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.

Adam Rice: 0:34

Hello, everybody, and welcome to episode number 21 of the applied MMT Podcast. Today, we have another special guest, Derek McDaniel. Derek is a big, what I think to be an MMT, or we'll find out more on the conversation. But who's pretty active on Twitter, and the MMT debates that are constantly going on. Derek, I think to kick us off, would love to hear more about about your background, and maybe how you got into MMT. And we can go from there.

Derek McDaniel: 1:05

Yeah, so, um, when I was younger, like I was really into academics like mathematics. And I varied between mathematics and computer science in school. But just due to some personal circumstances, I didn't end up graduating when I initially went to school, and so like, I was like, doing different jobs, looking for work, and just trying to understand how the economy function and stuff. And like, one thing I noticed was like, the kinds of jobs that are very productive, aren't necessarily the ones that compensate well, like, I worked briefly as a dishwasher. And I calculated like, in a couple of days, I would wash as many dishes as I'd use in two years or something like that. And so it's, it's just like, trying to understand how the economy out allocate stuff. And we were talking before we started how a lot of us have a familiarity with Austrian economics. And I read human action. Early on, when I was trying to figure out economics. And I liked it, I thought it was an interesting book. But, um, we can get more into that later. But long story short, like I went online, and was trying to discuss these things how, like, personally, I cared more with a job of whether I enjoyed it and how much money I made, just because I felt I could learn to be very frugal, and such. And so I thought there would be benefit for me if I could take lower pay and learn different skills. So I was like, going on Twitter trying to debate like minimum wage and stuff. And then I'm just some reason the national debt came up. And someone mentions like, what was just like, why is that a problem? And then I was like, and suddenly, oh, it's not like it just hit me instantly like this. I didn't know the worded verbiage at that time, just like the score. People are analogy, like, it's just points. It's just like, an accounting system. Is this a system of allocation? So like, um, yeah, I run it. I ran into a few of them tears. I know, one issue like Ellis Winningham talked a lot about was minimum wage, and like, he Well, not just him, but others convince me Hey, this is actually a good idea, given the way that entire labor market functions and relative power and stuff but so yeah, I, I started out on one path, early learning economics. And then I was like, hey, this doesn't make sense. And that's when I sort of got into him, too. So.

Adam Rice: 4:14

Got it? And do you remember what it was that that? Like? What were the first materials you came across? related? Mm

Derek McDaniel: 4:24

hmm. The first materials so when, like, I don't recall exactly this was like, in the, between, like, 2012 and 2015. Like the deficit mess hadn't come out yet. And like, it was mostly just blogs. Yes. And videos. So I remember when Steve Kean like, lecture, really stuck with me like dialectic as a foundation for non equilibrium monetary, economic, or something like that. So there was the Steve King lecture, it's like two or three hours long. And then Mosler obviously, like I would have to say it was mostly the YouTube lectures at first First, and then I started reading more books, and then blogs, and then books and stuff like that.

Adam Rice: 5:24

Got it, I kind of had a similar path into MMT where I was I was reading a lot of the, you know, I first started hearing about it on YouTube. And then I started reading the New Economic Perspectives blog. And then I bought Randy Ray's book, The primer, the MMT primer, which I think is great. So we're so today like, where would you say you stand when it comes to MMT? Like, are you are you

Derek McDaniel: 5:51

so I think MMT is substantially Correct. Like, I would maybe nitpick was more like presentation or wording rather than the substance of anything. My biggest critique of the way we engage with MMT is that I think we could do better to separate it into independent propositions like, we can talk about endogenous money as one proposition. That is, frankly, uncontroversial once when you talk to experts, but it's just ignored it it's crazy how people love their money abstractions, but and so you have endogenous money, then you have the consolidated view of government finance. And then that at least one other part, just Mosers idea of price anchoring, like the price levels of functional prices paid by government spends. So like people talk about fiscal theory of the price level, um, and they compare MMT to that, but like, it's, I would call it, at least for price anchoring, anchoring, I would call it the fiscal bidding theory of the price level. So not so much the amount of the deficit matters, but like, how much you're offering when you spend that money, will drive the price level. So um, yeah, so I agree with MMT. Like, obviously, there's the issue of how to label you, yourselves. And like, the whole idea of post Keynesians, that's sort of confusing, because it's not really a well defined. There's not a single proposition with post Keynesian economics, it's sort of came out of this historical, just set of arguments that people landed on one side or the other on so. And there's a lot of disagreement among post Keynesians themselves. You know?

Douglas Padgett: 7:57

Derek, you've, you've brought up a topic I do, like you're gonna call them amorphous, because I think they're definitionally succinct, but you're kind of three pockets of ideas. And one of them you brought up was endogenous money. And you've mentioned Steve Kean. So I imagine at this point, you've, you've listened quite a few of those deep, clean lectures that are out there. Which, by the way, if if you're listening, and you haven't gone back, like, probably not starting in 22,009 2010, up until 2015, there is just a trove of great lectures by Warren Mosler by Steve keen on on YouTube, if you're a YouTube consumer, which it sounds like, Derek you are, if you've listened to some of those lectures, then we've probably listened to the exact same stuff. That was there was a great time period. And really one of the only places you could get them empty stuff. If, if you really wanted to get deep into it, but endogenous money. Steve keen, just just walk us through that idea. And, and then kind of tell me tell me maybe why you why you segment that out, I'll tell you what, to just listeners. If endogenous money didn't have so many damn syllables, I would have been Douglas, the endogenous money trader, because I think that's even more important. A causal function of what we see is kind of economics than necessarily, you know, broader. MMT. But yeah, tell me a little bit about this endogenous money and, and kind of kind of where you think, you know, where you think people belong or whatever,

Derek McDaniel: 9:31

the word. It's confusing on two accounts because the word endogenous and money they're both the most confusing terms you can think of. So, money is just whatever we use to transact so people can generate their own transaction mediums. That's basically the way I would summarize it since succinctly like it's basically credit runs the economy like yep, yep. So I mean, there's all sorts of aspects to it like even people talk about I was talking on Twitter today about euro dollar. Just there's this term called Euro dollars for the these foreign credit markets. That deal in Treasury bonds, and I don't. I'm not a finance person like to Actually Trade I just highly fascinated by this stuff. So yeah,

Douglas Padgett: 10:29

yeah. But when when dollars make it out of the US and they go into foreign banks, all of a sudden the foreign banks now have the ability to use this now dollar deposit in their bank to to essentially be capital or? Yeah, it's probably the best way to explain it to capitalize their own creation of these then new dollars. Oh, there's new Euro dollars.

Derek McDaniel: 10:55

Yeah, and I would say the question with interest rates is like, Oh, if if banks create their own money, then why do they charge interest kind of thing? Why does anyone charge interest if we're just creating money on the spot? So one, now this isn't necessarily the way endogenous money is typically described. But I typically describe bank money creation as upgrading from one for money to another, or from one IOU. So like, if I, back in the day, if you watch old westerns, like people would pay at a bar, like put it on my tablet, like if you try to go to a bar grocery store and try to pay with credit, they aren't going to do that for you. Just because credit works a little different today. But credit used to be very common, like an even non mm tears, like, if you follow George selgin. I'm not sure if I said that correctly. But he's sort of an expert on having multiple different currencies circulating. So when you have like different credit systems, the tendency is for one to dominate that. And then that's how you end up with something called money. When really people are just transacting and using resources.

Douglas Padgett: 12:16

Yes, yeah. Yeah. Have you watched a lot of Steve Kean lectures and his whole?

Derek McDaniel: 12:22

Oh, yeah. Okay. Yeah. Like, he has one where he talks about dialectic. And just like, everything has a foreground and background like, yeah, a worker is also a consumer. And if, if you work too much, then you won't have time to consume. Like, it's just a philosophical principle that has surprising economic relevance. And that's sort of one thing that got me thinking, hey, maybe mathematical models aren't in the full picture here. Maybe there's, I mean, there's these ideas that sound vague on the surface, but it's, they actually better describe reality.

Douglas Padgett: 13:03

Yeah, yeah. I have more. I have more questions down the rate idea. But Ryan or Adam, if you want to come in and

Ryan Benincasa: 13:16

jump in, and yeah, yeah. Hey, Derek. So I first kind of stumbled on your work. And it caught my eye. Because of the, you know, this idea, and we talk a lot about the term structure of prices and how, you know, if the Fed is raising rates, it's it's, you know, literally discounting or, or depreciating. future cash flows or future piles of cash. And and I know that that's, that sort of goes down your whole rate disparity thing, which I think is your Twitter handle, too. So maybe, so maybe we could talk a little bit about about the concept of rate disparity. Okay,

Derek McDaniel: 14:11

so it's sort of a pun on words. So in the first sense, it's sort of making fun of equilibrium. Right? So if you look at the economy, what's what's the range of wages people earn in the economy? What's like the lowest rate wage to the highest?

Ryan Benincasa: 14:29

Zero?

Derek McDaniel: 14:31

Yeah, so you could go zero, but just for the sake of argument, let's start at 725. And like, what's the highest? What's the highest wage someone would earn?

Ryan Benincasa: 14:44

On a per hour basis, as good question.

Derek McDaniel: 14:47

So I think once you start 1000s of hours, like the most high end lawyer 1000s of dollars an hour would probably be where people are just start making capital gains, and they don't bother paying themselves a wage, right. So there's probably 1000 times factor from the lowest wage to the highest wage in the economy. And I'm interesting, economists like this is just the normalized thing right? It's just like, hey, this is how the economy works. But then if you talk about interest rates if if one financial instruments yield 5% and another yields 3%, and then it's like, oh, no, no one's gonna buy the underperforming asset, like. So. That's that's one meaning of a disparity like, I mean, that relates to MMT. Because that MMT helps you be more aware of like, inequalities and what actually is happening in the economy and the whole hierarchy.

Ryan Benincasa: 15:55

Um, that's a good way to put it.

Derek McDaniel: 15:59

Yeah, so basically. And another thing with so economics either when there's any difference in returns, they either attribute that to either risk, like if you lend someone at a higher money at a higher rate, usually that's attributed risk, right? A riskier investor. The weird thing about risk is you're actually punishing the people who don't default based on their cohort who you think might default. So does that make sense? Anyway, sorry, if I'm a little bit all over the map, that's sometimes how my thought process go. Yeah, yeah.

Ryan Benincasa: 16:43

No, that's, that's, that's very interesting. Yeah. No, this is all this is all like novel stuff. I'm just trying to process it all.

Derek McDaniel: 16:53

Yeah, so, um, as I was saying, normally, when there's a difference in returns, it's either to attributed to economic frictions, or to or to risk. But I don't think that's a good way to describe equilibrium, like, and so I came up with this notion, which I called adaptive equilibrium. Like, if you look, if you go into a mall and into a crowd of people, like, the variation in people's height isn't that big, right? For most adults, yeah. So, um, but there's no like feedback process to make that all converge. It's just like, there's, there's all these processes where I don't know if you've heard of like convergent evolution, where two different animals will develop similar solutions to a problem.

Ryan Benincasa: 17:56

I have not, but it sounds like it was intuitive.

Derek McDaniel: 18:00

convergent evolution is like fish and dolphins both have fins even though one's a mammal and ones.

Ryan Benincasa: 18:08

Go Okay, a fish.

Derek McDaniel: 18:11

So, in that case, there may be like, sort of a uniformity, the rates, even if there's no like feedback process, or direct competition, you know?

Ryan Benincasa: 18:22

Interesting, okay.

Derek McDaniel: 18:24

So I like whenever I think of an idea, try to think of something new, I try to see if there's, like examples other people have done. And the closest thing with this idea is, I guess there's there's some things called there's a webpage, resilience Alliance, which basically talks about ecological cycles, like there's a growth phase. And there's like, exploitation, and then there's like, reorganization. So there's all these, we talked about, like business cycles and stuff, where the economy goes through some cycles. And like, in the Austrian perspective, the business cycle is a problem of inventory, right? These businesses build up inventory, but I see it more complex is like you have political cycles, you have cycles and media technology, like there's just like, it's like the waves of the ocean, like in the ocean, many different things can affect the how the water moves, like you can have earthquakes you can have if you're in a harbor, like the boats in the harbor might affect the water in the proximity, but even something as esoteric as the moon affects the waves in the ocean. So yeah, yeah. That's

Ryan Benincasa: 20:03

yeah, that's, that's interesting. And, you know, what? What's, what's funny is, I feel like a lot of times you'll hear people talk about cycles and natural processes. And, and, and all this sort of thing. And it's almost like it, it removes, like, agency, right? It's almost like it's, you know, it's like a very deterministic way of looking at the world and, and it's like, oh, well, you know, they'll see, they'll know some pattern. And then they'll say, Well, this is just such and such again, and this is going to happen, and it's inevitable, inevitable that we're going to have a blow up. And it's like,

Derek McDaniel: 20:44

it's very hard to find patterns in processes where there's a lot of interacting forces. Right. Right.

Ryan Benincasa: 20:53

And you'll get to, and it's, but it's also like, you know, you don't know, necessarily how, like, there's, there's, there's power and structures and hierarchies. And, you know, you don't necessarily know how people are going to react, if they're, you know, through react one way, then this is the outcome. If they react another way, then then, you know, this is the likely outcome, and there's just no way to predict that. So, you know, it shouldn't be like, like the Fed setting rates or like, you know, Yeah, or like Mosler talks about, you know, the Saudis, the Crown Prince, like, you know, I think I've heard Moses, like,

Derek McDaniel: 21:38

in hindsight, things must have happened that way, just because, right, right, exactly. You play a poker game, one person picking out the wind, half the other person can lose, but it could have easily gone that like,

Ryan Benincasa: 21:51

exactly, yeah, yeah, it doesn't take into consideration all the potential outcomes. And yeah, you're kind of

Derek McDaniel: 22:00

recently, there's just been so many debates about counterfactuals. With the transient inflation, it's like, well, what would have happened if the Fed hadn't raised rates? And

Ryan Benincasa: 22:11

right. So

Douglas Padgett: 22:15

So Derek, I know a few times back when I was doing the live stream, you would you would comment on my, my various ideas about rates in the the the impact of rates, and you can always comment and be like a nod my head and think okay, but but but then you comment again, and I'm like, you know, maybe I'm not understanding what he's saying, maybe? I

Derek McDaniel: 22:34

don't understand what I'm saying, either. No,

Douglas Padgett: 22:36

I didn't mean it that way. Or I made it more like No, no, I think I think there's nothing here. And but I got I got to fully understand because I, I don't think we're in major disagreement, but we're definitely seeing something different. So So tell me your thoughts on rates and the implication of rates, higher rates, lower rates, and to the best of your ability? I know, you've you've been able to hear a lot of what I've thought about. But tell me in contrast to that, yeah.

Derek McDaniel: 23:05

Yeah. I mean, so we talked about leaving the gold standard with MMT. A lot, right. So now, we're in a fiat money world. Central banks buy treasury bonds. So it's like, one thing with that you can't compare interest rates directly. Right. And this is some Brian Roman Chuck talks about some sometimes, like, you're, you're always looking at expected rates of inflation, especially when people talk about the Taylor rule. Rather, it's just it's hard to compare interest rates when you don't have once fixed unit of account that everyone has operated on. So when you're raising and lowering rates in this fiat money world, it's, it's not so clear that you're directly competing with anyone so much. But sorry, can you restate your question?

Douglas Padgett: 24:11

Okay, you've I know. But you know, my big thesis is been fed raise rates, that makes the future cost of doing business, more expensive, but then the Fed is also supplying the additional income to support that higher price structure. And I think you've you've heard and I wouldn't call them critique, but you've certainly commented on that a few times. So you know, feel free to tell me where various right

Derek McDaniel: 24:36

or wrong way to think of how rates can cause inflation. So and this makes sense on a fiat money world this explanation. So I think of interest rates is just an exchange rate, right? So let's say the Mexican peso 10 pesos is worth one US dollar. I don't. That might might have been that 10 years ago. I'm close enough for this example. Right? Yeah. But so the US dollars worth more than than the peso does. Does that mean the US has a stronger currency? No, it I mean, obviously, if you understand FX like it's the relative move. moments, right? Yep. Yeah. Um, so what happens when you are buying a security when you're offering interest, basically. So it's 2024. Right now, if I want to buy an instrument at a 5% rate, then I will pay $100. Today to buy $105 in one year. So basically, on a unit to unit basis, that would mean money today is one unit of money today is worth more than the money you're buying in the future. Like, if you ignore CPI and all those things, like you're you're doing, like, whenever you have a market exchange, you're supposed to be exchanging equal value. So yeah, um, if you exchange a 20 $24, for, if you exchange 120 $24, for 105 20 $25, then on a unit basis, the 20 $24 is going to be worth more. So and you can get into like calling it a continuous stock split. Yeah. And stuff like that. And what happens with the real rate depends on CPI and all this other stuff. But I would compare that to like purchasing power parity. Like, if you go to a different country, sometimes your money will go further, which is a different concern from the exchange rate. So I like to think of the real rate as sort of analogous to purchasing power parity.

Douglas Padgett: 26:59

Yep. If I, if I was listening to this, I'd be hitting rewind to make sure I let that last point hit right there. So let me let me get let me get this restated about the 2024 20 $25. Because halfway through, I'm like, wait, we're in 2024. Now, so I think he's gonna do the next year. All right. So if I'm hearing what you're saying, correct me if I'm wrong here, when I take a $1 unit today, set it aside to get back by purchasing a bond to get it back by to then have it be 1.05 units a year from today, you're arguing argument is what I set aside, I'm literally buying something cheaper, I'm literally buying something of less value, then On what basis on a unit basis than what I had today.

Derek McDaniel: 27:56

A very simple example with fruit if you have apples and oranges if two apples buys an orange than which one's more valuable. Right. So if two apples buys an orange, the orange is going to be more valuable. Yep. So if you have interest, like, if the interest rates 100%, if $1 today buys $2 In a year, then on a unit basis, the dollars next year are less valuable, less value, okay. Okay, if the if the market equilibrates across time and not just at each point in time, it's also equilibrated across time.

Douglas Padgett: 28:40

So by raising interest rates, you are mechanically devaluing tomorrow's dollars. Yeah. And, and mechanically increasing. Today's dollars. Yeah.

Derek McDaniel: 28:58

So when, when people say, Oh, raising interest rates, fights inflation? Well, if you look at the duration shocks, and this is an argument Colin Roach often makes, he's like, oh, when you increase interest rates, outstanding bonds devalue, which means people have less purchasing power. And so he uses that to generally support the argument that higher rates are disinflationary because bonds lose present value, outstanding treasury bonds, but it's like, okay, they just bought 20 $25. And now we explicitly devalued them by changing the exchange rate between today's dollars and future dollars. And so we just in relative terms we inflated Yep, yeah, money.

Ryan Benincasa: 29:43

Well, yeah, I will also argue that, you know, it depends on it depends on who we're talking about here. Right. Um, you know, as we saw, you know, in 2023, following the collapse of Silicon Valley Bank, and, and, you know, the Fed and the Treasury came up with this bank term funding program, right, that, you know, they basically would lend a You know, against treasuries at 100 cents on the dollar, regardless of the, you know, the maturity. So, so in that instance the Fed is, is eating the, the duration, right. Yeah,

Derek McDaniel: 30:35

it's so funny to think paying out interest on reserves is deflationary. Right.

Ryan Benincasa: 30:40

It's absurd. It's just right. And well, that and that's and that's the other thing is that there is no, you know, duration risk with with reserves. I was talking about this last night. It's kind of ridiculous that, you know, banks can earn interest and money markets, you know, on reserves and money market funds can earn interest on RP balances. But, you know, if I if, you know, if we just hold cash, we'll get interest on that. Yeah. And like, we should be entitled to some interest on the on the physical cash.

Derek McDaniel: 31:20

Yeah, you're just taxing people who don't know how to move their money very well, or it's not cost effective for them to worry about optimizing the, like, if you only have $10,000 savings, it's not, it's not as much worth your time to, like, try to move your money around between accounts. And

Ryan Benincasa: 31:42

yeah, yeah. Well, you know, that's, that's another good point. And, you know, if people, especially in the financial world will kind of say like, okay, you know, oh, Americans are so financially stupid, like, what's the point of even having a checking account where you don't, you know, earn any, any interest on your money? And it's like, Well, okay, what is I think, I think the average or median checking account balance in the United States is like, what? $3,000 or something like that. So, you know, if you're, if you're talking about Yeah, feels like 5%. Yeah, if you're talking about 5% of, and this is before taking into considerations, you know, the, the monopoly that banks have over the payment system, and, and, you know, the direct deposit, system, and ACH and everything else. But if we just ignore that for a moment, and just think about, you know, just, you know, someone with$3,000 in their checking account, okay. 5% of that is, what, $150 a year or something. So that's, what, like, 12 ish, 13 ish dollars a month, that

Derek McDaniel: 33:11

that Netflix subscription. Exactly. So essentially, it's not, it's not the way you optimize personal finance. Right, a cheaper car. Right.

Ryan Benincasa: 33:21

Right. Right, exactly. But, but, but again, I think the way to think about it is a price. It's, it's, it's 12 or $12 a month, you know, to have the convenience of using a checking account and not having, I mean, you know, there's actual, a lot of times, you know, to move balances back and forth. Like, that actually takes some time and effort and stuff. It's like, what you pay so how much would you actually pay someone to do that for you? And so, you know, at $12 a month, like, that kind of seems like a bargain, like I don't even have to, you know, the funds come come into my account, they come out I don't have to think about it. You know, it cost me $12 A month that doesn't really that's actually in my opinion, not that crazy. Not that crazy. It doesn't reflect like, you know, being financially irresponsible or something it's like anything else? Yeah.

Douglas Padgett: 34:22

I gotta say I do like this idea about somehow our cash spitting out like little bits of cash as send it to you straight or something like that. Yeah. Like a Harry Potter movie. And I could just wave my wand and my cash. What

Derek McDaniel: 34:39

I made is like you take $1 Bill, you cross off the $1 and write 1.05 1.0

Douglas Padgett: 34:47

buddy with that'd be actually like every dollar bill had an expiration on it right and you just take it in the bank and they give you a you know, the 1.05 Yeah, the

Derek McDaniel: 34:55

expiration date because that's real proposal. Oh, yeah. Symbol. Yeah. On

Ryan Benincasa: 35:04

bank notes, you know, before we had deposits in this that's that's basically what bank notes were was that you had, you have you have a maturity. And yeah, you Uh, you know, they might be discount or something like that, you know, when you when they're initially issued, you know, they're it's worth 97 cents on the dollar or something and then yeah.

Derek McDaniel: 35:31

You know, it's from different banks like Wells Fargo, Chase JP Morgan, like, they would accept accept each other's notes but only at a discount.

Ryan Benincasa: 35:41

Right, right, right. Exactly. Yeah. Derek, what

Adam Rice: 35:44

was the proposal? You mentioned the miles Kimball?

Derek McDaniel: 35:46

Oh, yeah. So back in the after the great financial crisis? Well, not my, I'm a little hazy on the history. But people were talking about how to get around the zero lower bound, because they're like a lowering rates can't stimulate the economy when they're already at zero. And so many miles Kimball came up with a clever idea for how to charge a deposit fee on cash that progressively increased over time so that you could actually lower rates literally negative. And he did this with the idea that this would be stimulative. And then you could stimulate the economy really fast, and then get back to normal and then stop. And under the premise that lower rates are stimulative. I think it was a very clever idea.

Adam Rice: 36:42

And how would that work mechanically, like, there's there's an expiration date on your dollars? Oh, which incentivizes you to spend them?

Derek McDaniel: 36:50

Um, well, that there was a deposit fee when you would deposit cash that would progressively increase over time. So.

Douglas Padgett: 37:00

So it was, it was the opposite, then it was, if you're going to bring your money back into the bank, it's going to be worth less? Yeah. Is that how it worked?

Derek McDaniel: 37:09

Well, that was his proposal for rates. Okay. I thought it was a really clever proposal. So. But at the same time, I do not agree with the idea that lower rates are actually stimulative, at least not on their own. But

Ryan Benincasa: 37:24

interesting. I feel like I think I heard Joe weisenthal mentioned this recently on on the last podcast, this idea of like, you know, you you pay the bank for, you know, like a deposit, you know, service fee or something, because, you know, they're providing a real service or what have you. Yeah, which is? Yeah, that's

Derek McDaniel: 37:47

very negative rate. idea. So, yeah,

Douglas Padgett: 37:51

but under, okay, if, well, I guess the bank isn't necessarily destroying that money. But but if they were under that circumstance, if if if my $100 is going to be worth$95, next year, using the same fruit analogy that you had, today's currency, then is sorry, tomorrow's currency then is worth more than today's currency.

Derek McDaniel: 38:16

Yeah, yeah. Yeah. If we want to look at negative rates that way, and Mosler has said this before, like, if you want to stop inflation in its tracks, at least in terms of unit of account function, you just implement a negative rate policy. Yeah. So yeah. I mean, what would happen with a negative rate policy is your $2 literally becomes just $1. So it nominally eliminates inflation, but it's just like, a stock join, right? Is that the correct phrase?

Douglas Padgett: 38:47

And it's constantly incentivizing people to

Derek McDaniel: 38:50

save their money. Oh, no, it has no incentives. It's just, you know, you

Douglas Padgett: 38:54

don't think? Well, but if I guess my thought would be if if tomorrow's money, if tomorrow's money's gonna be worth more than today's money? What's the incentive to?

Derek McDaniel: 39:08

So you read denominating? Everyone's acids. Okay. You okay? Okay. Yeah, there's no, there's no effect on incentives. It's just the numbers. So, but that would affect contracts. And that gets complicated because like if Yeah, if you have contracts denominated in a particular, and this is why the Fed is so political, right? Because every decision they make has 100 Different ramifications and people when it's like, when you go to Vegas, you win or lose, but like the Feds like printing or picking the numbers at the roulette table or something. So Right. Yeah.

Douglas Padgett: 39:49

I'm one of the questions because I know, I know, this is another thing you've you've mentioned at least a few times some of the tweets I've had and that has to do with my, my, my voodoo kind of metrics.

Derek McDaniel: 40:06

Right? It's just hard like, yeah, it was really hard.

Douglas Padgett: 40:10

Yeah, you've you've you've expressed skepticism, which I appreciate because As whenever I look at Twitter, and people post charts, the first thing I think is, well, this is a bunch of nonsense. Like, there's no way this has any meaning whatsoever. But you've also I think, said recently like, okay, okay, maybe Doug's onto something here. Tell me, I mean, just, I am I am I highly, highly skeptical. I know I do a lot of econometrics. But before I ever posted anything, I've done a lot of thought, a lot of theory and a lot of testing of the data to see if it actually conforms to what I think it should. So start with first the skeptical route, because everyone should start as a skeptic or late

Derek McDaniel: 40:51

LIS to something else. So I, I really like computer programming, like I was in school. My first major was computer science, and then I saw some mathematics. But I'm in when you're programming a computer, like debugging is one of the hardest things. And they say there's like a 100x factor between the best engineers and the worst engineers in terms of how productive they are. And mostly because when you write a bad computer program, it's really hard to find why it's wrong. So you can end up spinning your wheels forever. So when you're doing statistics and tests, like you're basically testing every possible thesis, or I guess, with a regression you're like, so a lot of these things are very simple, trivial relationships that are being proposed. And but in computer programming, it's not just enough to do testing, you have to have a good mental model of the system. And then it's like playing 20 questions, right? If you play 20 questions, and you ask the wrong questions, you're gonna get nowhere, like, your methodology can be completely valid, completely good. But unless you're able to narrow in on the issues, that will actually give you more information. It's very difficult. So that's sort of where I'm coming from looking at it. Statistics is like, I'm very good at most areas of math, at least at the undergraduate level, weather analysis, calculus, linear algebra. But statistics is my weakest area, right? And then the limit statistics just becomes machine learning, right? Yep. Yeah. But what I don't like about machine learning is it's just a black box. Yep. Like, the machine. Like, you play chess against the computer. It can be anyone in the world, but you don't understand why. It just seems irrational. So

Douglas Padgett: 42:59

yeah, no, absolutely. Yeah. And I keep going. I mean, yeah, feel free to kind of find is,

Derek McDaniel: 43:08

when they're when there's definite statistical proof of something like, I'll be the last one to know. And I'm okay with that. Yeah, well, I just like looking at time series and trying to like, get us comparatively look at history, like case studies, things like that. Like, we can talk about Turkey, we can talk about Japan, we can talk about whatever, Venezuela or Argentina right now, Argentina is going to be a crazy case study. 15 years from now. Yeah. For better or worse, for better. To his credit, he's proposing dollarization. He's not proposing to put them on Bitcoin or something like, yeah, yeah. So we'll see how that goes. But that's my thinking. When there's the more variables you have, the harder it is to use statistics. Yep. And with the economy, there's, everything's very cool. Absolutely.

Douglas Padgett: 44:04

Absolutely. I think it's a very, it's a very fair critique. And I think that is the absolutely correct way to go about a critique of that is that at any given time, I mean, just just to make, like, you know, use or use a time series that I think approximates what interest rates are actually, you know, what they are, and then what the actual outcome is of what interest rates are doing. And then I'll overlay the charts like anyone will do and, you know, we'll say, look, one causes the other. Of course, no one for whatever reason, finance decides to take the next step of just running some statistical models to see if there's anything there. And then I think the next step is, Derek, what you're saying is, yeah, Doug, that's great that you're taking the next step there on the statistical models, but that could just be one of 100 things that at any given time are impacting what it is that you think that they're impacting, and until you test and come up with counterfactuals of the other 100 things for you. It's

Derek McDaniel: 44:57

so like, it's It's impressive how good meteorologists actually are that you can look on your phone and see what the weather is what's going to happen in the next five days. Yeah, yeah, that actually that's like voodoo. Yeah, yeah. Yeah. Outside of that, like they have so much data and they It's a closed system. There's only there's not as many variables.

Douglas Padgett: 45:20

Yeah, but, ya know, I it's just

Derek McDaniel: 45:24

hard I just try to look for low hanging fruit. That's what I say when it comes to methodology. Like, don't make things hard for yourself, just find the easiest example that will get you the right answer.

Douglas Padgett: 45:38

I do. I do appreciate the skepticism. And I definitely wanted to be able to bring that up in this conversation because I think, and your your, your explanation was great, too. And I think anytime you see data, and I know I do this as well. And so yeah, anytime I mean, and I'll see this happen too often the two time series that I believe are some sort of Twitter post two time series that are not directly related, and then they have some sort of correlation. And then to go through that step of a thorough skepticism of okay, yeah, there might be a correlation here. But there could be a lot of causal reasons that are both equally impacting the each time series. And it's actually that that unseen variable, that's actually the thing that's causing the correlation as opposed to your own assumption. And for any listeners out there, and Derek, it seems like this is your your instinct to, that's the first thing to do. And until you just buy something, you you need to do a ton of work to make sure that that there's something very hard. Yeah, yep. Yep. No, 100% 100% Agree. On a percent agree. I'm glad though. I'm glad I've posted a few things. It was your with your level of skepticism that at least has piqued your interest. So

Derek McDaniel: 46:45

yeah, I mean, when you're trading, you you look for, right, what's called signal like, any advantage you can get even if it's wrong, sometimes. Yeah. Yeah, to get if it's right, at all, like just gives you a net expected value game, then you'll go with it. But if you're trying to make claims on a relationship, that's a little harder.

Douglas Padgett: 47:11

Let's see, I forgot exactly what I posted the other day, too, but go for it. Go for it. Ryan,

Ryan Benincasa: 47:18

did you want to share some some thoughts on what's been going on in Turkey?

Derek McDaniel: 47:28

Oh, yeah, we talked about that before the call started. So Turkey has been doing crazy things with its interest rates. Um, and so outside of MMT, there's this proposal, what's called referred to as Neil Fisher ism, right? And generally, that's, it's called that because it's like a new take on the Fisher equation, that raising rates actually raises inflation, because if you look at the Fisher equation, just like in the simplest form, what is it? The real rate is the not equals to the nominal rate minus inflation? Right? So if you reorganize it to inflation equals what is it? It's the real way. Inflation is the nominal rate minus the real rate. So if you increase the nominal rate, just looking at that, it would potentially increase inflation. So, um, a lot of people have toyed with this idea of Neo Fisher's, even more conventional economist MMT takes a different approach. They're like, okay, what are the who gains and who loses when you raise interest rates? What, what's the effect of increasing the real rates, but I'm okay with Turkey. So a lot of people are looking to it to try and like test Neil Fisher ism as an idea. And I just don't think it's a good example of that, just because, for one thing, their lira debt is small compared to their GDP. And so what they do with interest rates be like, because they don't have a lot of lira bonds. If they raise rates, it doesn't dramatically increase their

Ryan Benincasa: 49:28

interest payments, and do they deserve central bank pay interest on reserves? Or someday or their

Derek McDaniel: 49:38

son, okay, what their central bank has been doing. My recollection is imperfect but they've been trying to guarantee do FX guarantees so that people savings are protected against FX markets. So it gets very complicated. They abandoned that last year though, I think last April got um, so Turkey has a lot of issues. They recently had an election where they're gone changes policies all the time. And they have foreign debts there. Like I said before, they're in the middle of Europe. So they're next to Russia, they have to import a lot of stuff. So their balance of trade can really affect inflation. So as a test of Neil Fisher ism, it's not great. And it's really hard to read the data with all these confounding variables.

Ryan Benincasa: 50:37

Got. Got okay. But inflation has picked up recently following the rate hikes, is that correct?

Derek McDaniel: 50:46

So what gets me about Turkey is people usually comment. And economics articles will talk about the year over year inflation. And instead of the month over month, but they'll report it like on a frequent basis, or like report it right now. Oh, inflation just hit 80%. But it's year over year. So you had 11 months, and it's just like, the last? I don't know, I, I just don't like the way people report these numbers. So if if you keep track of month over month, you can predict what's going to happen to the year over the year and the next month, because you'll have one month leave series and then another month gets added to the series. So if 11 months ago, you had really high inflation, then you can predict the year over year inflation is about to drop precipitously. So

Ryan Benincasa: 51:44

yeah, that makes sense.

Derek McDaniel: 51:46

It just becomes difficult to report. And, obviously, interest rate policy, the Taylor rule, it's supposed to act with long and variable time lags. I mean, you went over this with your, in your podcasts with Riddick before but

Ryan Benincasa: 52:03

anyway, yeah. Yeah, it's so funny. No, and to your point, like, you know, when we talk about inflation, generally, we're referring to some sort of consumer price index or equivalent or something. And it's like, at the end of the day, that's an index. Right? So I mean, the s&p 500 is also an index. And but when, when it goes up in a month, we don't say, hey, like, you know, stock market inflation was up, you know, 1%, you know, this month or something like that, even though they're, they're really I mean, you know, they're kind of politically constructed indexes to sort of measure to some, you know, to some sort of, you know, economic measurement or what have you. So, ya know, it is it does make, you know, communications about inflation confusing, because, you know, just because inflation, the rate goes down, that doesn't mean that prices go down, necessarily. And I also, you know, kind of getting back to what we were talking about earlier and stuff with, with inflate, it's like, you know, with with any of this stuff, we're, we're talking about, you know, prices of real goods and services in an economy and a CPI growth rate, or what have you, doesn't really, you know, there are factors that are completely unrelated to, well, not completely unrelated, but not really exogenous. Yeah. Right. Like, like we had, we had this, this, you know, this fracking boom, you know, that kind of kind of kicked off in what like, like, 20, the 2009 2010, I think, was when the technology really started to get commercialized. And, you know, we had basically like a, a classic sort of credit boom, in the form of, you know, the high yield junk bond, or junk bond market, financing these massive oil and gas projects in the early 2010s. And, you know, as as these things go, you had a huge boom, and then a huge bust and 2014 2015, you know, there and, you know, for the years that followed, there were a lot of bankruptcies that took place with, you know, companies and in the various oil patches in the United States. Now, as a result of that we had very, very low relative to history. Oil, oil and gas prices? And and and it's because we have those low prices is precisely why a lot of these companies went bust. Right? Their their costs were too high relative to their revenues,

Derek McDaniel: 55:31

commodities are a hell of a market to trade. Right?

Ryan Benincasa: 55:35

Right, exactly. But my point is, like, so we had really, really low and not really much energy, inflation, or, you know, for for a long while there. And that would have been, you know, and inflation came in consistently low during that time period. And so that doesn't have anything to do with, you know, the size of the Fed's balance sheet, or any of this other sort of nonsense that we hear all the time are like, I

Derek McDaniel: 56:11

think the idea people are grasping at is, you should be able to control the money independently of what happens in the real world. So the to match each other. And the way that was done in the past was trying to control the quantity of the money. But MMT is like, No, you have to control the bid at which it's created rather than just the quantity.

Ryan Benincasa: 56:33

Right, right. And as and, you know, as the I think what MMT shows too, is it like, yeah, it right, the bid. Yeah, controlling the bid that you know, for it in the form, for example of, you know, people's labor, it's like, okay, you have to pay a tax, and, you know, this is okay, well, how do I accumulate the money necessary to pay the tax? Well, you know, at that point, then, you know, the government is the sort of monopolist price setter, and, and, you know, just names the price for okay, you know, doing this type of work, you know, will get you away with, you know, the necessarily the dollars that, you know, are needed to meet the taxes. So, yeah, so, but, again, to your point, that's all about prices. And then, you know, once you kind of have established these sort of anchor prices, and, you know, these market in these markets will sort of trade around that, and kind of have relative price discovery. But you can't, but it's sort of like, I mean, you know, it's a unit of account, right? You can't just, you know, the someone has to be the arbitrary price setter, so to speak.

Derek McDaniel: 58:02

Yeah, I think you're exactly right. It's, it's just a very difficult thing to articulate. Articulate. So, I do want to say one more thing about m&t. Why people don't seem to get it. For one thing, it's unfortunate. MMT is correct. Being so simple. It's like economics has been sort of stagnated for a long time. And it's like MMT comes along, and like, oh, the answer is pretty simple. Just public finance doesn't work the way you think, or you like, you're creating artificial scarcity. But I think that goes into why people don't understand him and tea. It's because there's, there's not an individual benefit to understanding public finance, the way like people understand equities markets really well, they understand how to raise capital, do all these things. But for public financing, it's just seen as a source of cost rather than a way to create value. So I think that's where finance sort of goes off. Everyone's focused on making money for themselves that they don't bother looking at, hey, we can use public money for public good. Like, even if it doesn't work out, in every case, it can, like, not every company that raises capital is going to be successful, but you at least try and we've sort of created a whole system for doing that. But anyway, yeah. The funny

Ryan Benincasa: 59:30

thing to kind of to that point, though, is that like, I mean, the capital markets, are some of those highly regulated markets, that that that we have, right? I mean, it's, it's, and so when they

Derek McDaniel: 59:44

would assets be as valuable if they weren't regulated?

Ryan Benincasa: 59:47

Well, would they even exist?

Derek McDaniel: 59:51

Right. That's a good question. And

Ryan Benincasa: 59:54

this is where, you know, like, and I know, you've talked before about like, property rights and stuff. And it's like, yeah, we have a, you know, you have a public sector that administers property rights and enforces contracts.

Derek McDaniel: 1:00:09

You know, yeah, like Bitcoin prides itself on being what's called permissionless. But if you have you No one wants to permissionless property because then you can't enforce property rights. Exactly.

Ryan Benincasa: 1:00:22

That's there is no property if it's not legally defined. And so that's something where I think, I think the analogy of like the, the, the two fish talking to each other, and, you know, one of them talks about the water and the other says, Well, what's water? Right? And like, you don't even think about Yeah, this institutional structure that exists. Graph

Derek McDaniel: 1:00:48

paper that yeah, trying the charts. 111

Ryan Benincasa: 1:00:52

final thing. And you were kind of talking about oh, that was really interesting point you made about the the price ranges for for wages and an economy. And, and, you know, one, one thing that I've, and kind of reconciling with what I was just talking about, one thing I've thought about is, and I'm not a lawyer, so I'd be interested to talk someone who's more familiar with contract law, but like, it, it seems like the way that contracts are written sort of defines the sort of the price and the price level and or the price ranges in an economy like, I'm pretty sure, I can't buy someone's house for a gazillion dollars, because I literally,

Derek McDaniel: 1:01:47

money laundering.

Ryan Benincasa: 1:01:49

Well, but but also, just like, that's not a you know, if that's governed by a contract, it's not it's like if someone tries to fight, it would be it's it's not, it's not. Yeah, it's not enforceable. I would think. So. Yeah.

Derek McDaniel: 1:02:07

I wrote an article once called the billion dollar, high five, where you could create a huge tax burden for yourself by charging. Two people charge each other for a high five, so that anyway, so they're both consuming, like a billion dollars of goods and services. And then, like, if you ever want to be in debt to the IRS? I don't know. At a certain point. Yeah, it's like, what, what even makes any of this real like legal? Like, right, if it's subjective, then.

Ryan Benincasa: 1:02:44

Yeah. Right. And so but at the end of the day, yeah, you kind of have this market system that's sort of built on a foundation of public law. And then it's like, okay, well, and this is something that I got, you know, we got in a little bit with some, some Twitter back and forth, like, last year, where, you know, people will say, like, you know, oh, well, banks can just create money. And I would just point out that banks, you know, operate within financial contracts, right? A bank loan is fundamentally a contract, you need to have some sort of public legal institution that governs that contract. And so, you know, that has to sort of exists first. It's like a base layer. Yeah.

Derek McDaniel: 1:03:33

If you watch Game of Thrones, they do a great job portraying the political dynamics between the bank and the Wow, isn't everything, like, the bank is that they act like they're so powerful, but they're just like, trying to figure out who's gonna come up ahead and not make a man. Right.

Ryan Benincasa: 1:03:52

Right. Yeah. It's all just politics. Hey, have you ever read a book called scale by Geoffrey West?

Derek McDaniel: 1:04:01

No, I can't say that. I have, I think you would really

Ryan Benincasa: 1:04:04

enjoy that book. And we can kinda just as a closing thought, I think, because, yeah, it's just, you know, your, your points about sort of, well, rates of disparity, and, and, you know, ecological kind of parallels to economics and stuff. It'll tie in really nicely. And, you know, like, like, as just one example, he talks about how, you know, trees don't grow to the sky, because at some point, like, they, the branches would just get too heavy, and they would collapse. Yeah. And, and so there are limits AdWords,

Derek McDaniel: 1:04:54

right. Yeah, exactly. or 1000 years old,

Ryan Benincasa: 1:04:57

they can get up there. Right. Right. Exactly. Right. Because and so there are limits. To sort of, you know, you know, these growth rates and stuff and, and, and sort of like what we were saying of, of, yeah, no, you can't actually sell something for a bajillion dollars because, you know, it's not you know, it doesn't work within within our broader economic financial I mean,

Derek McDaniel: 1:05:29

we talk about perpetuity is right. Right. So I guess if you're solid a perpetuity that's going to be an infinite dollar contract but yeah. Anyway, it's it's been fun chatting with you guys. There. Yeah,

Ryan Benincasa: 1:05:46

yeah. Thanks for coming. Thanks

Douglas Padgett: 1:05:47

for Thanks for joining us, Derek. I know you have a medium blog, Derek D E, R e k seven MC Dodd medium.com. Then you also have your Twitter account as well rate disparity I'm sure Adam will put that in the show notes. And anywhere else that you that you publish or anything like that, or those

Derek McDaniel: 1:06:08

that should be good to spots? Yeah, I've been working on a book, I sorted a soft release, but it's just a confusing topic. So trying to figure out everything with interest rates.

Douglas Padgett: 1:06:23

Okay, we'll be on it will be on interest rates. And you'll you'll promote that on the Twitter when it when it finally drops. Okay. Okay. Well, good. We'll look forward to that. Derek, Thanks for Thanks for coming on. And it was a great conversation and definitely, like I said, follow him on Twitter and he has a handful of good post on the blog as well. So that's all we got for this week on the applied MMT podcast. See you next time.