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This episode of the Tape MacWilliams podcast is brought to you by now TV Mike know that the dreaded second wave seems to be creeping up on us. We could actually be heading for another lockdown. So you know what that means? More watching television. You're watching telly. I tell you, I'm looking forward to the coming. Yeah. Brendan Gleeson as Donald Trump. I cannot wait. I've been to a couple of the promos, and it's kind of shocking because, you know, I'm thinking of the guard in Brugge.

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I think you know that character. Yeah. And then to see him play the Donald Fisher, is he any good? I haven't seen those trailers yet.

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He's got the R slipping down to a fine art.

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Really. So I'm looking forward to this. It's on now TV. I think it's going to be a really interesting series, an interesting series, just a brilliant witnesses. And also, you know, it's lovely to see an actor take on that role because we've seen comedians play Trump, but serious actors play Trump. That's that's a brave move. It'll be interesting to see what The Donald says about it. What I'm really looking forward to, John, is Trump's first tweet about a party playing him.

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Yeah. And an old cop so bad that starting on now TV on the 30th of September and now TV have a rake of good movies, latest blockbusters, award winning box sets of all sorts of stuff going on. You know, there's kind of a movie for for as far as we can see, every Muj with this guy, Semba Pass, you know, and, you know, our moods kind of fluctuate all over the Gulf here.

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They're certainly swinging it here at the moment. So I think what you've got to do is search now TV to start your free seven day trial, but also look out for Brendan Gleeson as Donald Trump in the KOMY rule.

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What in the world is happening on Wall Street? The economic indicators, he knows where this is going to end up.

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To understand the economy, you have to understand human nature. This podcast is powered by a cost. How are you doing? There it is, David, it's the podcast, we're in lockdown, man. The strangest thing about this is how you told us remember back in early March when Varadkar came out onto the lawn, I think of the White House and said, we're locking down. Most of us thought three weeks, four or five, not really having ever dealt with a pandemic before in our lifetime.

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If you'd said that we're going into lockdown, Mark, to just before Halloween, I think a lot of people would say snap out of it. But that's where we are. And you know, the drill. The podcast is trying to make sense of the world, make that economics part of the world that little bit more comprehensible. And we really need that at this stage. If you do like the podcast, give us a follow on Patreon, not just to give John Davies a dig out who clearly needs it all the time, but also also for yourself to actually learn economics.

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We've got all sorts of tutorials and stuff. In actual fact, this podcast is going to be a bench policy wonk ish. It's going to be heavy in economics and we're going to split into two parts. One is a discussion with me and Paul McCulley before I talk to John. And then second is John coming back and saying, OK, you two have had a nerd fest. Now please make this intelligent nerd or the average nerd, Johnny Boy.

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What's the crack, my friend? I'm good. I'm good. I'm good, to be honest. I absolutely you know, the way I've been talking to a lot of people and everyone is happy. You're always talking to a lot of people, but everyone's having their bad covid days.

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You know, you're talking along, you're trying to get on with stuff and then all of a sudden you just kind of hit a wall, I find in this as well. And I'm kind of having one of those at the moment where I'm just sick of it. I'm sick of all the shite around us. But and then the other thing as well is that when we went into lockdown first, as you were saying back in March, we've been doing pretty good.

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You and I have to do pretty good in the in the gym, you know, just trying to get fit and lose the bag and all that kind of stuff. Oh, the bag is back, man. It's back. It's absolutely back. You know, then I went I started going to the gym again. I'm old sorghum. And now all the restrictions again, we have to give it up. So I'm just going to put on more weight maybe.

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I think I think we should just compare needs in the future. Middle aged men's needs. No, but I know what you mean. I mean, the problem is that you're sick of covered with covid is not sick of.

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You know, that.

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Listen, I'll tell you who we're going to talk to now in two seconds. You remember my old mates, Paul McCulley? Paul Yeah. We did a few animations with Paul. He's great. He's a he's a preacher Paul. Preacher Paul.

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But his dad was his dad was a Baptist preacher. And he has that. He has the gates, the accent and the delivery of a man who was really born to read Deuteronomy, Leviticus, Genesis. Absolutely. John, I can tell you ahead of time, Paul, is, I would say, the best macroeconomist I have ever had the pleasure of working with a known over the years. He is a man who came up with the expression the Minsky moment, the shadow banking system.

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He's the real deal. He is up there, in my view. And I've spoken at last on the economics to Krugman himself. He is at that level of brilliance, on macroeconomics, on financial markets, on monetary policy and fiscal policy, on the way in which public policy should work. He is again, Krugman said something very interesting about colleague. He said that PIMCO, which is the largest bond fund in the world, Paul was the chief economist and strategist.

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So he was making all the decisions for him. Right, OK, for 15 years. Right. Which is an extraordinarily powerful position in financial markets. Paul left a couple of years ago. PIMCO performance began to tank. Really interesting. It was Krugman said in The New York Times that he could identify why PIMCO performance began to tank because they didn't have McColley as the chief brain of the operation, which I think is very interesting now. So McCullom on a continent that is.

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Yeah, it is a coming from the Nobel Prize winner. It really is.

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So let's talk to him. Paul McCartney has been a nomad for years. Paul, how are you? It's a real privilege to have you on the podcast.

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It's absolutely wonderful to hear your voice, David. And you're bringing back memories of a long time ago. We're getting older, my friend. We are certainly getting older. But they were good times. They were good times. And you know, the interesting thing, Paul, let's start with that. Twenty five years ago, I want to talk about the Fed yesterday, the day before last week. But I want to do it in the context of the economics that people thought was gospel 25 years ago.

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And the reality of now but what has changed and are we at a tipping point in the way we see economics and the way we change? Because in the old days, if you were printing money, you are having inflation. In the old days, if the government was spending money, it was crying that the private sector in the old days, if the fiscal deficit was getting big, you were gonna have a current account problem and you'd be in some way, people think, throwing money away.

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Now the governments are doing all that and more and everybody is chilling out and not freaked out. I want to talk about that in a sec. But first poll in the last week, Jay Powell, the head of the Fed, said that he thought using monetary policy and the banks to get money to small businesses was not the cleverest way to go. Explain what's going on.

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Powell has said many, many things over the last couple months, and they're all in and around what I call a paradigm shift. The life that you and I have lived for the last twenty five years as an analyst is fundamentally changing because the paradigms are changing and essentially we are merging the monetary authority and the fiscal authority. We're breaking down the church and state separation that you and I have lived our life worshipping in many respects. And essentially on that point of getting money to the man on Main Street, particularly in small sizes, Sherpao is essentially saying that the plumbing system of the monetary authority really isn't suited for that.

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And what's more, that doing that endeavor of sending helicopter money to the man on Main Street is a decision for elected officials under the umbrella of democracy. So he was not opposing doing that. He was simply saying that I'm the wrong plumbing system and too I'm the wrong guy to make the decision to do that. That is the job of the congressional body, the fiscal authority. So he was in full agreement with the need to do it. But basically, he said to Congress, you do it.

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OK, so, Paul, this is this is interesting because here we have. The head of the central bank, the Federal Reserve, and I'm also I've got one eye on the European Central Bank thinking along the same lines, not necessarily coming out and saying this, but what they're saying is we are in a lockdown situation in Europe. Again, the United States might well go into a lockdown again very, very soon, as long as that is the case.

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Small businesses have been ordered not to trade by the states of bars and restaurants and hotels and these sort of guys right now, unless you get money into their account, Paul, these people can't pay their creditors, the people they owe money to. And it seems that we're at an inflection point here. And how do you get money from the states to the little guy in order to prevent the little guy going bust and having a huge depression in the next couple of months?

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I think that's an excellent summary, David, that really is where we are, and I use the analogy that the pandemic puts us on a war footing. It's not a war against an adversary. That's another country or another sovereign, but metaphorically, it is a war. And when you're at a war, then the power of the state by definition will ascend and including saying shut down your economy. So the power of the state, which derives from the democratic process, is ordering the private sector or the capitalist sector if you prefer to stand down and the private sector can do that.

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However, the consequence of it is going down the plug hole of serial bankruptcies and insolvency. So essentially, the state has the power to say we're at war and shut down. But if they don't do something to keep the private economy as a going concern, then not only do you have a war against the virus, you have a modern day depression which actually feeds on itself. But I think that's an important point to make. David, it's not just a matter of a level adjustment associated with the economic fallout of the mandated shutdown.

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It becomes a recursive dynamic. You shut it down, you have X number of people who go broke. But the act of X going broke means that there will be a next iteration of Y going broke. So you have to have the state simultaneously with declaring a war to say essentially we will insure with the power of the state and the power of fiat money that the private sector is a going concern on the other side. OK, Paul, let me come back to 25 years ago.

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OK, can the state right now, tomorrow morning, just print money? This is for people trying to get their. You were the chief economist of PIMCO, the biggest bond fund in the world. The biggest bond from the world spends its time looking out for inflation, fearing inflation because of the relationship between inflation and bond prices. Can the European Central Bank or the Federal Reserve just simply print money today in order to prevent the bankruptcies that you worry about?

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The word you use simply is the tricky word in your question, David, that can't do it simply within our political architecture. But mechanically, yes. Yes, literally. All I would take is a simple act of Congress and for technocrats at the Fed to hit computer buttons so mechanically, it is very easy to do what I'm suggesting and what you're suggesting. The political environment makes it less than simple, but mechanically, the short answer is yes, you can do it.

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So the central bank could basically add a zero to the account of every small business are two zeros or three zeros. You could actually bequeath money to businesses that are struggling. Now, a lot of people listening would say, well, hold on a second. You know, the economics I learned are even common sense are my, my, my feel for the world says that if you do that, there has to be some sort of consequence, a competent, easy.

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Well, there certainly are consequences of doing that. It redefines the relationship between capitalism and democracy, between the private sector and the public sector. So there are a whole host, a whole mosaic of consequences of doing that. But it can be mechanically done. Now, as a very practical matter, since citizens in the United States do not have checking accounts, are deposit accounts at the central bank, the central bank would have to do it through the commercial banking system.

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So would have to be a bank shot, if you will. But at the conceptual level, yes, the central bank could credit the account with a bank shot of the citizenry of the country. And in fact, we've had some trial runs and doing that, and particularly with what is known as the PGP program here in the United States, the payroll protection plan where essentially the central bank printed money and it showed up into the bank account of small business.

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Now, there were a lot of intermediary steps. We don't need to go through those because those are wonky, technocratic sort of deal. Conceptually, the answer is yes, you can go directly from the computer that creates money at the Fed to the computer that holds the money of the citizenry. As long as you have the enabling legislation, the Fed can't do it legally without Congress saying to do it. But with legal authority, they can do it through the plumbing system that we're operating with.

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Because, you see, I find this really fascinating. Let's go. We were talking twenty five years ago. Let's go right back to the 1930s and let's go back to the Great Depression. And Roosevelt is sitting there in the White House. He's looking at a 30 percent unemployment, mass bankruptcies, as you were suggesting. And I think this is the debt deflation that Irving Fisher spoke about. Exactly. And he says to himself, this gold standard thing, this is tying my hands when I really need to print money and get the American economy out of this.

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And in the face of huge opposition, both intellectual and commercial opposition to people who owned gold and owned assets, he said, you know what? We're going to take America off the gold standard that will allow me print as much money as I need. And in so doing, I think I'll be able to relaunch this economy. Are we talking about that type of moment? Paul? It's fascinating you bring up that history of nineteen thirty three, because very few people fully understand what FDR did back then, people remember what he did on fiscal policy and the establishment of Social Security and deposit insurance and all that sort of thing.

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But actually, FDR First Act was on monetary policy, not on fiscal policy when he devalued the dollar against gold because we had effectively outsourced the anchor of the system to gold. So he devalued the dollar against gold and probably more powerful. He made private sector holdings of gold illegal so he didn't get the Arab states off the gold standard per say. He devalued the dollar against goal, but also he effectively, dramatically increased the gold supply available for backing expansion in the banking system by making it illegal for private citizens to hold it.

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So essentially what he was doing there was using the power of the printing press. The technical details really don't matter. But essentially what he did in sequence was to free up monetary space, to create fiscal space, to do what needed to be done. And I think that is a really good analogy for where we are right now, is that you remove the constraint, if you will, on monetary space. It's not gold like it was in nineteen thirty three.

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It is legislation in various jurisdictions and also custom and general consensus understanding. So essentially, you suspend, for lack of a better word, the doctrine of central bank independence. You free up the central bank to use its monopoly power to create legal tender. And then on the other side, you have your fiscal authority gin up the spending of that legal tender to Main Street. So what's going on right now, philosophically, is very, very similar to what happened in thirty three, details aside.

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OK, Paul, let's let's just have a quick think. If this is not done both in the United States and within the European Union, I mean, through the euro system in terms of the European Central Bank, let's just keep these two major trading blocs in mind. What do you think a new lockdown will do to the economy if the governments? Because what what I fear, Paul, is not really a lack of economics, but a lack of imagination when it comes to trying to figure out what is available.

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And against that background, sometimes those decisions are taken by technocrats who, as you and I know, don't necessarily wake up in the middle of the night worried about paying the bills or paying the rent right there from a different mindset if the governments don't. Appreciate the urgency of what is happening, what what fear do you have? You've asked the most important question facing us right now. In that monetary authorities both here in Europe and around the world get it, they fully, unambiguously get it and are essentially saying to fiscal authorities, you have unlimited space to do what is necessary to replace lost private sector income.

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And I think that's important. It's not stimulating the private sector. It is replacing lost private sector income, gross income. The continuity of income is the substance of all private sector contracts. So the central banks get it. And the big question is whether or not fiscal authorities will use the latitude and freedom given to them by monetary authorities to do the right thing. And I hear I have to say that I pull my hair out here in D.C. literally almost every day at the stupidity.

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That's the only word that comes to mind, the stupidity of our fiscal authorities not to do the obvious thing. It's not just the right thing. It is the obvious thing. And over where you are, I sense you're grappling with the same sort of lack of political willingness on the fiscal authorities, though, actually, and I haven't said this in a long time, more optimistic that the fiscal authorities in Europe will figure it out before we do here and the United States.

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And it should be a lot easier here and the United States because we genuinely have fiscal union, whereas in Europe, you're happen to come to the reality of the need for fiscal union and an emergency. But from my observation, you guys are doing a better job there than we are here. Granat is a really easy benchmark to beat looking at the United States.

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Well, listen, we can talk about the United States in Texas. I just want to just want to finish this sort of more philosophical discussion about the power of economics when faced with a pandemic. OK, because I do feel that many people, particularly in small businesses, have been bullied by this notion that if you print money, you're going to get inflation. You can't give money away for free. Money doesn't grow on trees. All these expressions that we were brought up with, you know, our mothers said these things, you know, money doesn't go please be parsimonious, save, etc.

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. Yeah, maybe.

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But I think you're putting your finger on a on a key issue here and doing what needs to be done, which is the locked in mindset of how money works. And everything that your mother told you and you tell your children makes total sense because you are a currency user, you are not a currency issuer. Now, your daughter may think you are, but actually you can issue the currency. You have to go out and earn it. It would be illegal for you to go down into your cellar and print it out.

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So I think most of us as citizens think in terms of the macro being the summing up of our micro constraints, that we can't do that at the national level because we can't do it at the household level without breaking the law and counterfeiting money and get arrested. And that is the mental cul de sac that everyone is. And is that well, you as a household are a user of the country. Collectively, the country is a issue or if it's a sovereign country and therefore it can do it and should do it.

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If they do too much of it for too long, gash, you will get a inflationary echo. But that's not the main issue right now because we're not dealing with an inflationary problem. We're dealing with a deflationary problem. And if you drank too much and a deflationary medicine, you could end up with a inflationary hangover. But that doesn't mean you shouldn't take the any deflationary medicine that the sovern. Is a issuer, it has a monopoly over the fiat creation of money, unlike you and your household, and I think that is the conceptual leap that is so hard for people to make that the sovereign is not simply a summing up of the individual household constraints.

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Now, Paul, again, I mean, this this stuff goes to the root of the misunderstanding of money, the fact that people have inherited preconceptions and prejudices about money, but the idea that the issuer and the user are two different creatures is absolutely crucial to understand. And again, I try to explain this on the podcast to many people that in actual fact, there is an alchemy in central banking and the alchemy is the following. The central bank can just make the stuff up if it needs to.

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Now, can I ask you about a situation of a country like Ireland? Right. So Ireland's in a monetary union. Look, I don't think we really appreciate the extraordinary latitude you have when you're a tiny country in a big monetary union. So you've got a huge pool of savings to play around with if you so wish to. Can the government, like the Irish government, say, OK, look, I get what McCully is saying. I understand that we need to deposit money into the accounts of small businesses just for the next six months or 10 months or 12 months or whatever happens to be in terms of the pound.

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However, all the war last.

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Exactly right. And so we don't govern what the war how the war is going to basically pan out the disease and the medical community do. So we'll figure this out. But. We have a problem, which is that we issue debt, IOUs and the Irish government's name, and then we bring those debt now really to the European Central Bank. I mean, it's pretending it's not doing this, but in effect, it is OK, because, as you said, the monetary authority gets it.

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Can the Irish government indefinitely just print these IOUs, get the new money, put it into people's accounts and actually assuage the anxiety of the people? The short answer is yes, David. And in fact, I think the European Central Bank is saying subtly, they're always subtle to do exactly that. And actually, I find it fascinating. Goes back to twenty five years ago when you and I were studying these things in the runup to monetary union in that through its creation and its lifetime.

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The answer was supposed to be no, that Ireland and Greece can't simply put money into the citizen injuries, bank accounts, issue bonds and then sell the bonds to the ECB. And everyone lives happily after you have this stability pact sort of notion and deficits as three percent of GDP and all of that stuff. But my read and correct me if I'm wrong, David, but my read of the current situation in this war timelike footing is the ECB has effectively said that the stability pact is going to be suspended.

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Is that a fair read? That's an absolutely fair read. I mean, as I always said, I always say that basically what the Germans didn't realize is there's been an Italian to today at the ECB. The Italians have taken over the place. And in effect, what has happened is the ECB has said through Philip Lane, who's the Irish chief economist of the ECB. Look, do what is necessary. We're looking the other way. You need to fix yourselves.

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We can't lend, but you can spend and we can facilitate that spend by basically giving you free money. That's what they've said. And in effect, the problem is I'm reading tonight Ireland that and all the journalists and lots of economists are saying, oh, yes, well, if we borrow this money now, we'd all have to pay it back in the future. We'd have to have austerity next year. And they don't get that. That's not necessarily the case.

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Yeah, I mean, it's it's fascinating that this pandemic has finally brought monetary and fiscal union to talk to Euroland because you had the monetary union without the fiscal union and we know what that begat and various crises in the north versus the south and all of those sorts of things. So you are there and looking at it from this perspective, I understand while your fellow neighbors there in Ireland would say this sounds way too good, that, yeah, the ECB is willing to let us distribute helicopter money and they will take our bonds in infinite amounts right now.

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But there's got to be a day of reckoning. And I understand that sort of issue because you look at the history of monetary union there and Euroland and there have been lots of days of reckoning. So I think the next step conceptually for the ECB and I'm not forecasting they're going to do this because that is not my field of expertise on the ground. The next step would be that the ECB would say to the member states, including Ireland, is that the bonds that we buy during this war period, however long it lasts, the bonds we buy from you, which allow you to distribute helicopter money, those bonds will have a de facto perpetual maturity, meaning they will never have to be paid back, that the ECB will pre commit to rolling them over at maturity ad infinitum, in which case, effectively, the helicopter money, the euros that are distributed within Ireland, which are perpetual, the notes that you carry in your pocket don't have a maturity date on them would be on the other side of the ledger.

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A government bond and Irish government bond with a de facto perpetual maturity sitting on the asset side of the ECB balance sheet that would complete the circle and reduce that rational concern that your citizens have, that there is a day of reckoning because effectively you're doing helicopter money and issuing de facto perpetual bonds. The day of reckoning is postponed into infinity, meaning there ain't no day of reckoning.

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That is a hallelujah moment for me, not as a hallelujah moment that full. I just ask you finally before we go. Right. You were the chief economist of PIMCO when when you and I parted companies back in the late 90s, although we've been friends ever since. People will listen and say, yeah, Paul, but what will the financial markets say if the ECB says these are Perpetual's, you don't have to pay them back. There's always this fear of what we used to call the bond vigilantes.

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Paul, you remember that the financial markets will penalize countries, our currency unions that do something like this. What do you think? I mean, again, I'm coming from your you know, your deep financial markets guy. What do you think? I think the whole concept of a bond market vigilante is nonsensical, and the current regime, the only reason it was sensible going back twenty five years ago is essentially democratic governments delegated to the central bank the mission of being the disciplinarian in the system and bond markets would front run central banks and that regime.

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So that's how the bond market vigilantes got their statue is because they were front running central banks leaning against fiscal expansion because we were fighting a war against inflation back in those days. So essentially, the bond market vigilantes looked at into two environment, our soldiers without trousers and guns, without bayonets. That is a beautiful image upon which to end this discussion. Paul, listen, it's been an absolute pleasure, as always. Listening to be in touch. Anyway, just a quick, quick word.

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American politics, your four weeks out. How do you call it? I wish you would ask me an easy question, David.

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The easiest answer is that six months from now, Joe Biden will be president of the United States and that we will have restored a semblance of civility in our politics and America. And I only mention, Joe, because he'll be president. But actually, the fundamental problem with our politics is much bigger than who sits in the Oval Office. So I'm actually optimistic looking out six months, but the journey between here and there is very, very fraught with risk, existential risk in many respects, because it comes down to the integrity and our collective belief and the fundamental fairness of our democratic governing order.

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We truly have a autocrat who wants to be a dictator and the Oval Office, he will be unsuccessful in that endeavor, but he can certainly create a huge amount of mischief, serious, serious mischief ripping at the fabric of our society between here and the exit door. The exit door or will happen between here and the exit door is something that I as a citizen, forget about me as an economist. I, as a citizen, have a great deal of worry about.

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Mr. Trump does not want to go gently into the good night. And that is going to be very unpleasant. But the reassuring note that I want to leave with you, David, is he will go into the.

[00:37:40]

Good night, Paul, as always, an absolute pleasure. My is to thank you.

[00:37:48]

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[00:38:08]

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I used to be an band here, host of Superbrain, the podcast for everyone with a brain. I have a passion for people and a fascination for the human brain. That's why I became a psychologist and neuroscientist. On Mondays, I pick the brains of inspiring guests about thriving and surviving in life. And on Thursdays I share insights and hacks to help you to understand and unleash your inner superbrain to join me each week. Simply search for Superbrain on Apple Edgecast or wherever you get your podcast.

[00:38:43]

Ákos Powers the world's best podcast, including the Two Journeys I'm Grandma and the one you're listening to right now.

[00:38:55]

Hello, preacher Paul. Straight off the pulpit there, he is amazing. He is the real he is the real deal. He is the real deal.

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BUCKMEIER Like, I got an awful lot of that stuff, but you the two of you nerds hang out there in economics. So you need to decipher some of this for me. You see, these are the weirdos I hang out with. You know, when I'm hanging out with you, I've got this whole I've got this whole subculture. It's like it's it's it's like this kind of bunch of very, very dodgy policy wonk mates that we all we can sit around, you know, and they chat and we we go to our nerd out and say, yeah, it's like economic atwa, you know, it's like a certain sort of language.

[00:39:32]

And you want to. Poindexter Yeah. As I said at the top, though, like, you know, I turned up as a young economist years ago, UBS, he was my boss. He was the guy who set policy for the whole bank light years ahead of the rest of us. And I learned an enormous amount. And again, he's extraordinarily generous with his knowledge and his wisdom. And he sit me down and say, look, this is the way this works.

[00:39:57]

All that stuff you learned in college, he said, is that even with all that stuff you learn in central banking, because I thought I came from the holy of holies, is now not forget that this is actually the way the world works. And in fact, what he was talking there was kind of heretical to all the stuff that you would learn as a central banker, which is that inflation always comes off of the money supply has expanded that fiscal policy, i.e. the government and monetary policies have to be separate church and state idea.

[00:40:21]

And, you know, people forget. I mean, but I'll tell you, the Paul McCulley came up with the expression the Minsky moment, which describes when, oh, financial markets, his financial market collapse. He came up with the expression shadow banking, the shadow banking system, which was basically he was the one who identified that there was the banks in the U.S. before the 2008 crisis and there were the shadow banks, which were kind of things like the banking system, that they were lending money into the system, but they weren't officially banks.

[00:40:53]

He steered PIMCO. I mean, as always, we always joke, you know, I left UBS and he left around the same time. He went on to become the chief economist of PIMCO, one of the board of PIMCO, the biggest bond fund. And I decided to be a journalist and a storyteller making documentaries and writing. You were fired, right? You were all fired. The whole thing only imploded. I was far from the next one.

[00:41:16]

That was a disaster. The reason that was the reason that was, was I actually went to a place called BNP BNP Paribas. Yeah. And I'll tell you a story, because I've done a lot of this work in emerging markets and because I'd actually gone to Russia, I remember the years ago, but to Russia to learn Russian and to listen to all that malarkey. And I had been doing a lot of emerging market stuff at UBS and IBM started.

[00:41:40]

So that was fine. And I worked with a really interesting bunch of guys who were French or French Serbs. Their parents were Serbs and they were really, really good at Slavic languages. They understood the Slavic world very, very well. Yardie idea. But I can tell you on the 16th of August. In nineteen ninety eight, it remains etched on my memory, I am in a. In the structure in Paris, in a hotel room, and I'm about to go to gym, you know, it's not that at all.

[00:42:11]

I'm about to go in the next day. To the board of PMP and explain the position we have in Russia, so we are taking this very, very large positions in Russia and we had what's called shore to the positions which sold everything. About a week prior to that, I'd gone on a client trip to Russia organized by a large bank that will remain nameless, Goldman Sachs and its and it was an IMF trip. Right. And I remember sitting on the plane and realizing this is nothing to do with economics.

[00:42:48]

It was more to do the feeling about what was happening in Russia in 1998, that the more money the IMF was giving to the Russians, the more the Russians were trousering, pretending they were using for economic reasons. This was just the end of the Yeltsin kleptocracy. And I am coming back and I said to the chief trade at the time, a guy called Cohran Capital Serb name, I said, look, this isn't an economics to hunt, but basically they're using the IMF money to do the thing in Russia called the Potemkin Village.

[00:43:19]

I've ever heard of that job. Oh, so so Potemkin was Catherine the great Slover General Potemkin. Right. And General turned out so that the villages of Russian thing. Right. And in the summer of 17 07, I bring you back a wee bit. Right. All the ambassadors of Britain are France. Of all the big nations came to Russia and Catherine the Great took them on a barge trip down the sniper, the river to Ukraine to show them the extraordinary gratitude the Ukrainian people had for having been conquered by the Russians.

[00:43:55]

The Russians had just conquered Ukraine for the first time. OK, yeah. And the idea was that they would show the Russians would reveal that all these peasants, these liberated peasants, were in total gratitude from the Russians, having liberated them from their own local oppressors. And this was about Russian dominance. But Russia wasn't an occupier. Russia was a liberator. Right now, the A if you know, if you look at the river, it's a huge, huge river, bends quite a lot.

[00:44:21]

Massive, massive river goes down, makes it down the spine of Russia into the Ukraine. Potemkin villages were what Potemkin had done, which is amazing, right? He made makeshift villages, pretend villages with pretend actor peasants in the rice. And every time every time the royal barge came to the bend, right. They'd see this village and all the villages started waving to Catherine, the great Hollywood style, Hollywood style. This is right, right, right.

[00:44:48]

And then as the barge would go slowly right in the park, the barge and the Russians slow down, they part of the village fucked around the next bend in the river. This is all true, man. Right. And it's cold. And it's called Potemkin villages are Padukone as the Russians would pronounce villages. And it's the way in which Russia has always tried to obscure reality, try to deceive the West. I mean, Putin is doing it all the time, right?

[00:45:12]

It's a Russian thing. It's called the Potemkin village approach to deceiving your enemy. So what happened was after that is all the French and the British and, you know, all of this, the Swedes, all those ambassadors went back to the capitals of Western Europe to say the Russians, everyone loves them, the Ukrainians loved them.

[00:45:29]

There's no problem. Don't believe this propaganda that they're actually killing Ukrainians. They all love them. Right. So it all a big fraud. And I've been aware of the for years studying Russian history and culture and all that malarkey. And I remember the IMF was a massive Potemkin village. I came away thinking the Russians are doing the same thing. They're window dressing reality. They're taking the IMF money. Right. The trousering it for themselves, Yeltsin's cronies, and the whole thing's going to crash.

[00:45:58]

And I went back to Gore and he said, You sure? I said, I'm not sure. But it's a hunch I have. So we went from having what's called a long position, John, which is means you're actually you've bought Russian bonds in a short position, which means you actually sell Russian bonds. Right. And you sell them into the future. Right. So these are long and short contracts. So we were positioned extremely well to take advantage of what happened on the 16th of August, nineteen ninety eight, which was that Russia defaulted, devalued and did everything they'd march from.

[00:46:31]

They said that we weren't. So they did exactly as we thought they were going to do. Right. Problem was we had the contracts that we had actually signed counterparts. On the other side of the deals were Russian banks that we'd signed the contracts with. And one by one they all went bust. So we had the macro position. Right. But the micro position was that the Russians never actually did the deals that they said they would do and all the banks went bust.

[00:47:00]

So consequently, our position was completely posterized. And that morning I had to go in to a guy called Pedro, who was the head of. BNP in their massive, massive French office and in Boulevard housemen in Paris and explain what was going on. So that's another go down, a very brutal French as well. Can you imagine trying to do it in French? Oh, jeez, I kind of half French, half English. But the problem was that were you marched off the premises more or less.

[00:47:34]

Yeah, we were. It was it was you just sometimes when you're a dead man, you know it you know, when the guillotine has been sharpened. And it's a very strange thing, actually. And people who've ever been fired or isolating the company will know that is that you actually become toxic and people will speak to you and people get very, very cowardly. Right. So people then everyone starts to try and pretend they don't know you. They weren't part of your team, your decision making.

[00:48:02]

They tried to isolate, you know, not just me, just me and the dart team in particular. Yeah. And it's an interesting it's an interesting insight into human behavior as to when. You become a persona non grata. You really know who has a spine and who doesn't. And the vast majority of people, unfortunately, don't have focused points. Yeah, that's very often the case. And I do remember it. So that's why we all ended up.

[00:48:28]

So while I was walking the plank. Right. Paul McCulley had abandoned and gone to California. So while I was in fact in Ukraine being deceived, Paul McCulley went to California to I think it's called Where Does He Live? Palm Beach. Long Beach is one of those beaches. Yeah. On the phone to you. Yeah. Yeah. And he even his career took off and I came back with my tail between my legs, gonyea's my dinner.

[00:48:54]

So that's the. That's fantastic story. So what I need to kind of understand a little bit more is, first of all, let me get this straight. Fiscal policy is how government spends money. Essentially, a monetary policy is all about the supply of money. Yes. So today's fiscal and monetary policy have always been separate, like the separation of church and state. Obviously, that was for a reason. So what's the downside? What are the what should we be concerned about now that they're becoming more, what Paul call it, a war footing?

[00:49:31]

Yeah. Yeah. Well, before the war there is the armistice. Right, right. OK, so the first thing to say is, I imagine fiscal policy and monetary policy. Imagine a boxer, right? Boxer boxers with both hands. You have the right and the left. Right, the job and the hook. So imagine that's the same way in economics. We're experts at this. Yes, exactly. Because the two of us have fought our way around chip shops all around the military over many years.

[00:49:58]

And then, Neal, anyway, so. So imagine that. Right?

[00:50:03]

So one arm is fiscal policy and one arm is monetary policy. Right. And when they're working together, they should work extremely well, which is the following. So, for example, the central bank. Issues the money, prints the money, and the government and the private sector should avail of that money to do what they will do in great times and really good times when the government, for example, wants to do something, let's say wants to build.

[00:50:35]

Let's say a housing project, right? So a big housing project like in Dublin, for example. And we want to build 10000 houses and we want to build state houses or the government will do is the government will go to the central bank. It'll give the central bank IOUs, i.e. the government bond we spoke about the central bank gives that money. So the central bank facilitates the government doing what it wants to do. And in the United States, this is very much the case because in the United States, the Fed and the Treasury are arms of the government.

[00:51:09]

Now, what has happened in Europe over the years is that because largely Germany has always feared that governments will spend too much money and they will force the central banks to print too much money and you'll get hyperinflation. There has been this separation of church and state, which is that the central bank leans against the government. If the government has this big expansionary ideas about change in society. Why? Because the central bank is obsessed about inflation. So the thing to really look about is the inflation rate.

[00:51:42]

That's what the central bank is obsessed about. The results of the inflation rate is if inflation increases dramatically, John, the currency of that country will depreciate. And what you will get is instability, political and social and economic instability thing. And so the separation of church and state is made legislatively clear in Europe, where the central bank ECB is actually separate, too. And it's a separate institution to European governments in the United States. It's less legislation and more practice so that when you think.

[00:52:16]

Right. But always remember, John, that the key thing we're worried about is inflation. So over the last five or six years, if inflation has almost disappeared worldwide and right now what we're looking at is deflation, it's falling prices, right.

[00:52:35]

So consequently, the answer to deflation is always inflation in the same way as the answer to inflation. Is deflation the solution? So both Paul and myself have been thinking about for quite some time. Is that the old economic way of looking at the world, this separation of church and state, the fact that the central bank can't print money, the fact the state has to be totally different, that's all very well in peace time, OK, when there's nothing to going on.

[00:53:04]

But in a war where you have a Kowit inspired collapse of the economy, I believe the central bank and the government are obliged to act in tandem to come together, as we were talking about. And then you can say, well, what's the best way to come together at the moment that the central bank is saying we will print as much money as possible, we will give that money to the banks, and then the banks can actually give that to small businesses.

[00:53:34]

But the problem is that that is predicated on the idea that small businesses take out a loan. But who's going to take out a loan in these times? Nobody, because if you don't even know what's going to go on tomorrow, the chances of. So what we both believe is that the central bank should actually dispense with this idea of using the banking system. I want to say dispense with not wait until people go to the bank and apply for a loan that they should actually just deposit money in people's accounts using the banking system.

[00:54:04]

And the idea comes from Milton Friedman, who said that at a certain stage during a Great Depression because of Milton Friedman big insight was that the Great Depression was a monetary phenomenon and nothing more and nothing less. And he says at a time when the demand for money is zero, when there's loads of money supply, but people don't want to take out money, what you do is you just give them the stuff. Now, you can do that if the rate of interest is zero because it means the cost of money is zero.

[00:54:33]

So when you actually borrow at zero, so that's what we're talking about. And it's it's very this is deep economic. Logic, but you know what's really interesting, John, is that it's the way in which that mantra's replace hard thinking in every pursuit. So the mantra now is you cannot do this when we actually know you can. And it's amazing how many intelligent people hold dear to ideas way after those ideas of loss to sell by date because they've built a career on those ideas.

[00:55:08]

So I'm talking about government departments, academics, central bankers, columnists and economists. If there are such things, private sector economists, you know, finance people, they hold on to ideas stupidly. You know, this idea of the generals fighting the last war, that's why, for example, the reason was such slaughter in the Western Front in 1916 was that they were deploying the tactics of the Boer War and previous wars. Against technology that had changed completely, so the generals were fighting the last war and what happened was millions, millions of men were slaughtered.

[00:55:48]

It's the same idea. Yeah, I mean, people in general are afraid of change. And what Paul was was talking about as well, and you mentioned it before, was that what's happening now during covid and monetary and fiscal policy coming together is that it could bring about a profound change in the entire economy and global economy. Yeah, absolutely. And the changes will be very political as well. So people are understandably a bit concerned about that.

[00:56:16]

They are. They are. I mean, the funny thing, what we're talking about, John, is going against conventional wisdom. And Galbraith, the great Canadian economist, said one thing about the conventional man. He said the conventional man is the most dangerous man in the world and the vast majority economic profession is made up of conventional men. And he described what he said when faced with a choice between changing his mind and finding the proof not to do so.

[00:56:40]

The conventional man always gets busy looking for the proof. So rather than saying, look, the world has changed, we're going into a depression, that depression is government sanctioned because the government has actually closed down big sectors of the economy. Sure, if you do that, you have a responsibility to actually make sure that those bits of the economy are alive. When you choose of an covid gives you the permission to open back up. So we're not talking about normal times.

[00:57:09]

We're talking about abnormal times. And in abnormal times, you've got to do abnormal things. And I believe as we go into the second Lockton, it looks pretty much that we're doing this now. In Ireland, it looks more or less is going to be the case around Europe, around the Eurozone, probably the case in the United States. What are we going to do about it? It's all very well saying, you know, we're going to lock down because of covid.

[00:57:33]

But the businesses that you elect to close, you instructed to close down, need to be protected. And the beautiful thing about economics is we can do it. It can be done. Yeah, I think you're right. And, you know, we've learned so much about the covid virus and how it spreads and how it's working. So we do need to come up with a new plan. A new strategy. Yeah.

[00:57:59]

And it's there in front of our eyes. Right. Which is what you do is you use the central bank at zero interest rates to fund the private sector that you have instructed to close right through no fault of their own. And that's what you do. And what Paul was talking about. You might to talk about perpetual bonds there. Yes. So perpetual bonds, John, are bonds that do not need to be paid back. It's a beautiful thing.

[00:58:27]

And I tell you, the reason they're important is, for example, slavery was abolished using perpetual bonds. The banks of the British government realised that it's kind of crazy that they had to actually compensate slave owners for the liberation of slaves because slaves were an asset and the slave owners were all in the House of Lords. Are their mates from the House of Lords. So what the British government does, they they issued perpetual bonds, which are bonds that yield maybe two or three percent, but they're never paid back.

[00:58:55]

So they just keep going on and on. The Dutch financed oh, it's a Dutch idea. They financed all their dikes and polders with this in the 17th century. In fact, certain people are still getting paid Dutch perpetual bonds that were actually financed. Dutch Yeah, yeah, yeah, yeah. I mean, it's amazing. You can turn up in Holland if you have a piece of paper from the 17th century and you can demand your money back.

[00:59:18]

Ah you can demand, yeah, you can demand to get paid and Gilder's and the old Dutch currency. Right. It is amazing. Right. So all these things can be done. So to me, OK, so if this kind of monetary policy works so well, why are we only kind of utilizing it now? I mean, we don't know before. There's three issues here. One is that. Lenders of money have always demanded a an interest rate, which is above the prevailing rate of interest rates, normally the rate of interest has been in the past between four and five percent.

[00:59:54]

So clearly, you'd have to offer a rate of interest, which is higher than that. But now that rates of interest are zero percent, if you offer a perpetual pain one percent, somebody is going to take it up because it actually pays you something. So it's better than having a deposit in the bank. OK, that's the first thing. The second thing is the reason we haven't done it for so, so long ago, again, the Brits fought the First World War using 100 year bonds.

[01:00:18]

I mean, you know, is that we haven't faced these crises and we haven't used our collective imagination the same way. And the third thing, again, is just inertia, John. Its people say, well, that can't be done. You know, how can you possibly do that? Bonds have to be paid back. Well, in actual fact, in most times, yes, they do. But in actual fact, if you can give somebody a stream of income of one or two percent.

[01:00:43]

Right. What actually, if you look at it all, government debt is rarely paid back. It's always rolled over. It's a big myth that Ireland actually pays its debt. We don't what we do is we swap old debt for new debt and we start again.

[01:00:55]

Right. That's the whole thing works. I mean, it is a big myth that, you know, at some stage you Ariva somebody arrives in the Irish government with a big bag and gives it to the investor.

[01:01:03]

That's not how it works. It's always, what do you call it, the Russian villages. The Potemkin village is the Potemkin Google Potemkin man. He was also the greatest lover. And she was a very partial. She was the lady who's believed to be attracted to horses at a certain level. But that's, I think, an urban myth. That's that's true. It's the truth, man. I read an amazing book about Catherine the Great. Not that long ago, she was the most extraordinary character.

[01:01:30]

She was German. This is people forget. Yeah. The basically Germany was like an aristocratic stud farm in the seventeenth century, an 18th century for mares and still died. But they used to go to Germany. Germany is like a still farm and they pick up these mares, these sort of well gotten. German princesses and marry them all off, so like it's extraordinary, like an aristocratic stood firm, it was like, you know, that that that placed on the curve that they have for all the matzah and cotton is one of them.

[01:02:00]

And she made. It's a different type of colonialism. It's a very different kind of keeping the family colonialism. But it's very interesting. And of course, she was the one that that exported Germans to the Volga down in Ukraine and then the Volga done further and further east and Volga Germans. You might remember Gabriella Heisei, who was a left back for Man United. And five years ago, to me, Argentinean Keyzer right. Gabrielle Heisei was a Vulgate German right.

[01:02:29]

And the Volga Germans emigrate to Argentina in the late 19th century, but they were originally colonizers sent by Catherine the Great to teach the Russians side the farm because the Russians were too chaotic. So they sent Germans there. Oh, mad stuff to show children in this podcast. But actually, seriously, if you are in professional services and if your career is affected by CPD points and you need CP2 points or you won't see points, why don't you use our course as part of that?

[01:03:03]

Again, our courses now are CTT accredited, which means you'll get points, you learn economics and you will add to your career progression. So again, have a look at this patron Dockum, for example, MacWilliams look for the CPD points and we can learn economics together.

[01:03:36]

It's 25 years since Father Ted was on the telly. That's a long time. I mean, it's nearly 26 years. So the lads in on cost are releasing a set of four commemorative lamps. We can get them at our post office or up on post.com. Father Ted, send them to people. You know why we just had lunch. Oh, right. They're actually stamps. Yeah. A great bunch of stops and laughs and fun sundlun unposed for your world.