Unknown: 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 the position of any associated employers or organizations. And hello,

Adam Rice: 0:32

everybody, and welcome to episode 16 of the applied MMT podcast. It is Adam rice and Ryan, Ben and casa. It's been a while since we did an episode. The last conversation we had was with Nick Gomez of Angie, traders. And I think we want to start off by giving Nick some credit here. For his call, he said that, you know, everyone should expect the market to go up after the debt ceiling issue is resolved. Despite calls to the contrary. Ryan, do you want to go a little bit into, you know, the fears and at the end of May, early June about the liquidity, the liquidity drain of the TGA that everyone was was talking about?

Ryan Benincasa: 1:10

Yeah, sure. Thanks, Ed. Yeah, definitely want to give a shout out to Nick Gomez from Angie trailers. He definitely deserves a little victory lap for that call. Let's talk about that for malicious backup for a moment. So I think it was May 31, that the news came out that, you know, the, the debt ceiling limit was raised. And so there was palpable fear amongst market practitioners and prognosticators with this with this idea that you know, that by refilling the cash in the in the TGA, that would be pulling liquidity from other sources in financial markets. And so that would be negative. The idea is that that would be negative for stocks and stuff. Meanwhile, markets, risk assets have been absolutely on.

Adam Rice: 2:08

What so so if you if you were to ask someone who, who was proposing that, how does that work mechanically, like in their, from their perspective?

Ryan Benincasa: 2:19

Well, I can't speak for them. I think what they're just saying is like, you know, look, the cash has has to come from somewhere. And so, you know, it's, again, this this sort of zero sum loanable funds, kind of framework of saying, Well, you know, if the cash is going to have to go into the TGA. You know, that has to, they have to come from somewhere. So you know, that that's going to likely meet be negative for other assets, again, because if you think of money as like a fixed stock, right, if they have to go from one account to another, you know, then you're going to have a, you know, a deficiency somewhere else. And so that's going to put pressure the problem is that's not that's not an accurate description of of our financial system. I mean, think about it for a second, right? The, as a matter of practice, the US Treasury sells bonds first to get, you know, to get cash into the TGA. And to its general account, the Fed, and, and then and then, you know, spends, it spends it, that's not something that's necessary. It's just the institutional practice that we've adopted. Right. So I heard that theory. And I was like, that is, it's crazy that people are calling for that. Because if you, if you look back, I haven't I haven't looked back at the numbers in April 2020. But just think about it for a second. Right, you got the first the first wave of the, the COVID stimulus, right. What was that the Cares Act? I think that Trump passed. Yeah. And and so, like, that was like a trillion dollars? What are a couple of trillion dollars or whatever it was? Right. So so that had to do two point 2,000,000,000,002 point 2 trillion. So the trip so in order to spend that amount of money, the Treasury had the first accumulate the cash in its TGA as a matter of institutional practice, right, right. It did not have 2.2 trillion just sitting there. It had to the money had to be added to its account first before it could then be drained from its account on, you know, in the form of the actual spending, that happens, right. And what happened in April 2020. markets went nuts. Right, right. You had this explosion in, you know, the stock market that you know, you know, how you bought, like everything just went crazy. You know, crazy up. And so, I'm like that, you know, we're it's basically a repeat, essentially to it. much smaller scale. But it was was my interpretation is that is that it's a repeat essentially of April 2020. And so so that that theory again, this is why I got into MMT in the first place, right? Because, because I'm like, everything about that loanable funds framework didn't make any sense in terms of the actual outcomes that were experienced in, in March and April of 2020. Right. Right. And so but but but, you know, and this was, this wasn't like some fringe this liquidity drain thing wasn't some fringe theory, this is on the front page of the Financial Times. Right. It was, indeed, on the front page of the of the Financial Times. You know, it's a quote from someone at JP Morgan, talking about this, this liquidity drain, you know, as being a negative and meanwhile, I mean, it's not even that, that the stock market has, has, you know, risen very rapidly in the six weeks since then. But, but like, junky stocks have have performed exceptionally exceptionally well. Right, like, like low, like, non investment grade, you know, high yield issuers have have been on fire. And so it's, and that's consistent with what happened in in, in April 2008. Right, so the riskiest, kind of most speculative parts of the market are the ones that have actually performed the best since this suppose since you know, the suppose liquidity drain, so everyone, so the mainstream, because because their framework is wrong, just got that call completely wrong. And, and, and your Nicoma is, absolutely nailed it. And so, you know, I do want to talk about plumbing for just just a couple of minutes here. Yeah. 100%. Because because, again, people say, okay, you know, the cash has to come from somewhere. And one thing that, you know, first of all, first of all, right, if you look at so I've got the Alright, so the I'm looking at the May 31. You know, federal reserve balance sheet, factors affecting reserve balances h four, one. Okay. So, first of all, it says right here on May 31, the reserve balances with Federal Reserve Banks. 3,205,000,000,000. Okay. Yep. On June 7 2023, reserve balances with Federal Reserve Bank, Reserve Bank's 3,306,000,000,000. So, literally, in the immediate week after, oh, and by the way, the the Treasury general account went up from 48 and a half billion to 7777 and a half billion, right. So the people will say, well, where the money has to come from somewhere, it comes from the Fed, crediting reserve balances. Right. Right, right. That's where so so that's what I think people got so wrong, it's like, actually no, like, they're like, they're kind of partially right, in the sense that like, yeah, you know, the reserves have to be, have to go from, you know, have to go from one account to another, but then the problem is, and this was my point, or has been my point. The problem with that theory is it's only partially right. Because if there are insufficient reserves, for the Fed to hit its target rate, then it adds reserves. Right. Right. So, so, if and that's the whole thing, like, like Stephanie, Kelton, you know, back back when she went by Stephanie Bell wrote a paper on this, this, you know, if you just look at it, just it's not complicated. It's just algebra, if you just look at the reserve equation, right, if the if, you know, the funds go from, you know, commercial bank reserve accounts to the Treasury general account, and there's an that creates a deficiency in reserves, well, then the Fed won't be able to, you know, the, the rate on reserves will explode. Right. Right. And the Fed, you know, and the Fed doesn't allow that to happen. It has a target rate, so it supplies additional reserves in order to hit its target rate. Right. And that and so and so in the aftermath of this debt ceiling, you know, stupid episode. The Fed net added to reserve balances And that was and so that doesn't that doesn't that didn't require, you know, some liquidity drain from financial markets, it's just from the Fed, adding. And that was sort of Cohen's points to is it's like, it's like the, the, there's actually more liquidity being added to the, to the markets, as opposed to less when, when, when the Treasury you know, issues a lot of a lot of securities. And I also think that there's probably something in the, in the kind of, you know, collateral channel to have like, Okay, well, there's, you know, if Treasuries are the, you know, pristine, you know, best collateral out that, you know, in financial markets, then adding them means that there's a, there's additional capacity for things like, margin debt, for example. So, I know, Douglas over at the MMT macro trader, he's been talking about how margin debt has, has exploded basically since then. And I think that there's probably some sort of connection there as well. But I also want to talk about one other piece of plumbing, which is, which is the the Feds reverse repo facility? Right. And so

Adam Rice: 11:42

that that started and 2019. Right.

Ryan Benincasa: 11:47

I think it started in 2001. I think the I think the Fed repo facility started in 2019. But the reverse repo was 2020. Okay, got it, I think. But, okay, so where's the? I'm trying to say, so. Okay. All right. So here. So essentially, so reverse repo is a, it's a liability on the Fed's balance sheet. Okay. So basically, the Fed has assets, it has a bunch of securities on its balance sheet. And when it enters into a, you know, reverse repo arrangement, it basically, you know, sells securities to whoever is on the other side with an issues have promised to, to buy it back in like a few days or something. It's a contract. Okay. Yeah. And so, and there's a rate and everything else. So so it says right here on on the Feds website, it says, Okay, so on their FAQ, how does our RP impact the Fed's balance sheet? It says here, an R RP is a liability on the Federal Reserve's balance sheet like reserves, currency, like reserves currency in circulation and the treasuries general account with our RP transactions are settled. The New York Feds tri party agent transfers the cash proceeds received from our RP counterparties to the New York Fed, this movement of funds from the clearing bank to the New York Fed reduces bank reserve liabilities on the Federal Reserve's balance sheet and increases RP liabilities by an equal offsetting amount. So I want to the reason I bring that up is that is just to point out our RP, the RP facility, and by the way, this is not like some nominal thing that before the the debt ceiling got raised, right. The balance of the Fed RP was two and a half trillion. So it's basically a way for I believe it's a way for money market funds, essentially to because they don't have reserve accounts with the Fed. It's a way for them to interact, but But basically, the RP, like, like explicitly says here is is it's draining reserves. It's a reserve drain operation, just like issuing Treasury securities is a reserve drain operation, right. And so and so, which begs the question of like, so why does this thing even exist? Right? Like, like, Why did and the reason it exists? And the reason it's got two and a half trillion, is because if it didn't exist, the the Fed wouldn't be able to hit its target rate. The it would drive it there would be, you know, the balance of reserves would be too high, and that would force the federal funds rate towards 0%. Right, right. That's why That's why they do this is to drain reserves. If they didn't to drain the reserves, and then they wouldn't be able to, to hit their, their target rate. So this is a reserve drain operation, just like issuing Treasury securities is a reserve drain operation. So when you think about it like that, well, it's like, okay, why didn't the that begs the question of why why does this exist? Well, the the, you know, we have a debt ceiling, that that had to get lifted. Right. So, yeah, so there's two reasons. So once it is the debt ceiling limit, that essentially by limiting how much debt the Treasury could issue, the it meant that the Fed was unable to hit its target rate, because there weren't enough treasuries outstanding to, you know, for the, for the, to drain out the reserves. Right. And that's also a function of QE, right, because the Fed had purchased so many, you know, Treasury securities that that were on its balance sheet. So, so if you think about it, right, like, so you've kind of restricted how much how many, like the available securities that can be used to drain reserves out of the system. So they had to figure out a different operation to drain the reserves. Right. And, and so when you think about it like that, okay. The it becomes clear that the very existence of the RP, the 2 trillion worth of RP that the Fed has, means that actually, there wasn't enough debt, that the United States didn't have enough debt outstanding relative to the the amount of spending and subsequent reserve balances, you know, for the Fed to be able to conduct its monetary policies. So people say like, oh, the US states have too much debt? Well, this is actually evidence that there wasn't enough data. Right? And what we're seeing now is, is so okay, if we look at let me pull it up here. So on May, on May 31, the RP I'm looking at it was two points, 6 trillion. Okay. And the, and the Treasury general account was 48 billion, okay. Now, in the in the latest, you know, the 12, release. RP is down to 2.1 trillion. So it's almost, you know, half a trillion that that's gone down. Okay. And an almost equal amount. 500, there's now you know, 517 billion in the treasury general account. Right. Right. So essentially, anyone who was buying who was buying it, who was, you know, participating in the Feds or RP program. Now that the, the, the ceiling got lifted, and the Treasury can start issuing treasuries again, they're just they're just buying treasuries the old fashioned way? They probably get, I assume there's, there's some sort of like, you know, better rate or something that they get if they by, you know, primary versus versus doing the RP. But, but, but yeah, so like, there's like a one for one, you know, as of as our P has gone down, the TGA has gone up.

Adam Rice: 19:06

So it's basically just like, a backup facility to facilitate the reserve drain Yes. necessary to conduct monetary policy?

Ryan Benincasa: 19:16

Yes. And the reason you need it is a because the treasurer was allowed to issue Treasury securities and be the Fed had bought so many securities during during QE. Right.

Adam Rice: 19:28

That's really funny. This is a funny, yeah. So

Ryan Benincasa: 19:31

and now it's just like, yeah, it's coming down. And and because, you know, they're just buying treasuries directly from, you know, directly instead. So it's just, it's just kind of a little, a funny little thing. That, you know, it's literally its very existence is actual proof that the amount of debt outstanding was it was insufficient as possible, and yeah, and one other thing I want to talk about too, and this is, this is a I've been kind of, like, thinking about this a lot recently because Moser had a couple just just Goldmine tweets. And I want to explain something and like, this is so important, it gets to the crux of like this entire thing. So, let's let's start from scratch for a moment. Okay? The the United States government, the Treasury wants to spend $100. Okay. It's institutional arrangement says that it has to have cash in its account before it can spend that$100. And the only way you can get cash in its account is by issuing securities. Okay. Yeah. And, and, and so, so that's so. So that's one, two. Okay. So you've got on the other side, you've got a broker dealer, right, a primary dealer, who, you know, it by law has to, you know, submit competitive bids at primary auctions of the treasury of Treasury securities, right, and the only way and the Fed sort of sits in between them, right. It's a fiscal agent of the United States government, it sits between the commercial banks and dealers and the United States government. Okay. So the dealer says, Okay, I want to bid x four mil arm 100, Treasury's 100, bots, whatever. Okay. So, let's assume though, we're starting from scratch, okay. The, the dealer doesn't have any reserves, because we're starting from scratch and the only way like reserves only exist when the Fed creates them in existence, right, it's some monopoly supplier of reserves it and and reserves are the only are the only thing that are proper, you know, that that can be used to clear transactions with the Treasury right, you have to tender right reserves in order to get the Treasury securities okay. So you need right so, so essentially, so they say, Okay, I want to buy 100 bonds, all right. The Fed says, okay, okay, great. It the the, the Treasury, it marks up, you know, $100 cash in the Treasury's general account? Well, guess what? It has to simultaneously that, or that markup of $100 has to be offset by a debit, right? So it credits the TGA. And it debits the broker dealers. reserve balance by $100 as well. So now, the dealer has $100 reserve deficiency, it's an overdraft. Right? Yeah, it's a negative balance. It had zero. And it's I want to buy her bonds. Okay. Okay, great. Now it has a balance of negative 100. Right. Okay, that is functionally a line of credit from the Fed to the bank. Or to the dealer that and that is such an important. So profound thing. Right, the Fed is literally Lent is lending those reserves into existence by virtue, and it's not like it's making some deliberate decision to do so it's just doing accounting. It's saying, Okay, I'm marking up the TGA by 100, I have to do an equal offsetting mark down of 100. At the, the, you know, in the in the broker dealers reserve account, that alone, the Fed is Lent, the Fed is lending that $100, to the dealer to then buy the, the $100 worth of, of Treasury securities, a read. So this idea, and again, like, this idea, that that's what, that's why that's why like, the MMT in MMT, we say, oh, all spending is done by the Fed, you know, crediting accounts, and that's literally true. And people will try to, you know, get into some some, you know, arguments about legal arrangements and say, Oh, well, you know, the, you know, the Treasury needs cash in his account. Verse, it's like, okay, well, I don't necessarily agree with that. And then Randy's Randy Ray's latest book, he mentioned that there's a there's an FAQ for like a manual at you know, for fed staffers. It literally says if, if the TGA account is zero Oh, and, you know, you receive a check drawing on on the on the the account, you know, just book a negative just book a negative balance into TGA. That's right. Right. So again, this is not it's just accounting. And so that's something that I think like, is really important to, to hammer home. And it ties back to this idea of oh, you know, the liquidity has to be drained from somewhere. No, it doesn't. The fact that just the Fed just just just the the money just gets credited to the account, if there's not enough reserves in the Fed, you know, you know, can can just create new reserves, right, just doing the accounting is functionally the Fed, lending, the reserve rent, lending, you know, dollars into existence?

Adam Rice: 26:19

Right. Yeah, it's kind of it kind of goes back to the old like, or the, or the, you know, the aspect of MMT that, like, you know, it's all just account balances that are being credited in debit, debit. And it's not like, they're, it's not like the money is coming from anywhere. It's right. You know, it's like the scorekeeper thing.

Ryan Benincasa: 26:36

Right? Right. That's literally that's all it is. Yeah. Yeah.

Adam Rice: 26:40

It's like the scorekeepers points don't come from anywhere.

Ryan Benincasa: 26:45

It's such a great analogy. Yeah.

Adam Rice: 26:47

No, it's perfect. But it's very hard for, for people to get comfortable with.

Ryan Benincasa: 26:51

Yes, yes. Yes. Agreed.

Adam Rice: 26:58

All right, Ryan, where? Where do you want? Thank you for walking through that. That? Yeah. Plumbing, that stuff is? I don't I don't know those details as well as you do. So it's good to hear. And I'm sure that it'll be interesting to people. Is there anything else you want to? You want to touch on with that?

Ryan Benincasa: 27:16

Um, let's see. I mean, you know, I don't know, we can go into specifics if you want to, but, you know, there's been some there's been some criticism of MMT. Lately, saying I'm in ti he's gotten everything wrong, and that MMT doesn't make predictions.

Adam Rice: 27:40

That MMT is the reason for inflation. Inflation.

Ryan Benincasa: 27:43

Right, right. Right, right. Oh, no, we got a good one on Twitter the other day, someone tried to say that, that Stephanie Kelton. titling her book, the deficit myth is a reason that we got inflation.

Adam Rice: 27:55

I liked I liked what you said to me yesterday, and that MMT is actually the only school of economics that that makes policy recommendations based on inflation, and not based on arbitrary numbers. Isn't that so? That's that that's the irony of it is that oh, I've run it is that in like, like, inflation is absolutely central to MMT. And everyone else argues that it doesn't pay attention to MMT MMT. And it doesn't pay attention to

Ryan Benincasa: 28:24

is by far the most hawkish on inflation of any economic school of thought. Stephanie Kelton explicitly wrote in the deficit myth that they recommend the CBO score, spending and tax bills based on impacts on inflation, not impacts on the deficit, the deficit, no one else national debt, right. No one else. No one else scores it like that. Right? When else makes that recommendation MMT is the toughest on inflation. And what I love too, is, you know, Randy, and, and you Eva, published a one pager at the time that pandemic and they explicitly rejected calls for large scale.

Adam Rice: 29:17

Cash giveaways. Right, which and it was funny, because they called out Jason Furman in that paper, yes, who is calling for I think, like$3,000, a person in March of 2020. And Randy and Eva, were saying this isn't a demand issue. It's a supply issue. And so it's hard to justify that kind of policy at this point.

Ryan Benincasa: 29:34

Exactly. Which is actually the

Adam Rice: 29:38

ultimate irony, because, you know, everyone thinks the stimulus checks were like, somehow thinks that the stimulus checks were MMTs idea.

Ryan Benincasa: 29:45

I know. And meanwhile, not a single MMT economist was was employed in either the Trump or Biden administration. Right. Right. I think like somehow it's MMTs fault that, you know, that we got this inflation, right.

Adam Rice: 30:01

I think, you know, it's just like, people can't distinguish between MMT saying like, yes, you know, it is possible to give everyone a stimulus check. You know, that there isn't a fight financial constraint there, there isn't inflation constraint. People just for some reason they only focus on the financial constraint portion, right? Yes. And I don't know why that

Ryan Benincasa: 30:26

is. I don't know. I don't know why either. Also, like, it's important to say like, Hey, you know, to distinguish between what's operationally feasible versus versus, you know, a, an arbitrary political constraint, right. If someone says, Well, you know, this law passed in 1981, says the Treasury has to spend only when it has cash in its account. It's like, Yeah, that might be correct. And I'm not. I'm not as well versed on that specific law. And but, you know, so I'm generally kind of skeptical of that argument. But let's assume for a second, that it's correct. Well, saying that something is, you know, a political constraint, right, like refusing to raise the the debt ceiling or, you know, forcing the Treasury to have to have cash in its account before it spends. That doesn't mean that operationally it can't still spend the money. Right. The Fed just books a negative negative balance in the account, right. It's operationally possible, right? It's just so when people say, they can't do it, oh, no, they can do it. Right. And so that's where I get really frustrated. When when people make arguments about political constraints, rather than operational ones, right. It's like, well, let's, let's, let's be honest with ourselves about about it, like, let's call it how it is, it's operationally possible, you can't say it's not possible. Of course, it's possible. It's just we have this, you know, this arbitrary political condition. And so yeah, so that, yeah, so, I mean, literally, so I guess there's been some criticisms, you know, about MMT. And so yeah, it's ironic that MMT gets blamed for inflation and stuff. But so

Adam Rice: 32:36

I Ryan, I just want to I want to jump in and just point out, I don't know if I ever sent this to you. But Ray wrote a book in 2020, or the book is released in 2020, called a great leap forward. And in it, he talks about why MMT generally opposes UBI. Okay, he calls it big basic income guarantee. But you know, he's essentially talking about UBI. Oh, I'm just gonna read some some quotes here. He says, Let me summarize why big or UBI cannot be universal, sending a big check to everyone would be inflationary, and would devalue the currency as prices rise and affect the big payment essentially becomes the entry price to the marketplace as prices rise to keep aggregate purchasing purchasing power essentially constant. So we will need to target the big to those who do not or cannot work. Yes, there's some stigma involved in targeted social support programs. But first, we implement the job guarantee, so that anyone who is ready and willing to work has a job in the job guarantee, then we provide basic income guarantee to those who cannot, should not or will not work, this approach to social welfare spending would be far less inflationary. And that is why social welfare spending has to be targeted to those who need it. And then he goes on to say, there's actually a few quotes. I don't I don't want to read this whole thing. But he says, he says, Sorry, folks, but we need to anchor the currency, it is only worth what you need to do to obtain it. As your mom told you long ago, if money grew on trees, it would be worthless. A big payment to everyone is essentially the same thing as letting people rake a pile leaves off the lawn to go buy beamers will the price of a BMW rise You betcha. Just efficiently so the so that post big price of a BMW exhaust, the big income received by beamer buyers did everything else consumers will buy. So it's like you read something like that, you know, directly from the horse's mouth, Randy Ray, who's one of the original MMT academics, and then you have people saying that MMT ignores inflation it's just like, it's crazy, like this guy's he's, he's coming out against UBI because because the inflationary impact, right, and then and I think one of the reasons is, I think that you know, MMT is understanding of what causes inflation is different than kind of just like monetarism right? And that like, it's just, oh, it's the quantity of money that drives inflation. Right, right. That's, that's not really what's what's happening, or that's not at least MMT is understanding what's happening.

Ryan Benincasa: 35:11

Exactly, exactly. You know, what's so funny is Like, okay, so I made a prediction at the end of 22. I said, in 2023, the the budget, the federal budget deficit will go higher and inflation will go down. Right. And that's basically exactly

Adam Rice: 35:36

what's happened. Yeah, exactly what's happened and there's no talk of the of the deficit going up, there's no no talk of like the fiscal picture,

Ryan Benincasa: 35:45

right? There's no talk of how the, the deficit tightened in 2022. And we and, and we had a huge market sell off and, and two straight quarters of negative GDP. And this year, you know, the deficit has gone higher. And, you know, lo and behold, you know, bitcoins up like 90%. Now, the tech stocks are ripping, all the tech stocks are ripping despite rates being higher. All like the junky stuff, like, I mean, I Carvana as a multibagger. This year Coinbase was in distress territory, its bonds were trading in the 50s. Last year, you know, those bonds are up about 20 points, stock has tripled this year. And that, by the way, and I got some Twitter spat with someone on this when I pointed out that Coinbase is actually a direct beneficiary of the rate hikes because it has this a pile of cash and also has an arrangement, basically, a revenue sharing arrangement with circle who's the issuer of USDC, which is a stable coin. Okay. And so, basically, they have this you know, they have this circle reserve fund, that's managed by BlackRock, okay. And they basically invest the proceeds of that in cash, you know, T bills and repo, okay. And Coinbase actually gets a revenue share with you know, with that circle, reserve fund or whatever. So, essentially, that, that income, right, but, you know, that interest income, that interest income, is that, okay? So so Coinbase, in the first quarter of this year reported 284 million of adjusted EBIT, da, you know, EBIT, earnings before interest taxes, and depreciation is basically a proxy for cash flow. Okay, that's one metric that investors and analysts use, you know, as, as a way of gauging the profitability of a company. Okay? So 284 million, okay. 272 million of that was interest income. Crazy, think about that. So basically, their entire report of the adjusted EBIT, dA is just, it's just the interest income, they're receiving the direct, direct fiscal injections from the United States government. Crazy, crazy. And so what they're doing is they've been they've been taking using the cash proceeds from that to buy back their bonds at a huge discount. And so that's supported the bond price, and that's why the stock has gone so much higher this year.

Adam Rice: 38:41

So, so so so let me let me see if I can summarize that really quickly. Yeah, the government's tight money policies. Right. Right. are floating Coinbase. Yes. Directly

Ryan Benincasa: 38:55

directly employed in Coinbase. A

Adam Rice: 38:58

quality company like Coinbase.

Ryan Benincasa: 39:00

Right, right. Yeah. Meanwhile, yeah. Meanwhile, it's so its core, like transaction revenue. So like, its core business. They're down 63. There were down 63%. year on year in the first quarter. I mean, and last year, they were down like 67%. year on year. So literally, the like, like their business or actual business is like imploding.

Adam Rice: 39:26

Right, but they're surviving. Because because of the direct

Ryan Benincasa: 39:30

fiscal injections from the government.

Adam Rice: 39:34

God and no, and again, no one is talking about it. No one's talking. No one

Ryan Benincasa: 39:39

talks about it chinos talks about but yeah, let's get

Adam Rice: 39:43

at least at least someone's talking about it. Yes,

Ryan Benincasa: 39:45

yes. But but that but it is more he comes more so from the point of saying like, you know, these are low quality earnings. Yeah, like this is just this isn't from their business. This is just interesting come that they're receiving not not really from the from, you know, the broader point of like, yeah, the you know, the rate hikes are subsidizing you know, distressed junky companies. Right who's But so. But But yeah, so that's that's a pretty, I mean, it's just it's direct evidence right there of what we've been saying. All right. I also want to just point out again, Nick Gomez made an amazing call it saying like this. Thank you, Nick. You know, for an our buddy is over Douglas and beat you at T macro trader. You know, they've been very bullish on the stock market, basically since I think last December. And so I guess he's up big this year. So he's having a great year. You know, obviously, the s&p is up almost one, you know, I think like, getting close, like, like mid the high teen percent this year. I want to share something I wrote in a blog post. So this is this was posted on October 17 2022. The same day that I wrote this, okay. The there was an article that came out from Bloomberg that said was

Adam Rice: 41:25

that literally the same day, it was literally the same day. That's amazing. Love it literally the

Ryan Benincasa: 41:29

same day. And it said, you know, the commerce have a 100% probability of recession in 2023 100%. from Bloomberg, okay, so on the very same day that that went to print, I wrote. purchasers of both equities and fixed income securities today are getting a bargain relative to a year ago. And in the case of equities, the government is promising to increase the nominal amount of dollars it will spend into the economy by the interest income channel, thus expanding the pool of potential dollars that business can accumulate through its operations. This is perhaps the best buying opportunity of my career. I have been increasing equities exposure lately, with a particular focus on pro cyclical stocks that will be direct and indirect beneficiaries of recent policies enacted by the federal government, including the inflation Reduction Act and and student loan forgiveness. Obviously, there's issues with the student loan forgiveness, forgiveness. But the point is, I mean, MMT doesn't make predictions really?

Adam Rice: 42:40

Well, it's like, I don't understand even what you know, what, no

Ryan Benincasa: 42:44

other way that the stock market is up over 20%. The s&p 500 is up over 20% Since then, right.

Adam Rice: 42:51

Crazy. Well, Ryan, great call. I don't I still don't know what Ryan or what Noah is referring to when he says that MMT doesn't make predictions. You know, it's like, I don't understand that. And I think this might be just a broader misunderstanding of what MMT is, in that, you know, I like to say it's a framework for analysis. So it's like, you can look at any economy and understand it via the MMT lens, right. And people might draw different conclusions from that, like Warren Mosler, for example, was bullish, because the rate hikes while Randy Ray was bearish because of the rate hikes. But I don't think it's fair to say that MMT, you know, in general, was one way or another, right. It's just like, it's like people can interpret or have predict, make predictions based on the same data in different ways. You know, what I mean?

Ryan Benincasa: 43:45

Right, right. Yeah. Right. I mean, predictions are hard. Yeah. There's just there's, you know, there's disagreements at the margin, about, you know, the, the, the impacts of different policies. One thing that I've been thinking about a lot lately is this idea of, okay. You know, we're doing essentially fiscal injections. Fiscal policy, for rich people is basically how they think of the rate hikes, right? It's like, if you have money, then you're getting more, you're getting more money for free directly from the government. Right. So you have if you're, if you're, you know, a boomer, a rich Boomer with a million dollars, and, you know, a year ago, well, I guess it started hiking a little bit a year ago, a year and a half ago, you're making basically 0% on your savings. Now, today, you can make over 5% free from the US $50,000. Okay. And and if we look at some of the current trends in the economy and where inflation inflation has been been the stickiest right, where's it been? It's been in services. Right. You know, the travel has been one of the hottest sectors. I mean, just the other day we had the highest, like a new high watermark for global travel. Right. We have nearly record amounts of people Well traveling right now. Right? Okay. And that makes perfect sense. Who are the biggest spenders on travelers? Well, it's boomers. And they're the ones, right. And they're the ones getting the direct fiscal support from the government to spend on. On travel. So, you know, you know, airlines are really expensive, right. And flights are really expensive. hotel bookings are really expensive. You know, going out to eat is really expensive. All this stuff that, you know, if you're in, you're a boomer, you're in your, you know, your golden years, your retirement years, whatever you want to travel, or maybe you want to pay, or you want to take your family and your grandkids to the you know, maybe that, you know, that's a nice way to spend time with your family. So you're you're essentially able to fund that with this free interest income that you're getting from the government. Right. Right.

Adam Rice: 46:06

It sounds it sounds like tight money to me.

Ryan Benincasa: 46:10

Exactly. Right. So So my point too, is that, like we have to, that's what we have to think about. And we have to think about, you know, what are sort of like, how does that sort of reform the economy right now? You know, yeah, those are the hot sectors. And that's where the employment opportunities are. Right. And so people are rationally flowing to those employment opportunities, because that's where, you know, the spending is the most right now. And you know, when people talk, so I just think like, you know, is that really what we want from a public policy perspective is we want people doing non productive service work? I'm not sure that that's really an ideal outcome from from a public policy perspective. And

Adam Rice: 47:00

so right. Well, I think and I just want to make that point clear, as well as that. You know, just because, like Ryan and I, and others in the in the MMT world, like Douglas and BG from MMT, macro trader, and just because and Warren even Warren Mosler, you know, we've been saying like, you know, there's not a recession coming. And given the level of fiscal support, in part due to the rate hikes, there's not going to be a recession, because of that level of fiscal support. And I think people confuse that with us saying that, like, that's a good thing. And I just want to be clear that, you know, in my opinion, it's super regressive, what's going on, but, right, from a macro perspective, this is what is is stimulating the economy and keeping the economy growing. Yes. It's just not it's not great. It's not It's the opposite of good distribution. Really. It's it's very poor public policy that is, but it is stimulating the economy.

Ryan Benincasa: 47:56

Right. Right. Right. It's not income is not enough basic income for for, you know, rich people is is not enough. You know, we have to do things like guarantee employment for people who want to work in order to, you know, achieve real sort of financial stability and security and, you know, maximum economic productivity.

Adam Rice: 48:25

Because right now, it's just kind of, like trickle, it's like, trickle down via stimulus or stimulus by dragging down, you know, right. It's not,

Ryan Benincasa: 48:35

I mean, boomers are the largest homebuyers right now. Right. Right. Which is like, yeah, because they're making all the money, they get all the income directly from the government. You know, so they

Adam Rice: 48:46

can they can they can they can buy without a, they can buy without a mortgage as well. Right.

Ryan Benincasa: 48:53

So you're not going to get the, you know, the monetary you know, tightening, because if they if they're just cash buyers.

Adam Rice: 49:05

Right, exactly. Crazy times,

Ryan Benincasa: 49:10

crazy times? Well, it's been it's been pretty exciting. Few weeks, just in terms of, you know, just all the victory laps that we've been taking. You know, I do you think there's real risk of a kind of like, what we talked about Mosler of, you know, if the Fed continues on this path of continuing to hike rates, you know, we really, like we could see some, some real pickups inflation, right. I mean, we've kind of seen that, that the the bottlenecks and energy inflation, energy induced inflation that we experienced in 2022 have rolled over, right. And that was fairly predictable. That was the whole point of, you know, looking at inflation is transitory is that like, okay, it's like this kind of this, these, these sort of one off things, you know, supply demand imbalances that have to get, you know, worked out. Okay, cool. Well, now, we're seeing core inflation and is still pretty high still, like close to the, the policy rate around 5%. So what I worry about is that, you know, the Fed is focusing on the core, not the cyclical factors, and thinks that, you know, needs to continue hiking rates to get that core inflation down, and that that could, you know, lead to even more inflation, right, even more basic income for for, you know, for for the rich people. Right, so, yeah, so that is definitely, I think, a risk, but also like, if the Fed cuts. And so, you know, you've got this inverted yield curve, and we talked about this with Mosler if the markets right about, you know, that the Fed is going to cut rates, which is basically what it's what it's predicting right now. As evidenced by the inverted yield curve. Okay. If that happens, then you're and we don't have offsetting, you know, that we lost income into, like, into the private sector. Right. So, and I don't know, how much political I don't know how palatable it would be for, you know, additional spending programs. I mean, we did, you know, great job passing the inflation Reduction Act, the infrastructure Act, the chips act, okay. But, you know, if we, if we cut this income, channel off by cutting rates, really quickly and dramatically, you know, that income is going to be law, that income to the private sector is gonna be last regressive, though it is. If we don't pass in an additional spending bill, that's gonna represent loss income. So I think that that's definitely a potential risk. And I also think that energy prices are a risk, you know, if, if the Saudis decide they want start hiking oil again, then that's

Adam Rice: 52:18

kind of like, that's just like the it's kind of like the silent killer. Like that's, that's always in the background, regardless of what's going on. Yeah, no,

Ryan Benincasa: 52:26

exactly. I almost think like, like, it's like, the, like, I wonder if like, the oil and gas industry is really the one behind all this, you know, like, oh, government spending and, and, and money creation is what causes inflation. I wonder if, like, the if, essentially, they're, they're the ones, you know, behind the scenes, you know, promoting all all these series, you know, as as political cover for jacking up, you know, the price of oil and, and, and stuff. Yeah, I

Adam Rice: 52:56

guess. I mean, I think I think there's a lot of people who it's convenient politically, it's politically convenient to just blame like, oh, it's, you know, it's the government spending money that causes inflation. Right. Like, like, it's like when Jamie Dimon is saying we need to raise interest rates further to fix inflation. Right. Right. Well, I wonder why he thinks that.

Ryan Benincasa: 53:17

Yeah. Yeah. He doesn't get any benefit for that. Does he? Yeah, no, exactly. Exactly. And, and I mean, it's just crazy that, that we, you know, I mean, the deficit is much higher this year than it was a year ago. And, you know, I think I think I just saw Warren said something like, it's currently around 8% of, of GDP. And it was at like, five and a half, I think, in 2022. So that's like meaningful erase, right. And, and, and yet inflation is going down. So you know, it's, but no one talks about that. No, one well,

Adam Rice: 53:52

doesn't doesn't I'm not sure of what what numbers that Nick Gomez is referring to. But he says that net transfers to the economy, year over year up like 50%, this year over last year. Yeah, that tracks is that. is he referring to the deficit specifically? Or how is he calculating that?

Ryan Benincasa: 54:10

I'm not sure I'm gonna, I'm assuming he's looking at the TGA. And just looking at cash flows into and out of, you know, because you can just go to the Treasury, and I've done this before. Just go to the daily Treasury statement and just track the actual cash flows. But yeah, I mean, if you're at, you know, if you're at five 5% of GDP a year ago, and now you're at eight, yeah, that's about 50%. Higher. Right. Right. That makes sense.

Adam Rice: 54:42

Cool. Anything else you want to touch on run? ahead for today? All right, man. Well, good catching up, as always, and thank you for everyone. Thank you to everyone for listening at home. I hope you enjoyed this episode. And if you're listening on YouTube, it'd be great if you could like or subscribe or comment, and we will see you next time. All

Ryan Benincasa: 55:03

right. Thanks.