replacing it Financial collateral such as US Treasury securities, with with bank reserves, and, you know, collateral like, those those treasuries that that collateral itself has a multiplier effect amongst the kind of broker dealer network so So essentially, you know, like, those securities get used and reused, they get lent out. So there's a whole sort of financial infrastructure that's built on, on top of that sort of leverage on top of the, you know, the existing, you know, Treasury securities and stuff. So, so that was very interesting. I thought, okay, you know, maybe that, you know, this guy's saying that, you know, QE isn't the stimulative phenomenon that that we all thought it was, and maybe this is a reason. And so all these things seem plausible, but something just just didn't it just none of it really added up. Right. And then I read the deficit myth. Yeah. Right. And I mean, the deficit meant I was I was pretty shocked. Like, I don't know about you like, I mean, I'm actually curious now put back in your, on your plate for a sec. Like, what was the moment? Or the thing that you read? That? That? Were they just the light bulb went off?

Adam Rice: 11:50

Yeah, that's a good question. So I kind of you know, I found MMT kind of through a different way. It was back, it was when I was working in venture investing. And we were exploring a lot of, you know, the new stuff that was going on in FinTech. And this was probably 2016. And I was it was really, when cryptocurrencies were becoming mainstream, everyone was buying them, because, you know, everyone downloaded Coinbase. And they're getting a ton of hype. And I was really trying to wrap my head around what, what these things were like, what what is money in the first place? What is cryptocurrency is this actually an alternative to US dollars. And so much of what was online, you know, implicitly or explicitly, it was kind of Austrian economics, and really rooted and like hard money philosophy. So I was watching videos, I was reading books, and a lot of the thinking was just that, you know, the government's debasing the currency, fiat currency is going to become worthless, eventually, we need to go back to a gold standard, Bitcoin fixes all this. And it just never really passed the sniff test for me. Like I just, it seemed kind of conspiratorial, it seemed, you know, politically motivated in a lot of ways. And I was like, There's got to be, you know, a more neutral understanding of how monetary systems actually work. I forget, I don't remember if it was a video, I, I somehow found mmta was probably a video on YouTube. And I ended, I ended up buying Randy Ray's book, The MMT primer, which I think is great. And it really goes in depth, and in terms of like, the technical details and the operational details about or of how the monetary system works. And when I read all that, I was like, Wow, this makes absolute sense. It sounds like a pretty neutral description of what's going on here. And it's a lot more rooted in reality than all this stuff about hard money and Bitcoin and, you know, the money multiplier and people fear mongering about quantitative easing. And I think once you understand it, it's pretty intuitive. Because, you know, it's like, comparing the conversation now around the national debt to the conversation. In 2011. You hear all the same things, but none of what, you know, the fear mongers were saying in 2011 ended up happening, there was no, because of QE, there was no hyperinflation because the national debt, the government, you know, has continued to be able to pay its debts. As far as I can tell the dollars as strong as ever, even though the national debt has gone from something like 10 trillion to$30 trillion over that time period. So basically, you know, MMT was the lens for me that that most accurately described what's going on. And I think you and I feel the same way that you know, once you see it and understand it, it's very hard not to see it, it's very hard to unsee you can't unsee it. You can't unsee it, and it really, you know, informs a lot of my thinking about political issues about all kinds of issues. And I think that's what you know, that's what I'm excited to talk about on the podcast.

Ryan Benincasa: 15:06

Yeah, absolutely. Let me just also add that technically, I did read a a great essay, Paul. was by Randy that was that was published in American Affairs journal. Back in I think 2019. And I was like, huh, this is very, very interesting. And it's completely counterintuitive, but but without the context of, of you no thinking about, you know, or questioning how this, this stuff actually works. I kind of, you know, filed it in the back of my brain and thoughts. It's an interesting thing. I maybe I'll maybe I'll come back to that someday. But I also just have a general curiosity and and how about you, but we're the same grade, right? Did you graduate college in 2012? Yeah. 2012. Okay. Yeah, same. Okay. Cool. So, so yeah, so we were freshmen in college, like, a couple of weeks in, I don't know, what the what your timing of semesters was like, but, but when Lehman collapsed, right, it was September 2008. And, and all I remember hearing about in the aftermath of that, and this is again, I was 18. I knew next to nothing. Was these, you know, oh, these taxpayer bailouts? Right, right. Like, all reported all over the mute, you know, the taxpayer, are bailing out the banks and bailing out AIG and, and Detroit and, and all this stuff. And it's so interesting, like, how, how does that even work? I literally asked my parents, I was like, so guys, this whole, you know, financial meltdown and whatnot, is that there's like a taxpayer funded bailout. Did you get some sort of like special assessment or something? When you when you file taxes, tax? They look to me like I had two heads. What are you talking about? So so, you know, I always had kind of a genuine, a genuine curiosity. I also took a phenomenal, I studied politics in college, and I took a phenomenal seminar, my senior year, with this professor named Deborah booking on it's called a class called states and markets. And she really made the case for this sort of more Institutionalists framework, thinking about markets and capitalism and stuff, not as some thing, or a system that popped up organically or some sort of law in nature, but but rather, you know, a deliberate economic system that is imposed on, you know, a given population. And so that really sort of, sort of opened my mind up to kind of alternative ways of thinking about markets and, and, and capitalism and banking and stuff that was countered to basically everything I had been taught up to this point. So yeah, so I kind of just had these curiosities, and, you know, these little nuggets here and there, and then all of a sudden, 2020 happens. And thank goodness, I stumbled upon the deficit myth, because all of a sudden, it's just amazing. And, you know, some I gotta give so much credit to Stephanie Kelton and stuff because it is, or at least it was for me, like, an easily digestible book. You know, she's really distills quite complex concepts, and makes them much simpler. But she, I mean, she, like, I'm kind of, I'm a little bit of an accounting nerd. And yeah, I love, you know, looking at, you know, tearing apart these companies accounts and, and thinking about, you know, how funds should be flowing through and how that affects different balances and stuff. And, you know, potentially finding some sort of insight, you know, some sort of hidden treasure, you know, by virtue of having dug through their financial statements. And, and what Stephanie Kelton? I mean, she was telling us about us, you know, I spent last summer I spent a week at the levy Institute, up at Bard College in Hudson Valley outside New York City. And Stephanie Kelton among among many other MMT heavyweights were there and she talks about how literally, she spent months just the Just up at the levy Institute just just from what I can interpret, basically doing a forensic accounting analysis of Treasury and Fed operations, right, like, I mean, I mean, literally tore the counterpart, the way like a forensic accountant with a company. And that to me, it's it's that, that that rigor, the analytical rigor, that is also what's so compelling about what they're saying because they've done their homework, you know, and whereas most people no one knows they'll QE the base it was just like this like buzzword after buzzword, buzzword. It's not helpful. And and then you listen to her and, and Warren, Mosler and, and Randy Ray, and all these guys and girls, obviously, he's like, you know, Stephanie Kelton is like the, one of the leading faces. You know, they're, it's just incredible. The the intellectual honesty and consistency and the rigor. But also just thinking about it from a, from a logic perspective, right. Like, like, you know, Warren Moser says, You can't, you can't pay attacks in the currency that doesn't exist.

Adam Rice: 21:43

Right? Exactly. Of course, you

Ryan Benincasa: 21:46

can't. It's like, well, you pay your taxes while I'm in dollars. Well, where are the dollars come from? Oh, no, I guess it comes from the government. Yeah, literally$1 bill gets printed at the Bureau of Engraving and Printing. And it's, it's legally issued by the Federal Reserve. Right, you can not pay taxes in that unless it gets issued first. It's just simple logic. So totally. Anyway, I've kind of been ranting for a while. But that's what's so. But that's also what's so exciting. What's so exciting about this. And part of reason I wanted to come on, you know, and do this podcast with you is to, you know, help get these these views out there help maybe with some new framings and stuff, and also just kind of discuss, like I, I haven't been so optimistic about things in the direction of our country in a long time. And part of it is because it has been enabled by this understanding of MMT and, and public finance, and how these things actually work. And recognizing that it's all really just, it all comes down to political choices in real resources. So that is so much more optimistic. Like it creates such a more optimistic outlook for this country, and you know, for the legacy in the world that you leave for your kids and stuff, then this sort of nihilistic doomsday kind of, oh, the debt is that we can never pay it back. You know, why even try? You know, the government has always off balance sheet liabilities, it'll never pay back. And, and our children are going to be slaves to China, because it's like, oh, my gosh, yeah, that's all. That's all wrong. Yeah.

Adam Rice: 23:48

Totally. And I think, you know, that's one of the reasons why I originally became so enthused by MMT. Because, you know, it really opens your eyes to what's possible. It might not be probable, but it opens your eyes to what's possible. And I think that that's, you know, I kind of wanted to go into why. And I know, I know, you and I have loosely talked about this. But, you know, the reason why I wanted to get the podcast going again, and the reason why I've kept the meetup going in New York is I just think it's really important that people you know, regardless of your political persuasion, I think it's important that people understand this. Before, it's really the only you can't really have a conversation on this conversation about public policy, at least, you know, the costs the financial costs of public policy unless you understand MMT, in my opinion. Absolutely. And it does, you know, I'm glad you said that it makes you optimistic, it makes me optimistic as well, because I think if more people understand this, then it really opens the door to improving the lives of many people, which is great.

Ryan Benincasa: 24:58

You know, what I love about oh, sorry. No, go ahead. Go for it. Oh, what I love about this. Understanding this framework stuff is I can look back and say, Yeah, you know, we can we're going to make better public policy. So, so forth. If you are, look, I I'm a I'm a card carrying capitalist, I work at a hedge fund in New York. If you're gonna sit there and tell me that the, you know, the the economic stimulus package that was passed by both Trump and Biden, were not ostensibly good for businesses. You're insane. I mean, if you look at growth margins, like, I mean, it's it's remarkable how I mean, new business starts, right, new business starts have exploded following these these big programs, so it's like, it's like, how you, if you're, you know, against any of this, it's like your anti business, anti capitalist, anti American, as far as I'm concerned. I mean, it's just, I mean, it's just amazing. And yes, like, it's important to discuss public policy. Absolutely. I'm excited to talk about that. But how about thinking about, you know, public policy, as it as it, you know, helps business growth? Yeah, yeah.

Adam Rice: 26:32

100%. And, you know, for I know that a lot of people immediately go to inflation, on the topic by stimulus, but which we can cover, which I'm sure we'll talk about a lot, eventually. But no, I think you're absolutely right. It's it's, you know, once you understand MMT, you know, what do you think is gonna happen to the private sector, if the government starts reducing the deficit, or running balanced budgets, it would be a disaster for the private sector. And there's nothing inherently political about that. It's

Ryan Benincasa: 27:07

just a statement of fact. Right?

Adam Rice: 27:10

It's the you know, the private sector surplus is the government deficit. And if you want to start running a balanced budget or running a surplus, then you're taking away financial assets from the private sector. And I think once I don't think you have to be conservative, I don't think you have to be liberal, to recognize that that's actually the case as an accounting reality. And if you understand this stuff, you can discuss public policy a lot more clearly. You know, on the topic of the stimulus, it's what's crazy to me is, back in 2018, a lot of economists were saying that, you know, because of the Trump tax cuts, and because the deficit was going to expand as a result of the Trump tax cuts, that the government we limited in its ability to conduct fiscal policy in the future. And about a year, a year after the tax cuts passed a year and change after the tax cuts passed, Biden and Trump conducted some of the largest fiscal stimulus we've ever seen by far. And you know, that this is just another proof point for what, you know, what MMT says is correct. And we came out of what would have been probably the worst recession ever, by far very quickly as a result of what they did. And of course, there were, you know, there were inflationary effects. Is that just because of quote unquote, printing money? I don't think so. But, you know, it shows what's possible, it shows that the government stepped in, there was a rapid recovery. And of course, there were some negative effects, which, you know, is going to happen in a pandemic, but this idea that the government was fiscally limited because of the Trump tax cuts, should have, you know, and I hope it was just thrown out the window after that. It doesn't feel like it was just given how economists are talking about the debt ceiling right now. But that is, in my mind, a huge proof point for, you know, MMT be incorrect.

Ryan Benincasa: 29:14

But what I bought that that narrative, hook, line and sinker back in 2018, I'm ashamed to admit none of it, none of it, none of it was was was correct. I mean, I mean, rates went to zero. I mean, at the Fed, if I recall correctly, kind of went on a little bit of a hiking cycle. Right. Jay Powell? You know, kind of was being forceful about that in in fourth quarter 2018. I actually remember being in the in there's a huge stock market sell off on the on Christmas Eve 2018. More so probably related to liquidity and flows and, and, and whatnot. But But, and then they and then they they cut rates in in 2019. I guess kind of at a fear of, you know, there's a lot of talking about the yield curve inverted summer 2019. And it was always talking about recession. And, and. And I just, and but but rates ended up going to basically zero I mean, a little over a year ago, then this is what was January, January 20. Up, you know, 15 months ago, I think you could buy T bills for like, one year T bills for, like, a 25 basis point. Yield. Right. I mean, I mean, they went to zero, none of none of what people said, what happened with blowing out the deficit and stuff with the Trump tax cuts came came to be true, none of it. So it's. So you have to, you know, in order to be intellectually honest, and frankly, you know, in my industry in order to make money, you, if your model is wrong, then you have to go and figure out what's wrong with it. And, you know, it's just surprise, it's shocking to me, the lack, like, like, there's people that that that, you know, go on CNBC, that completely, you know, blew up their fund trying to short JGBs. Japanese government bonds. I mean, not naming names, but you lost your investors so much money, you think that you would have learned from that and learned what went wrong from that. But, you know, for whatever reason, that people don't that and they don't, you know, they still get invited back on on to shows and get quoted in the media. It's like, this guy doesn't know what he's talking about.