Banking on destruction

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[00:00:29] We've now changed the question, really, from how restricted do we need to be to how long do we need to be restricted?

[00:00:40] That's important. We've also taken the upside bias off. This is the Debunking Economics Podcast with Steve Keen & Phil Dobbie.

[00:00:54] So can you speak central bank? It is a peculiar language, isn't it? An unusual form of dialect

[00:01:00] spoken by very few wealthy people and only in central banks around the world. That was one

[00:01:05] off. The Bank of England Governor Andrew Bailey is saying that they won't be cutting rates just yet,

[00:01:09] but they probably won't lift them either. But while we wait, what happens to the economy?

[00:01:14] Are they getting to the root cause of the problem anyway? Or could they just be making things worse?

[00:01:21] That's this week on the Debunking Economics Podcast.

[00:01:25] So this week, how central banks gone too far? Just about everywhere, inflation is coming down,

[00:01:36] but the views of central banks over the last week or so is that they want more evidence

[00:01:41] before they are convinced that they can start lowering interest rates. Now, whatever you think

[00:01:45] about the effectiveness of monetary policy and how it hurts those who can least afford it and

[00:01:51] doesn't really impact the very people who are responsible for much of the inflation,

[00:01:55] isn't this time different anywhere? When we came out of a pandemic with more cash than we went into

[00:02:01] it with, in many cases, and there was a shortage of things we could buy because supply chains

[00:02:07] were devastated, and we've talked in the past about how companies were very opportunist on that,

[00:02:12] and they started increasing their margins. So, let's start on that, Steve, maybe. How

[00:02:18] different is this to previous periods of inflation, which is... I mean, they've tended to be caused

[00:02:23] by rising wages, completely different phenomena, and rising raw material costs, not from the

[00:02:29] scarcity that we're seeing this time, and also, obviously, that surplus cash that we've seen

[00:02:34] this time. Complete different equation, really, isn't it, that we're dealing with?

[00:02:38] Well, if anything is, it's the first time the equation has ever fitted the minds of neoclassical

[00:02:43] economists because they believe all the assureations come out of exogenous shocks. They don't have any

[00:02:48] really understanding of endogenous changes in an economy. And if you look back at the last

[00:02:55] major period of inflation, which was the 1970s, that really came at the end, and again, this is

[00:03:03] something which most people are not aware of, came at the end of a huge private debt bubble

[00:03:08] bursting. Right. Because we all thought it was destroyed, just the price of oil.

[00:03:13] Well, price have all turned up there as well, because what you had was an enormous

[00:03:17] private debt bubble, global, which led to... We've gone top of the fact that governments were

[00:03:24] stimulating the economy as well, rather than sort of classic Keynesian, or not class.

[00:03:30] My circle of friends called bastard Keynesian, but the government wasn't panicked about running a

[00:03:35] deficit. So you had deficit spending for the Vietnam War from America, which was adding to

[00:03:41] price pressure around the world, and domestic demand as well. And then you had the

[00:03:49] construction boom, the usual sort of story. It was a housing boom, but more commercial

[00:03:55] real estate globally than it was private houses. And that burst at the end of '74.

[00:04:03] Now, before I'd got there, you had an economy going gangbusters. Your unemployment in

[00:04:09] my home country, Australia, was well below two percent, and it was a real measure of unemployment.

[00:04:14] It was how many people actually were lined up for the dollar. It wasn't the statistical nonsense

[00:04:19] that they've gotten to in the last 40 or 50 years. America had a very low level unemployment as well.

[00:04:23] I think lower than it's got now. And so you had... And you had Trump unions, which could bargain for

[00:04:29] high wages. So in the context of all that, you had pressure from the union side. You also had

[00:04:35] the oil, OPEC, finally asserting itself against what we're called the four sisters.

[00:04:41] The oil companies that controlled the price for decades, meaning that the increase in the price

[00:04:46] of oil over time didn't get transferred back to the people producing the oil. Then you had the

[00:04:51] onkippa war, 1973. There I mentioned Israel. And so all that came together at once. And then the

[00:04:58] OPEC, when the war went against the Arab side, the decision of the OPEC organization of petroleum

[00:05:09] exporting countries, which is almost exclusively Arabic at that time, and all the UK joined later.

[00:05:16] But they were the main exporters. They put the price of oil up or the restricted supply of it,

[00:05:22] and the price went from $2.50 a hour to $10. So that came later, you're saying. So before that,

[00:05:28] I mean, before that happened, it sounds like... It's a credit to them. Yeah. But isn't that

[00:05:34] sort of like what the monetists would say? Well, that's why we push interest rates up, because

[00:05:38] the economy is running too hot. The employment market is too tight. If we don't act, then this

[00:05:46] is just going to get worse. We're going to see wage inflation. We're going to see resource

[00:05:49] inflation prices go up. That's why we're here. That's why we push interest rates up to cool things

[00:05:54] down. And that was their logic. And when you look at it, I'll see this actually. And the ECB

[00:06:01] has actually got to its cover at the moment is actually quite hilarious on that front today.

[00:06:06] I don't know if it's a hilarious way that makes me bloody angry, but that's another straw.

[00:06:10] So I can find it here. There's a very stern-looking character. President Louis De Guindoss,

[00:06:15] Vice President Louis De Guindoss, and he's got a very grim look in his face and said,

[00:06:21] "The need to reach our inflation target. We need to bring inflation down our 2% target.

[00:06:25] If inflation is significantly above that target, people may start expecting rising inflation

[00:06:30] and so demand higher wages." So the whole orientation that goes to explaining inflation

[00:06:35] on the basis of wage demands. All of them are saying the same thing. They're all saying,

[00:06:42] we're worried about wage inflation coming back again, and it's all to do with managing expectations.

[00:06:48] Absolutely. But going back to the '70s, though, ignoring the oil story for now,

[00:06:54] weren't they right? Didn't they need to do something? If they'd just done nothing,

[00:06:59] wouldn't we have seen inflation rise because the economy was running too hot? Are they wrong on

[00:07:03] that point? Well, they're wrong on the fact they think it's about inflationary expectations.

[00:07:08] And this is the garbage that Milton Friedman injected into the nine susceptible people,

[00:07:13] otherwise known as neoclassical economists. And they believe that inflation is caused by

[00:07:18] the expectation of price rises. And so if you can adjust people's expectations,

[00:07:24] you can cause a fall in the rate of inflation with very little damage to the real economy.

[00:07:29] That was the... Somebody told me I was pronouncing his name wrong. It's Volkla. Is that correct?

[00:07:34] Volkla pretty much swallowed that argument that the government creates the money supply,

[00:07:40] and he had people in his own research that started telling him that wasn't true. Alan Holmes,

[00:07:45] at the time, the director of research saying this is not correct, it's not just the government

[00:07:51] doesn't control the money to buy the private banks to. Volkla ignored his research...

[00:07:56] Volkla, by the way. Still getting it wrong. Volkla.

[00:07:58] Volkla, thank you. Volkla swallowed that line and put interest rates up. And the belief that would

[00:08:05] reduce people's expectations of future inflation, in fact, what it caused was the

[00:08:11] biggest recession at the time since the Great One, since the Great Depression.

[00:08:15] But is it... Are they right on the idea that you've got to manage expectations,

[00:08:19] but they're just using a blunt instrument? People can talk things up and talk things down,

[00:08:25] currently. I mean, if everyone thought the economy was in a bad way,

[00:08:28] that stopped spending in the economy, it would be in a bad way. I mean,

[00:08:31] there's an alum, a shred of truth behind that, isn't it?

[00:08:34] There's a shred of truth, but it's fundamentally presuming that everybody is

[00:08:39] forward-looking and has an economic model in their head when they make their decisions.

[00:08:43] We're much more reactor to that, and we much more follow herd mentality than we do

[00:08:50] to stuff that neoclassicals do. I mean, my mate in the Bank of England, we just talked to me

[00:08:55] anymore because I take COVID seriously, and he doesn't. But Michael Kumoff, when he looked at

[00:09:00] my model, said, "I'd like to modify your models to have forward-looking expectations."

[00:09:04] Now, that's what's in the mindset of neoclassical economists, that people have

[00:09:08] forward-looking expectations, and they therefore, if you're going to adjust those forward-looking

[00:09:13] expectations down, you will cause the rate of inflation before. That's what they believe in

[00:09:18] people who actually swallow neoclassical economics, believe, and they're the ones that control central

[00:09:22] banks. There's a theory out there, though, that there isn't that Japan hasn't seen inflation,

[00:09:28] it's because the Japanese people, being the way they are, it's just not part of their psyche to

[00:09:34] ask for wage increases. They had an inflation, but the central bank didn't react,

[00:09:41] and they had an inflation. But it's very mild compared to the rest of the world.

[00:09:46] Yeah, I mean, we've got to have to take a look at the work. Let's just do a comparative on

[00:09:49] Japan versus the rest of the world with a lot of

[00:09:51] - The International Bank of Nothing - The American - Americans in Europeans did hell of a lot and then

[00:10:03] Flashin rose and fell and I think primarily it's cause and effect are waving to each other

[00:10:08] in cars going in opposite directions in this particular event. So they're going to take credit

[00:10:14] for what would have happened anyway.

[00:10:16] Right, so how much of what's happened this time then is the surplus of cash that we've

[00:10:21] all had. There's some charts which are quite staggering aren't they? So if you look at

[00:10:28] the M1 money supply for the UK for example looking at the Fred database, January 2020

[00:10:34] 1.8 trillion was the amount of money that was around. It peaked in September 2020, it

[00:10:39] rose very quickly and then it started still rising but not quite as much. But it peaked

[00:10:44] in September 2022 at 2.6 trillion. So rose by almost half and if you look at the M1 money

[00:10:53] supply in the United States, I know there's other measures but this is all like the cash

[00:10:58] you've got which seems like a pretty good measure. But the M1 money supply, oh and components

[00:11:03] isn't it? So okay it's a movement. I mean there's different measures but anyway just

[00:11:07] the direct comparison it's gone from 4 trillion US dollars in January 2020 to 20.6 trillion

[00:11:14] in March 2022, five times more. So it looks as though there was a lot more money swimming

[00:11:20] around in the United States than there was in the UK even though you would have thought

[00:11:24] that in the UK we had more in the way of furloughs. We were looking after people more

[00:11:29] in the US and people had to fend for themselves a bit more over there but looking at this

[00:11:33] government spending seems to have increased that much more in the United States and that's

[00:11:36] found its way into bank accounts. So that's got to be a big part of it this time around

[00:11:40] isn't it too much money swimming around not enough to buy? It is and the interesting thing

[00:11:44] is that what that has boosted is not so much wages as corporate profit margins and this

[00:11:52] is the point that Isabella Weber made and was originally demonised for and now is being

[00:11:56] lionised for and she's quite right that if when you decompose the inflation into the

[00:12:01] three major components you can see that's coming from because we had this conversation

[00:12:05] before we started recording. The money supply doesn't put up prices people put up prices

[00:12:11] pardon me taking a line from the National Rifle Authority Association but to actually

[00:12:17] have prices rise somebody has to make a decision that affects the price level or you have to

[00:12:21] have something which causes price to rise simply because cost of production go up.

[00:12:26] So Klesky, McCal Kolesky the great polish economist that people in the know regard is

[00:12:32] having you know invented Keynes before Keynes were done with engineering mathematics rather

[00:12:36] than English words he argued you could break inflation down into the markup that firms put

[00:12:44] on their input costs find fundamentally wages change in money wages and the change in output

[00:12:52] per worker where the change in output per worker if it rises that reduces the rate of

[00:12:56] inflation. So if you do that decomposition on the American data you find that the initial

[00:13:03] increase in inflation came from 2020 there was an increase in wages and a fall in markups

[00:13:15] so the initial change you can say yes workers wage demands exceeded the rate of inflation

[00:13:20] and drive inflation up markups started going in the opposite direction. At the same time

[00:13:25] we had an enormous increase in the deficit it went from 5% of GDP in 2019 to 15% of

[00:13:35] GDP in 2020 that's a huge government stimulus for the economy and then what happened after

[00:13:41] that point is that a wage hands demands wage rises fall below the rate of inflation so

[00:13:47] wages would be subtracting from a place people were losing their jobs but markups went up

[00:13:51] yeah yeah but I mean there's a yeah so you wouldn't I'll be asking for a wage rise in

[00:13:55] the middle of a pandemic would you because you're just keeping your head down and hoping

[00:13:59] you can keep your job the it's the other side of it where maybe it becomes more of an issue

[00:14:04] but on the markups I mean that does it does fall into the land of blade and obvious doesn't

[00:14:10] it and we've seen examples of it in the past so if you've got more money but there's a limited

[00:14:15] amount of time and materials and products to buy and then the people who are selling you

[00:14:22] that stuff will go oh you've got a bit more money here we can't get as many supplies from

[00:14:25] China of course we're going to push our prices up and try and take take as much margin and

[00:14:30] when you look at it and it does get down to the resources that are available so another

[00:14:34] example would be do you remember when the pink bat scheme in the in in Australia and

[00:14:39] there's lots of examples where the government says well okay we're going to help you we're

[00:14:43] going to pay for you to insulate your house there's only so many people available to

[00:14:48] insulate houses so those people who insulate houses what do they do push their prices

[00:14:53] up because they there's an increased demand limited supply and the government is pushing

[00:14:59] money in their direction so of course they push the price so what you see is my the the

[00:15:04] predominant true for course by far causing inflation right now is markups increase in

[00:15:09] markups and that I've just give you the date when the when the turnover occurred was sort

[00:15:14] of halfway the early sort of say April 2021 the rate of change of markups in seat of the

[00:15:21] rate of inflation at the same time for wages had fallen down to zero and were actually

[00:15:26] negative can be like in terms of the rate rate but money change of money wages is negative

[00:15:32] this is talking in America so between 2020 2022 pretty much the 20 halfway to 2023 wages

[00:15:42] were actually falling so what you've got and this is we come back to the central bank here

[00:15:46] the the UCB saying we've got to reduce we've got to worry people may expect in rising inflation

[00:15:53] and so the man hire wages I'm sorry mate don't know these do the factors the mandering high

[00:15:57] yeah they're cheap they're achieving higher markets because workers can't just mark up

[00:16:02] their wages but firms can mark up their prices right okay makes perfect sense look only on

[00:16:07] a good time a good place to take a break when we come back I want to look at this in relation

[00:16:11] to MMT because this is this an example of modern monetary theory that we've seen in practice

[00:16:16] and it seems to be you're saying well monetary policies got nothing at all to do with this

[00:16:20] so you know the first question I'll ask after the break is and if we if we'd if we'd done

[00:16:25] nothing at all would we be in the same place and so we'll come back to that in just a second

[00:16:30] I'm not quite what I said but still yeah but yeah but now it's a different question but

[00:16:33] I mean it will it's what I will pick up it's the deep and economic podcast with Steve

[00:16:36] King stay with us in just a second

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[00:17:40] this is the debunking economics podcast with Steve King and Phil Dobby

[00:17:46] ok so we know then Steve that it is or you know inflation is largely being driven by

[00:17:54] companies pushing their prices up because they can and it stands to reason it's one

[00:17:58] of those things isn't it where if you were to look back and say what's going to happen

[00:18:01] I mean did you see it did you think well this is the way it's going to play out or I

[00:18:06] mean a lot of people seem to have been rather surprised by what has happened since the pandemic

[00:18:12] because we have had a lot of variables thrown at us that we just haven't seen before I'm

[00:18:17] manly focusing on climate change as you know these don't if it wasn't for that I'll be

[00:18:21] obsessing about this but yeah but I'm not not at all amazes seen increase in in markups

[00:18:26] coming out of it because as you said do you with the it's the meat milk and free bean

[00:18:32] I'm also changing the money for causes change in prices the modern monetary theory approach

[00:18:38] realism about how prices are set is that markups and and wage changes and changes in productivity

[00:18:47] they're what the terminal happened to process those three factors now if you throw a huge

[00:18:52] government stimulus and the scale of government spending as I mentioned the deficit went from

[00:18:57] about under 5% of GDP in 2019 to about 15% in early 20 in 2020 that's a huge increase

[00:19:07] this is a modern monetary theory injection of money into people's bank accounts that huge

[00:19:11] government so that that gave you much more money money demand now what it meant from

[00:19:17] the point of view of manufacturers as you're saying they suddenly saw effectively there

[00:19:21] was less competition not in the sense that competitors had disappeared but people had

[00:19:27] so much money to spend in the industries which they could spend it that there was they didn't

[00:19:32] feel the same firms didn't feel the same competitive pressures to restrain their markups so they

[00:19:37] put their markups up and so this this is classically it's the

[00:19:43] The monetary stimulus caused by the governments giving us cash during the pandemic, without which the financial system would have collapsed. People not paying their mortgage, not paying their rents, etc, etc, would have been a catastrophe, not to boost that money. But by boosting it, and by actually saving the day, one of the side effects was, you reduced the perceived level of competition and firms took advantage of it to put their mark on top.

[00:20:07] So, what a better way forward then. Monetary policy does just apply in this instance. We're

[00:20:13] either waste of time, just lifting interest rates at all, would we have been better, saying,

[00:20:17] "We need to impose restrictions on price levels."

[00:20:20] And that's what Isabella Webb has been arguing. We need price controls, or we'd mark up controls,

[00:20:25] and that was something that...

[00:20:26] So we did that? No raising interest rates needed at all. Central banks could have just

[00:20:31] stayed out of it. Nothing to do with them.

[00:20:32] If we had the mechanisms to do that, which of course we don't do, because economists

[00:20:36] avoid the argument against any direct intervention like that. But that was what the...

[00:20:41] If you remember the Hawken Keating Government in Australia, the idea they put forward, and

[00:20:46] I had a small role in designing that back in my post-student days. The idea was to price

[00:20:52] it in incomes accord, to control inflation by negotiation with manufacturers, not to

[00:20:58] increase their markups. And the work that's been done these days by Isabella Webb and

[00:21:02] Blair Fix identifies which sectors have price markups and so on. You can see, I don't have

[00:21:08] that data with me, but they've done the analysis of that. It was firms taking advantage of

[00:21:17] the extra money in the economy to put up their prices when they already...

[00:21:22] Funds have already taken far more of the increase in income over the last 40 years than workers

[00:21:27] have.

[00:21:28] But what is crazy about this is seeing a bunch of funds like the ECB coming back and always

[00:21:33] thinking it's workers' wage demands that need to be worried about as it causes inflation.

[00:21:37] They completely ignore the effect of markups.

[00:21:39] Well, wage demands never actually exceeded inflation. That's the thing.

[00:21:44] So people...

[00:21:45] They were ahead of it for a short while. I mean, if you're this again looking at...

[00:21:48] When only catching up on having been behind before.

[00:21:51] For so long before, yeah. If you've got done... This is actually in my new book, which I've

[00:21:55] got to send you a copy of, the manuscript of. But if you go back and look over time and

[00:22:00] find the initial inflation from... If you look at inflation versus change in the markup

[00:22:08] versus change in wages, then between 2018 and the January 2018, on October 2020, the increase

[00:22:19] in markups is above the rate of inflation all the way through.

[00:22:22] In the pandemic hit, which is the first quarter of 2021, you had a fall in markups and therefore

[00:22:28] for six months, the rate of growth of markups was below the rate of inflation.

[00:22:33] And then for ever since then, markups increase has been greater than the rate of inflation.

[00:22:39] So you're going to get an identified period between July 2019. This is quarterly data.

[00:22:47] So it's the start of the third quarter from between then and the first quarter of 2021.

[00:22:55] So one, two, three, seven quarters. Those seven quarters wage rises were above the rate of

[00:23:01] inflation. But since then, they're talking since April of 2021, since then, ranged wage

[00:23:09] change has been below the rate of inflation. And for one, two, three, four, five, six of

[00:23:15] those roughly 10 quarters, it's been negative.

[00:23:18] So the whole idea that you need to put up interest rates to restrain wage demands, when

[00:23:23] wage demands are currently running at well below the rate of inflation and in fact have

[00:23:27] been negative, there's something wrong with the thinking guys.

[00:23:30] Well, if, I mean, if the concern is they don't want to be too interventionist, which is

[00:23:35] why they haven't imposed price controls because that's distorting the market, well, actually

[00:23:40] you would have thought.

[00:23:41] They're screwing the workers instead, which is not interventionist at all.

[00:23:43] And actually, you know, putting a heap of extra cash into the economy, what you would say

[00:23:48] is quite interventionist as well.

[00:23:51] So, and if you would have, without an intervention, they would have been our economy.

[00:23:54] Yeah, well, for example has to happen. I'm not saying it's a bad thing, but it is intervention,

[00:23:58] isn't it? And if you, so if you, if you're in that situation where you're going, well,

[00:24:02] this is an emergency and you're worried about wages and you're worried about markups, but

[00:24:07] less so, but you're going to introduce price controls when you could at the same time

[00:24:11] also say, and we're going to introduce wage controls as well, you know, and therefore

[00:24:16] absolutely no reason whatsoever to push up interest rates, let's keep your mortgage

[00:24:19] at an affordable level and we can spend less government cash trying to subsidize you because

[00:24:25] you need less because, you know, half your income is probably going on paying a rising

[00:24:28] mortgage.

[00:24:29] But that's, that's actually what's happening now.

[00:24:30] It's you and I've both identified in the data because they've been putting up interest

[00:24:34] rates in both in UK, America, UK and Europe, and America has been continued to run a substantial

[00:24:42] deficit running at about 6% of GDP at the moment still, whereas Europe and the UK have

[00:24:47] gone for the back for austerity. So they're reducing the deficits. Now that, though the,

[00:24:54] that has made, as you're seeing in the UK and American European data, it seems as part

[00:24:59] of the world's going into recession, whereas America is still bouncing along gangbusters.

[00:25:04] The reason largely is the difference in government spending, but the intriguing similarity in

[00:25:09] both countries is it looks like private creditors plunging now. And that's, that's what the

[00:25:14] interest rates have done. So if we do have a recession in Europe and the UK, you can blame

[00:25:20] it on central banks overreacting and actually, you know, reacting to something which was targeting

[00:25:26] the wrong cause in the first place, which is, yeah, so they were banking on destruction,

[00:25:31] actually, which is what I've decided I'm going to call this week's episode because they,

[00:25:34] because it's not just, it's not just private credit, which is collapsing. In particular,

[00:25:39] it's corporates, isn't it, not taking out loans or not issuing bonds. They're not borrowing.

[00:25:46] So they're not investing to build out of this situation. So you on a downward spiral when

[00:25:53] they're quite remarkable that this is, if people want to take a look at what the data

[00:25:56] filling up and checking out, it's bank credit to all commercial banks in the USA. And this

[00:26:01] is actually weekly data, which is a great advantage over the, the, the quarterly data

[00:26:07] I've got to rely on when the Bank of International Settlements. So it's TOT BK CR, TOT BK CR.

[00:26:15] Take a look at the annual change in that and you'll see that bank credit was running at

[00:26:21] about a 10% annual rate of growth in August of 2022. And it has since plunged to minus

[00:26:29] 1% in December of 2023. So that's an 11% rate of change turnaround in the level of private

[00:26:38] credit. So this is, I think, the, this is the delayed effect of putting up those interest

[00:26:42] rates. You're screwing corporate, Benjamin. You're also screwing households, but it's

[00:26:46] more the corporate sector it's having with.

[00:26:48] And this will be smaller corporates go. The bigger, the bigger corporates will take, will,

[00:26:52] will issue bonds rather than go to their banks. It's a different situation in Europe. We should

[00:26:56] talk about that as well, because exactly the same thing's happening there. But it's more

[00:26:59] of a worry there in a way because people, the bigger businesses do borrow from banks

[00:27:03] more than they do in the US. But, but yeah, bigger companies issue corporate bonds. But

[00:27:08] guess what? Corporate bond issuance is also well done as well. So companies that just

[00:27:12] not grow big and small companies are not growing, will invest in.

[00:27:15] And that's, you know, it's mismanagement rather than management of the economy by the

[00:27:19] ECB and the Fed and so on. I'm lucky to take a look at French and German data on that

[00:27:24] front. The, the annual change in the level of loans in Germany was running at about 7%

[00:27:33] per annum in that serum was that looking for the dates here. That was early, early 2022.

[00:27:42] And now it's running at zero minus slightly negative. And the France has slowed down across

[00:27:48] the same period of time from about 5% also to zero. So you've now got, you know, one

[00:27:54] of the two main sources of money creation being bank lending, that's running at zero.

[00:27:59] You've got governments trying to put austerity into practice as well in the European Union

[00:28:02] and the UK. This just spells a recession coming along which will be caused by the central

[00:28:07] banks.

[00:28:08] Because companies were, when we were still have a shortage of supply, because if we still

[00:28:14] got, if we've still got household, that households have still got cash, that's the surprising

[00:28:19] thing, isn't it? It's amazing how long this is lasting for. It is coming down, but it's

[00:28:23] still a lot higher than it was before the pandemic.

[00:28:26] So the ability to buy is still there, isn't it? It's just, if you are hurting the corporate

[00:28:32] sector, their ability to meet that demand is, is not going to be met.

[00:28:37] So again, you're stuck with A incentive for them to say, well, okay, we'll just keep

[00:28:41] pushing our margins up because we're not making as much. We can't afford to make as

[00:28:45] much. We can't afford, we can't borrow, we've got to get money from somewhere to survive.

[00:28:51] So we'll, we'll keep those margins higher because people are still buying from us.

[00:28:55] I do, well, the margins, they might keep them high, whether they're continuing increasing

[00:28:59] is another story. And again, looking at the data and having through to my book again,

[00:29:05] one's here, pardon me, boom. But yeah, at the moment margins, the rate of change of

[00:29:11] margins is falling, it's still above the rate of inflation, but the rate of change

[00:29:14] of margins is falling. And but still have an inflate, it says still inflate, still

[00:29:19] higher than inflation, wages are well, wages are being increasing, but are below the rate

[00:29:24] of inflation markups are falling, but are below, but are above the rate of inflation.

[00:29:29] So we're still just still saying, now let's look at who's made a benefit out of this.

[00:29:34] - and not just over the period we're looking at from 2008 since all today; corporations and

[00:29:41] markups have been increased. It applies all the way from 1980 through to 2023 because

[00:29:47] they've looked across that period of time as they're looking at American data. The average

[00:29:50] change in the markup has been 5.1% per annum; average inflation has been 3.3% and the average

[00:29:56] change in the money weight has been 1.8%. So is this borrowing down, this corporate borrowing,

[00:30:03] is it lower because companies are saying interest rates are too high or are they saying – the

[00:30:09] answer can be C all of the above – they're saying interest rates are too high or are they

[00:30:14] saying the future is too uncertain or are they saying, "Well actually, right now, we're

[00:30:22] winning on margin. We actually don't need to up our capacity because if we all up our

[00:30:27] capacity, then we'll probably have to get a bit of a margin squeeze. Let's just make

[00:30:32] the most of the situation as it currently stands."

[00:30:34] I'm not going to try to divine the mind of corporations but I think there has been a

[00:30:42] huge bonus to their profitability from the markup increased through the pandemic. A

[00:30:48] lot of that money that's now on household accounts are now the health health of wealthy

[00:30:52] households rather than poor ones because the whole circulation of money and the fact

[00:30:56] that it's got to the rich rather than the poor as always happens.

[00:31:00] Now, you've got such a significant increase in the rate of interest. Like it normally

[00:31:06] canes, poo-pooed the importance of interest rate in affecting investment and when you

[00:31:11] talk to manufacturers, they are more concerned about expectations, uncertainty, the future

[00:31:18] rather than the rate of interest. But if you've increased it by a factor of five and this

[00:31:24] goes back to the Volcker, V-O-L-C-K-E-R. Can't see you compared to any other way.

[00:31:32] I'll forget the C Volcker. We must put the C on the wrong spot. So Volcker, the Volcker

[00:31:37] does, interest rates went from the order of 5% to 17%. You put up that big a change,

[00:31:43] you bring the place to a grinding halt. So interest rates are not a fine-tuning mechanism.

[00:31:48] They're a smash in the face. That's what brings the determination down. So we're seeing

[00:31:54] that in Bank Credit in America and we're seeing it in the European Union and the UK as well.

[00:31:59] That big a change of interest rates. Forget about it, and certainly the future, the present

[00:32:03] is pretty painful. We're not going to put it on more debt. We're not logging on more

[00:32:07] debt. We've got this money creation and the economy slows down because of that.

[00:32:11] Well, that's it, isn't it? If companies are not borrowing, then we're not expanding the

[00:32:15] money supply. But then the money supply is much, much, much, much, much, much bigger

[00:32:20] than it was. So does it want to come down?

[00:32:23] Well, you're talking about M1 there, which is, again, that's fundamentally the part of

[00:32:28] the money is by the government has control by running a deficit. And just to give people

[00:32:32] an idea of what they should be looking at here, it's quite classic. We'll talk about

[00:32:35] this in more detail on the forthcoming, let me just say, with myself and Phil. But the

[00:32:42] money over it in the United States went from $4 trillion in 2020 to $16 trillion, three

[00:32:54] months later. Now that is a classic example of the government's capacity to create money,

[00:32:59] which is the whole major point of MMT. It's a free agent in that sense. It can create

[00:33:04] what it wants.

[00:33:05] Can I go, by the way, March 22, is up to $20.6 trillion. So do five times where it started

[00:33:10] from? This is the space of a couple of years.

[00:33:12] Yeah, I find it at $20.6 or that's slowing down at that point. But the increase was

[00:33:18] from February 2020, that it's $4 trillion to May, so every April, it's a three months

[00:33:25] from $4 trillion to $16 trillion. Now, that isn't people suddenly finding money under

[00:33:30] their mattresses. The only expense of government creating that money because of the panic

[00:33:37] about the pandemic, which was entirely justified at the time. And frankly, we didn't take it

[00:33:42] seriously enough. On the other hand, you look at the velocity where we'll talk about

[00:33:46] some more detail.

[00:33:47] Yeah, there's a lot that stems from this, isn't it? Because I also want to talk about

[00:33:51] modern monetary theory and all of this, because this is an example of modern monetary theory

[00:33:54] at work. And I want to talk about building up at the assets of the Federal Reserve, which

[00:34:01] went from $3.8 trillion to $8.6 trillion in pretty short sharp order as well. But they

[00:34:06] had no choice, did they? I mean, they had to buy up those bonds, otherwise the bond market

[00:34:11] would just go crazy.

[00:34:12] Again, they've got the capacity, isn't it? Limitless capacity for the Fed to mark up

[00:34:16] its assets and mark up its liabilities at the same time. And this is something even people

[00:34:20] like may seem to let don't understand it. We found a little Twitter war I have with them

[00:34:24] a couple of days ago. So, yeah, the monetary dynamics of the economy matter, but there

[00:34:35] are two factors that can cause that dynamics. The government, which is a completely free

[00:34:39] agent, it matter money it can create. And then the private sector would bank borrowing

[00:34:44] and which involves two parties and it's nowhere near as free, but it's actually the major

[00:34:49] war.

[00:34:50] So this is a good case study for MMT in that the detractors from MMT would say, well, here

[00:34:57] we are. Here's the proof of the pudding. We created a great deal of money. We had massive

[00:35:02] inflation. I'm sure MMT is would say, well, here's the proof of the pudding. We've said

[00:35:07] all along that it's the availability of resources that we should be concerned about and we should

[00:35:13] be making most data, the resources that we've got. And there was a shortage of resources.

[00:35:19] And that was the problem, wasn't it? That's where the inflation came from, not because

[00:35:21] there was too much money book, because there was too much money and not enough resources

[00:35:26] to match that increase in and corporations having a free run to put their prices up,

[00:35:30] which, you know, the last thing we've, you know, workers wage demands, trying to negotiate

[00:35:34] that and you see the barriers you get put in your way in this libertarian economy we

[00:35:38] live in, manufacturers totally different story. And so let's see, let's put this word massive

[00:35:43] inflation in context. It went from, it was right down to pretty much zero during the

[00:35:49] pandemic.

[00:35:50] It went up to about two, three percent, then it hit about eight, now it's down to about

[00:35:54] two again. That there was much more transient than it was back in the 1970s. Yeah, I did

[00:36:02] 17 percent. We did get, we did get well over 11 percent in the UK, of course. But we feel

[00:36:08] it more this time because our debt is so much heavier. So you know, on your loan, I'm fairly

[00:36:14] certain you're paying more for your housing loan in real terms now than you were back

[00:36:16] then. Absolutely.

[00:36:17] So that's why it's hurting so much. So okay, well look, so the takeout then is that

[00:36:24] probably central banks really didn't need to lift rates in the first place. By hanging

[00:36:29] on longer now, they really do risk destroying more companies because they are not able to

[00:36:37] take out the loans that are needed to grow the economy and grow up in terms of the productive

[00:36:43] capacity of those businesses, but also help lift the money supply as well.

[00:36:47] Yeah, so if we do, it was still an effing opinion, but if we do get a recession, you can blame

[00:36:53] it on Federal Reserve and Central Bank policy globally, not on the private financial sector

[00:36:59] this time. Yeah. And if it's all about managing expectation, no, it's not. Which is, no, no,

[00:37:04] but I'm just saying I'm putting it, you know, if they're thinking, it's all about if they,

[00:37:08] yeah, then they, Central Banks are trying to manage expectations by saying that the future

[00:37:14] is bad. And if you tell people, if you tell companies that the future is bad, then they

[00:37:18] will be less inclined to borrow. So it's not just the control of strangling those very

[00:37:25] companies by putting the rates up so much that it's not making, so they were not going to borrow.

[00:37:29] And then that causes a downturn. So, you know, again, it's, it's central banks start by near

[00:37:34] classical economists haven't got a bloody clue about how the money supplies are determined,

[00:37:38] except for the, the renegades in the Bank of England and the borders bank who wrote the papers

[00:37:43] about private money creation. So we're getting the amateurs, the dynamics to capacity general

[00:37:48] equilibrium believers, managing their model, which has got nothing to do with the real world.

[00:37:53] All right. Well, a few separate podcasts stem from this one. I think we might touch on some of

[00:38:01] it next week. What is interesting is how would that money supply increase the speed, the velocity

[00:38:06] of money decreased as well. So I guess that's because we're all sitting at home. So we weren't

[00:38:12] and spending some interest in that. Maybe we should do one on the velocity of money,

[00:38:16] actually, we should do that sometime soon because this has been an interesting case studying that

[00:38:19] as well. Anyway, leave it up and out now. Good to talk Steve, catch you next time.

[00:38:22] The debunking economics podcast.

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