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Magic Money Tree
A conversation with Rabobank Strategist Michael Every
Welcome to Decade of 2020, a newsletter with a relentless focus on how the next 10 years will affect the middle class. Forewarned is forearmed, they say. If you’d like to sign up, you can do so here. Or just continue to read…
When I read this brilliant article on MMT, I was blown away. The quote from the article that I mention below resonated with something Harry Houdini, the greatest magician that ever lived, had once said (above).
“MMT: Not so Modern; not so Monetary; not so Theory”
Michael Every, Global Strategist at Rabobank based in the Netherlands.
I decided I had to bring Every on my podcast and when I finally got a chance to pick his brain on a variety of different topics, he didn’t disappoint. I spent some time thinking after our interview and realized there was a reason that central bankers - the greatest magicians of our era - were pulling the same trick they have been pulling on us time and again: Because it works……. every time!
So, if you are like me and are getting a little restless after that intriguing introduction, click on the icon below for the link to our entire conversation.
Below is a short excerpt of my chat with Michael Every. We speak about the implications of coronavirus on the lives of the regular public, MMT, inflation versus deflation, recent run-up in gold and silver prices, current geopolitical tensions and the US elections.
Q. Give us the 30,000 foot view of the world as you see it on your own radar.
A. “A disaster, to be honest, when you're working in this particular field, which is financial markets and economics, and you've been doing it for over two decades, like I have, you are generally surrounded by people who are talking their book, shall we say? So for example, if you see an economist talking on television who is employed to do with the housing market, They will tell you that the housing market is there just around, just about to turn the corner or already, you know, in a period of good times, if you're listening to an economist who deals with the equity market more naturally, the equity market is going to go up. The economy is going to be strong. Everyone's going to be laughing.”
“I'm lucky in that my background is in country risk and in the bond market, both of which areas that look for where things are going to go wrong, which I think makes you a bit more of a realist, and also because, you know, I don't have any one particular product portfolio by that to sort of now in the global strategy role, you're trying to look at the big picture.”
“And as I said, it's a disaster. I mean, as I speak now, we've just had the latest set of Q2 GDP data from Germany and from the US and they're both of a degree that if I had told you a year ago, we were going to see like negative 30 odd percent down in the U S negative 10, 11% down in Germany. If I told you that we were going to see those kinds of prints, you'd have laughed me out of the room and said that, you know, what am I expecting World War III? Another earthquake? Significant portions of countries falling into the ground? Well, that's exactly what we've recorded. Now you can look back and say, well, that's cute too!. That was the virus! Let's look onwards and upwards. Everything's going to get better from here. And I have to say, I don't think so.”
“You're going to get a bounce in Q3; that's undeniable. And then we're going to recognize the fact that from Q4 onwards really we're stuck in what I'm dubbing: The Next Normal, which is even worse. Then, the new normal, which is what we were stuck in before, which is lower growth than we had prior to this covid crisis, which was already far too long, even lower productivity, even more polarized societies, even higher unemployment, even more deflation, even more debt.”
“Everything that we had wrong before is much, much, much worse, right. All the way across the sociopolitical spectrum. Now, you wouldn't know it, looking at the stock market. Of course, if all you're interested in, is this in the stock market or the price of gold? Well, you're happy as Larry. Fantastic. I'm so I'm so thrilled for you that that's the metric you get to look at, but in the real world, but we all have to live.”
“As I said, a disaster.”
Q. Does the current zeitgeist whispering in your ear about things to come or what are the things that are keeping you up at night?
A. “Presently? Well, a lot of stuff's keeping me up at night. Let me try and answer it in two ways. First of all, the zeitgeist. It depends, as I said, if you're listening to people who are fixated on telling you the economy is going to bounce and get better, that we're past the worst of it.”
“And everything's going to improve, which I don't believe, but it feels like the zeitgeist is listening to people in the equity market. We've never had it better. Never had it so good. And again, that's true for the equity market, but the equity market has no connection to reality at all. Unfortunately, at the moment it's a separate entity, you know, there's like guys I’m listening to, and what keeps me up at night is looking at the fact that we already had a very, very unstable dynamic playing out globally.”
“The difference between countries that were winning and countries that were losing, the difference within countries between the narrow subset of society who had been winning hand over fist and the majority who've been losing time and time again. Political divisions, ethnic divisions in some places, massive polarization and the complete collapse of what could have been called once the sensible center, basically the fusion of Neo-liberal, economics, and liberal politics, where you had a whole generation of people who would say, well, I'm socially liberal and fiscally conservative as if somehow that was the most natural thing in the world. And the globalized world built on the back of that.”
“I think almost every element of that architecture is under existential threat at the moment. So we're talking about de-globalization I think with a great deal of credibility, we're also talking about, you know, the end of potentially liberal democracy. That's no longer a taboo topic.”
“So everything that you might want to hold dear, is potentially, and I stress potentially because nothing's fixed yet - potentially at risk. You know, the future is completely unwritten and the spectrum of possible future outcomes genuinely keeps me up at night.”
Q. In a recent piece that got published a week or so earlier you have connected the Hippocratic oath with money printing, the piece was titled ‘Money printing: First do no harm’. What was the thought process behind the title? And what do you feel about the response of the central banks to the pandemic and after?
A. “Well, the title, first of all, whenever you write a piece like that, you're always aiming to get a title that people will read. I don't mind being too technical and equally you don't want to be too controversial, but the reason we chose that particular one is we hope that it would capture accurately that people are increasingly relying on central bank policy.”
“In this particular case, we were writing about MMT on modern monetary theory as some kind of palliative or some kind of medicine, not just for one economy, but for the whole globe. And we wanted to stress that, as you correctly said, the Hippocratic oath is first do no harm. And that there's no guarantee whatsoever.”
“Very regrettably, MMT will do no harm. And in fact, a great deal of evidence that it could do a great deal of harm, if done wrong. And given that most of what we do everywhere, most of the time, is done wrong. That is quite likely to play out in MMT territory as well.”
“To answer what you're talking about with central banks. I mean, we live in a world in which central banks now I just ubiquitous they're everywhere; talking about every aspect of everything. And we're utterly reliant on them to maintain any semblance of normality because we're relying on central banks to prop up governments. And governments are basically the only thing stopping us from running around attacking each other in the streets at the moment, you know, having a genuine 1930s style queue for bread and homelessness, as far as the eye can see.”
“And yet central banks role used to be that of a boring technocrat looking at keeping inflation at 2% over the long term. Now they're talking about everything from how to build a just society to how to save us from global warming. And none of these things are easily achievable for a group of unelected technocrats who can't even get inflation at 2%.”
“Now, that being said, I think it's inevitable. They're going to keep doing more. And I think there's a lot more that they can do and should do in conjunction with governments. But at the moment, we're seeing this process of kind of backstage evolution of central banks from boring technocrats to purportedly masters of the universe, but they're masters of the universe with really very, very few tools left in the toolkit to do anything other than causing as much harm as good. And yet the alternative is probably even worse, which is why, as I said, I'm kept up at night, far more often than I would like.”
Q. Do you mind breaking (MMT) down for my listeners like you would explain it to your 10 year old?
A. “I think that's a good way to explain anything by the way, 10 year olds can be exceptionally sharp. And I think whenever you see anyone trying to explain anything in highfalutin, convoluted jargon, you know, that basically, they're either not very good at explaining things or they're deliberately not very good at explaining things, uh, you know, economists are experts at just saying gibberish and they dress it up in mathematics and jargon, to not make you realize actually it's a nonsense that they're saying.”
“MMT, in the simplest possible terms can stand for Magic Money Tree, magic money tree, which is something that, of course, every politician who's socially liberal and fiscally conservative will tell you it doesn't exist. There is no magic money tree. There's no such thing as free money. There's no such thing as a free lunch, you can't just print money and get away with it. Well, MMT is a theory that says: Oh yes, you can. Yes, we have for the past 5,000 years or so.”
“And historically they are absolutely correct because MMT is not really about money per se. It's about power for reasons. I'll come back to it in a moment. It's not modern. It's extremely old. And it's not really a theory because we can prove it exists. It's about a 5,000 year tradition of when you haven't got any money, printing it in order to make sure you've got money.”
“And that's effectively what MMT is now, whether you can or can't print. It is where we get to the power issue because governments do have the power to just print money via the central bank that they control or they can control if they want to, if they allow themselves to, and they can produce as much money as they want, you know, the real world limitations of what they can do with that money are physical supply and demand.”
“If you print too much money, so demand is higher than supply, you will get lots of inflation, which can be very, very damaging. If you don't print enough money, you can have lots and lots of deflation, which can be just as bad. And anybody who tells you that inflation is terrible, correctly, needs to be intellectually honest and say, deflation is just as terrible.”
“So, you know, it's an awful dilemma to be caught in both of those two extremes, (it) destroys societies. So there you go, the government has the power to print money. They can basically say we have unemployed doctors and sick people. We will print money to make sure the doctors treat the sick people. In many respects, you can say that's a sensible thing to do.”
“The catch is you have to have the power as a as a government to overcome vested interests within your own society and say - We're doing this. Whether the banking sector likes it or not, whether the media likes it or not, whether big business likes it or not, we're going to do it. That's one level of power. And the second dimension of power is, do you have the power to force other countries? To accept the money that you've just printed. If the money you've printed has to buy things from them rather than from yourself.”
“So effectively, if you're a net borrower from the rest of the world, if you've run a trade deficit with the rest of the world, because you don't have much productive capacity. Yeah! You can print as much money as you want in a country that has nothing but desert everywhere, but there's no way you're going to give that paper money to the rest of the world and say, we'll swap this for food, for construction materials to build houses, for nice iPads and technology to help us become a high tech superpower.”
“Why would they swap money backed by nothing but desert for those goods. So you have to have domestic power and you have to have international power. And that's why the M in MMT really isn't about just money. It's about much more than that. And why it isn't modern, it's as old as the hills and why isn't the theory because we've seen it play out time and time again.”
So I've taken a bit of time and I apologize, but I hope that's good enough for a 10 year old. And I hope it's good enough for your listeners.”