#5 - Ohio Disaster, UFOs, Retail Sales Boom, Energy Prices, and Trade Deficits

Adam Rice: 0:33

Hello, everyone, and welcome to episode five of the applied MMT podcast. I'm your host Adam rice. In today's episode, Ryan, and I cover the Ohio train derailment, the recent UFO sightings, the retail sales report from January energy prices and their effect on inflation, and the costs and benefits of trade deficits. Thank you again for listening. And with that we'll get started. One thing I would like to touch on, and I feel like you know, the reason I want to touch on this is because I feel like it's not getting enough media attention. It's getting a lot of attention on Twitter from, you know, just average Twitter users or people who are in the community. But this train derailment and East Palestine, Ohio, and it's pronounced Palestine, not Palestine, I think is just insane. And the reason I'm bringing it up is because I think it's a great example of what happens when you neglect infrastructure in the country. So basically, for those that haven't heard, a train derailed in a town called East Palestine in Ohio, I believe it's between Cleveland and Pittsburgh. And there were something like three or four cars on this train that were full of a chemical called thick nylon chloride. It's called highly toxic chemical, it has a boiling point of eight degrees Fahrenheit. And it's used in the production of PVC, plastics. And basically what happened is the train derailed. And whatever authorities were present decided the best way to clean this up was to just burn it, they did a controlled burn of the chemical. And if you look online, the pictures are pretty stunning. It's basically you know, these these massive black clouds coming from the coming from the site of the derailment and went up into the air. And I guess when this chemical meets water in the atmosphere, it then turns into a different chemical, which I believe is chlorine gas, which is a chemical that was actually used in World War One as a chemical weapon. And then it gets, you know, it pollutes the water supply pollutes the air, there were reports of animals dying, you know, in the days after this, and basically these people are being told it's safe to be at home, just don't drink your water for now. And to me, this is a shocking. And the response from the company. I believe the company, the RET DT Ryan, do you know the name of the company?

Ryan Benincasa: 3:07

Norfolk Southern?

Adam Rice: 3:08

Is that who it is? Yeah, yeah, Norfolk Southern. The company offered to pay or to donate $25,000 total? Oh, my gosh, as a result of this disaster. And this is something that, you know, is just an absolute failure to me. And in terms of the institutional structure we have here. And this is what happens when you neglect infrastructure. And stuff like this. I mean, these people feel horrible for these people. What do you know, what do you do as someone who lives in this town? And what is this stuff going to do? You know, not only to the people in the town and the surrounding areas, but they're saying this is already in the, in the Ohio River Basin, these chemicals? So Oh, my gosh, it's just it's it's a disaster. And it's something that, you know, I don't know why it's not getting more coverage. I don't know why the the government isn't addressing it more directly. But to me, this is this is an example of why MMT is so important. Because, you know, this stuff should be properly invested in, it shouldn't entirely be up to the market to decide what's safe and what's not. And it shouldn't be entirely up to the market to determine the response to crises like this. So all in a very sad story. I hope there's some kind of positive resolution for the people that live in the affected communities. But yeah, and any thoughts on that, Ron?

Ryan Benincasa: 4:39

Yeah, I mean, well, first of all, obviously, you know, thoughts and condolences with the people of East Palestine. I mean, it's just horrific. This whole, this whole thing, and you'll hear any stories about animals just dropping dead and stuff is pretty scary. And totally echoing your sentiments regarding infrastructure. I mean, you know, thank goodness we pass the bills we did last year, whether it was the infrastructure spending bill or the flushing Reduction Act or the chips and science act. I mean, there's just such a by a need for so much building in this country, and I think, you know, prior generations perhaps didn't understand or didn't appreciate, you know, the merits of public spending and kind of just free rode on their their prior generations investments and didn't bother doing necessary maintenance capital spending, I mean, a line I keep using is, is it's not fiscally deferring necessary maintenance, capital spending is not fiscally responsible. Right? If you have a, if you have a leaky roof, you you address the leaky roof, you don't just let it sit idle and get worse and worse and worse, because you're going to end up spending a lot more money to fix it, when all of a sudden, you know, your house is flooded, and you've got to rip out some walls and stuff and, and you've got, you know, your your personal possessions are ruined and stuff, like, it's just, you know, letting, letting things go unaddressed, is, is not, quote unquote, fiscally responsible. So we need to have real conversations. I mean, you know, in my town, there was a, this horrible incident was it a year or two ago, where one of the one of the elementary schools a roof collapsed in one of their elementary school, like, like a, like a second floor, you know, what it would be the ceiling for the first floor and the floor for the second floor, just completely fell in. And thank goodness, that no one was at the school at the time. But it could have been absolutely catastrophic, like people could have been killed at an elementary school. And it, you know, sparked this, a lot of public outcry against, you know, just the lack of public spending. And so, you know, they did the town did a, an assessment of one of the middle schools and found it to be structurally compromised. And so now they're, you know, they're doing this massive spending project to completely rebuild it. So it just, it just goes to show that, you know, ignoring real problems in the real world, does not make them go away, sticking your head in the sand is not a solution for for real problems. And, you know, and in the case of my town, obviously, it's a currency user, not a currency issuer. So, you know, there are hard budget constraints in terms of what it can do, but, but pretending but you know, at the same time, you know, you have to be, I mean, there's talk of public officials are so incredibly averse to any sort of, you know, borrowing to fund any sort of public. I mean, at some point, like, you've, if you're a currency user, and interest and the cost of debt is low, and you've got a lot of unnecessary spending to do, then you should hit the market and do the spending. I mean, that was pretty critical. Because now, you know, the cost of these capital projects is a lot higher, which, you know, has a real impact on a currency user. But it also just goes to show that that the federal government, which is a currency issuer, and is not financially constrained, should be plowing more money into these sorts of projects into into things that prevent, you know, large scale trip train derailments that poison you know, the water in the agriculture of of these communities. It's just, there's just no there's it's just, there's just no excuse and pretending like, we have financial constraints constraint on it is, is just, it's just wrong. It's just it's a lie.

Adam Rice: 9:52

It's fiscally irresponsible. It's

Ryan Benincasa: 9:54

fiscally irresponsible.

Adam Rice: 9:58

Yeah. So you know, on that topic, you know, it's whatever is going on with these unidentified aerial phenomenon right now. I think it's, you know, it's gonna be funny, or not funny so much, but kind of sad because you know, a bunch of Money is going to be plowed into this immediately. Like, you know, there's going to be massive defense spending to Space Force or to whatever, you know, it's whatever agency or or branch of the military is responsible for monitoring this stuff. And there's not gonna be any questions about how to pay for it at all. And it's just, you know, it's it's, it goes to show how different the priorities are.

Ryan Benincasa: 10:43

Absolutely, yeah. No, no people. I mean, yeah. When when you scare the public the way the way you do in terms of, by the way, like the fact that the UFOs are supposed to UFOs have dominated our headlines, versus this disaster in Ohio is really is really a shame. And, you know, I'm not someone who loves to just constantly bash the media. But but this is this is a, this is a screw up, in my opinion that they should have been all over the story in Ohio. And I mean, this UFO thing is ridiculous. So

Adam Rice: 11:18

agree, big time. All right. The next thing we wanted to cover is the retail sales numbers that came out today. So in January, retail sales were up 2.6% headline. And that was that was above a point 9% expected. So it was a massive beat in terms of retail sales. And if you've been listening to our podcast, you might have been expecting that I think, I think I think most people were not expecting that. And as a result, well, I don't know if it's as a result, but the market has been up and down today. And as of right now, which is 2:30pm. On Wednesday. The markets actually up. So it's interesting. It's, you know, it kind of it goes along for we've been saying that the economy is doing pretty well. Those are super strong retail sales numbers. And we assume that's being driven by the interest rate hikes, and then also all the new fiscal activity as of 2023. Ryan, any thoughts on that specifically?

Ryan Benincasa: 12:23

Um, I mean, nothing to add other than, you know, told you so.

Adam Rice: 12:32

Yeah. It's I said to someone today, I said, you know, what, it'll be interesting to see if the Fed continues hiking rates, and we're at 7% 8%. And the economy continues accelerating, how they'll respond them, but remains to be seen. All in though, I think it's good news. The economy, by all indications is really strong. And I think that's good for everybody.

Ryan Benincasa: 12:56

Yeah, I mean, this economy is on fire. I mean, between jobs and spending, it's, I mean, how I think housing is looking pretty good right now, too. Yeah, no, it's the gaslighting that took place last year is just is is is just shameful. It is terms of in terms of the the the economy and, you know, people's expectations and such.

Adam Rice: 13:24

It is, it will be interesting to see how it plays out, as we've talked about many times. Yeah.

Ryan Benincasa: 13:31

I mean, that's not to say there aren't like, there's always things that can go wrong. There's always risks. I think the biggest risk

Adam Rice: 13:40

alien invasion

Ryan Benincasa: 13:46

didn't you? Didn't you watch Independence Day? I mean, they brought the whole world together, like, like that would probably be bullish for the stock market if aliens invaded, you know, more public spending. I think the biggest risk to the economy right now, though, is a is potentially a, like an energy price spike. But as you know, as I mean, there's a big or a bigger than expected inventory build in terms of crude crude oil. So So oil is down today. Natural gas has been down and that's partly a function of you know, just how just how much will a like a milder than expected winter and Europe and be, you know, just arising in production, US production, you know, to sort of to support our European allies during this horrific war in Ukraine. And so energy prices have come down which I think is I mean, as as I'm talking, you know, like like oil and gas stocks are down and like in the in the Dow, which is more sort of tied to industrials. And cyclicals is down while while the SP View, and 500 and NASDAQ are up. So that kind of explains that a little bit. But I also just think in general, okay, if energy prices, you know, energy prices going down with obviously be very welcome. For the economy, it basically would be a form of stimulus, right, last year, they had the price spikes, and that was a that cause major tightening in terms of consumer spending. So, you know, by that same logic, if you get a big decline in, in energy prices, that's probably going to be a net stimulus for for consumer spending, so, and we'd probably flow through to, you know, other other prices that are part of the Consumer Price Index, with all potentially go down. So that would be a welcome development for sure. But I do worry about, you know, these geopolitical situations and, and risks, and what impact that might have on, you know, energy, energy price spikes, especially so the other day, Russia announced that they were going to cut oil production, which, which had a lot of people worried about, or the, you know, oil traded up in response to that news. So, it'll be interesting, but it's funny to watch Warren Mosler school these people on Twitter and basically explained that, you know, Russia, Russia has, you know, cutting of oil production is actually going to lead to the Saudis to expand production, to which people are like, why would why would they do that? Wouldn't they wouldn't, you know, expanding production when that drive the price of oil down? And, and his response is like, that's not how it works. I mean, the Saudis, essentially, they're the swing, they're the quote, unquote, swing producer. So everyone in the world, basically, are all the oil producing countries, basically. You know, they sell their crude oil to refineries. And then once they're, they've run out of barrels of oil that they can sell, then the refineries call up, you know, the Saudis. And at that point, the the Saudis are are a monopolist, right? They're, they're the only ones who can, who can provide that sort of swing production of oil given, you know, the sheer size of the, you know, the bases that they're sitting on. So they just, they just sort of that so they just set their price as Warren Mosler likes to put it, they're like a gas station. Right? They post the price. And, and then, you know, the, the, you know, however much whatever's leftover in terms of volumes. That's, that's how much they sell. And that's how that's how that that market structure kind of works. So if, if Russia is cutting production, then that means that the Saudis are going to have to increase their production and sell more barrels of oil, that doesn't necessarily mean that the price of oil is going to come is going to go down. Because the Saudis have already set their prices. They're called OSPF. I forget what that stands for. But essentially, as as, as Warren was explaining, like, this isn't, this isn't the Saudis like reacting to anything. It's just it's just, it sort of happens automatically. They post the price, and then whatever amount of barrels of oil is needed. That's how much they produce, they produce exactly how much is demanded. That's so it's not really like an okay supply and demand sort of an intersection curve. It's more so like a monopoly situation where, at you know, once once the the refineries have been filled up by everyone, every one who's not Saudi Arabia, then they go, then they go to Saudi Arabia and Saudi Arabia at that point, a monopolist they they name their price. Right.

Adam Rice: 19:57

Yeah, that makes sense. And it seems like it seems like that is not entirely recognized most of the time that there's, you know, it's essentially like a cartel controlling the market. It's not just a supply and demand driven.

Ryan Benincasa: 20:11

Right, right. That's, that's exactly it. I mean, yeah. I mean, OPEC itself is based is a cartel. So? Yeah, so it's not, ya know, and as as, as Warren likes to put it, I mean, you know, we we buy there if we buy their oil, that's a real resource. Yeah, that's a that's a that's a benefit, not a cost, the cost is, is I mean, we it's just numbers on a on a, on a paper statement or digital, or, you know, a digital statement, you know, there's no real cost there. It's and we get the real resource benefit. It's funny, actually, the, the, the only the only people that I've heard talk about in in similar terms, is actually Charlie Munger, Warren Buffett's right hand man, where he's just like, it doesn't make any sense for us to be selling to be selling our oil to, like, we should just basically, as he said, at the last year with me, he was like, we should just buy all of our oil from from the, from the Arabs and just keep our oil. Yeah. Yeah. Which is an interesting way to think about it. I mean, I know that there's a lot, there's a lot there. And I know that this is energy is a very, you know, fossil fuels are very controversial topic, but it is, it does make you think a little bit right, like, why give up this, you know, this real natural resource, when you can just buy it from someone else? Right.

Adam Rice: 21:49

Well, it's interesting, because I think I think it was under Obama that because there previously was a ban on on domestic oil exports in the US. I think, under Obama, that ban was lifted, and then Trump under Trump, the exports really accelerated. And it's continued under Biden. So I use rice to be the you know, you just the United States didn't export oil. And now it's a big exporter.

Ryan Benincasa: 22:19

Well, and that makes complete sense that Trump would do it, because if you think about Trump, like, and his business background, he thinks of it as okay, we need to increase our sales. Right. So he thinks it's a great thing. Okay, well, you know, the US we, you know, we, we produce this oil, we sell it to these other countries, and, you know, they send us over dollars, isn't that great? Right, because because any sort of business person would, would think that that would be a great thing, but the United States is not a business. And so the way that the correct way to think about is worth giving up a real resource, it's a cost and as opposed to a benefit, yeah. Because we It doesn't cost us anything to, to issue new to just create new dollars when

Adam Rice: 23:12

we need. And it's, it's funny, I think Trump, Trump used to talk about the tariffs in the same way, like he was excited by how much revenue the tariffs were generating, when really it was right, it was domestic importers that were being taxed. So it was really just, it's like bragging about, you know, taxing American businesses more to import cheap. It's totally backwards. And it's the same and the same way with uh, you know, with the trade deficit. I know most moslem talks about this a lot. But, you know, economists will frequently talk about how the trade, I mean, not so much anymore, which is interesting. I feel like this is a bigger talking point in the 2000s, in the 90s, but just about how large the trade deficit was, and how bad this was for the United States, when really, it just means that we are net importing goods from the rest of the world. And we receive the benefit of those goods in exchange for dollars, which we can't run out of.

Ryan Benincasa: 24:07

Right. Right. Which is it in a way that I and I'm just going to throw this out there. And and let me know what you think, is the way to think about that is when we run a, like a trade deficit that actually creates capacity for us to spend more domestically and I know that that's a little bit counter intuitive, particularly if if you know, you, you don't look at things through an MMT lens. But my my point is that if if China wants to sell us, you know, goods for cheaper than then what we make them domestically. That means that that word saving, it's a it's it's deflationary, it means prices come down. And it means that we save on our real resources we don't need people employed to make that stuff that we can get from childlife. So that actually creates So that in a way that creates additional real resource capacity that we could have put to work, right, we could have said, hey, you know, we're going to allow these, we're going to lose these jobs. We're making a conscious decision to, to offshore, all these jobs and screw over all these people. And, you know, we're gonna get cheap goods as a result, we could have, you know, spent dollars that don't cost anything, spent dollars to, you know, have those people redeployed, doing other things, maybe doing? Doing things that, you know, provide it, you know, maybe maybe working on the green energy transition, you know, doing things other than other publicly useful, you know, high higher value manufacturing skills, you know, not, you know, improving our, our railway system so that so that trains don't derail, and it caused Chernobyl in in sleepy little Midwest towns.

Adam Rice: 26:35

Yeah, 100%. I think, and I think that's really, the lesson is, you know, if we make the decision to outsource production, then there has to be an answer for people who lose their jobs because of that political decision, or that, you know, business decision, right. And that's really what's lacking all time.

Ryan Benincasa: 26:59

Well, but not only that, and to me, that's like, that, that's, that's the moral argument. And, and completely, also completely valid. But there's also the economic argument of, well, we just freed up resources, right, these people are no longer employed, yeah. That they don't have that. So we can afford to, to use to, you know, pay them to do things other than other useful for the public, we can, because because they no longer have to, they no longer have to work. We don't need them making stuff, because we've got the Chinese are making us stuff now. So now we have this this sort of excess capacity of people who are willing and able to work, you know, that's a real resource. That's a real benefit. I mean, why not? Why would you not, you know, deploy people, you know, to do more useful spend the money to get so that people could do more useful things. I mean, I think the fear has always been, you know, either a, you know, ability to service debt, which obviously, we know, is, is false, it's a, it's just a made up myth. And then the other fear is, as inflation if someone can get past the, you know, the national debt and deficit myths, then it's okay, well, well, that'll be cause inflation, it's like, okay, well, you have this massive deflationary force in the form of, of, you know, outsourcing everything to China and other countries. So, if you countered that with additional fiscal spending, to get people to, to do different work, that's, that's, you know, you know, higher value and more useful to the public purpose, then what that would counter that deflationary force. I mean, the Fed, talked for years about how they couldn't get inflation back up after the financial crisis. And, you know, they, they consistently, their their inflation numbers hit hit below their targets. And I My contention is that, you know, we could have used, you know, we could have spent the money to, you know, redeploy people, you know, build more schools, build more hospitals, build more childcare centers, build more senior care centers, I mean, all this stuff would have been a fantastic use of real resources, which we had available, because of all these people that lost their jobs, because we outsource Yeah.

Adam Rice: 29:46

100% 100%

Ryan Benincasa: 29:50

And the last thing I would say on that is, is I think we really missed an opportunity. I mean, so the shale boom, really, like I mean, was a it was a disaster for, you know, shareholders of, of companies. I mean, you had this huge boom, right? It was a lot of it was funded with with high yield debt. And long story short, I mean, all the incentives We're, we're geared towards increasing production, right? So this is, you know, starting in like 2012, probably. So you have this massive shale boom, it's funded by by, you know, high yield credit. And all of a sudden production in the US explodes, and the price of oil collapses. And all of a sudden, all these companies, all these energy companies are unprofitable. So we had this period of very, very low, abundant supplies of energy and very low energy prices. And that could have in my opinion, when you think about that, well, I mean, what a waste. We could have, we had all this cheap energy, we could have made a lot more, we could have done so much more, and have such higher economic growth and productivity, maybe, maybe, you know, do more in terms of transitioning to sustainable green energy, you know, do more of what I said before, which is, you know, create more schools and, and hospitals and care centers, right. That, I mean, unfortunately, those days are gone. But we had, that is a real, that was a real resource, sort of gift in the form of the that just kind of we just kind of we didn't spend enough, you know, because we had this made up fiscal restraint. So I think that was a real unfortunate. kind of missed opportunity. But

Adam Rice: 31:56

all right, Ryan, I actually have to run. Great chatting, and I think next time would love to chat about the tech and VC stuff we were talking about before the show. But yeah,

Ryan Benincasa: 32:08

oh, yeah. That's gonna be a good one. of many I suspect

Adam Rice: 32:13

for sure. All right, good talking to you and I will talk to you soon.

Ryan Benincasa: 32:18

Awesome. Thanks, Adams. Run