MMT & The Crisis Response to Coronavirus (w/ Nouriel Roubini)
ASH BENNINGTON: One of the things that you're hearing in, for example, on economics, Twitter is this phrase, "we're all modern monetary theorists now". Can you talk a little bit about what modern monetary theory is, how it relates to the union of fiscal policy and monetary policy, and whether it's an appropriate policy response to this particular crisis we're in right now? NOURIEL ROUBINI: Well, modern monetary theory was a leftist idea supported by a bunch of leftist academic, that essentially said that, if you're accounted as your own currency in your own central bank, you can run large budget deficits forever, you can monetize them, and then you're not going to even have an inflation. Now, that extreme view that you can run it forever under good times and bad times, even at full employment, and you can monetize fiscal deficit doesn't make sense but in a situation which you have a collapse of economic activity, you have a recession and deflation, and there is a collapse of velocity, we learned that lesson during the Global Financial Crisis, you can do a variant of modern monetary theory, budget deficits and the way you monetize them is through QE. It's not officially modern monetary theory, but essentially is a monetary theory, and you avoid the deflation and you avoid a deep recession. It used to be called MMT, modern monetary theory or used to be called helicopter drop of money meaning the government spends by issuing bonds, the central bank gives the government the cash and then you value drop it on people like transfer it like what they're going to do with the checks right now, used to be called so people's QE by UK labor, it was labeled as a leftist idea. Guess what, it has become mainstream. People like Ben Bernanke, former Fed Chairman, Stan Fischer, former Vice Fed Chair, together with that used Philipp Hildebrand that used to be running the Swiss National Bank, he's now at BlackRock, the biggest asset managers in the world, have come up with a proposal for an idea that's a variant of essentially a helicopter dropper, [indiscernible] Turner, William Mauter, pretty much mainstream economists. I wrote extensively about the idea of MMT for the next recession already literally a year ago and I said, when this stuff is going to hit the fan, and we're going to have the next recession, zero rate is not going to be enough, negative is not going to be enough. Forward guidance, quantitative easing is not going to be enough. We're going to go to MMT. Guess what? It happened in less than a month, literally, because the way they talk about it right now, Bernanke or Dalio, is not MMT, is not helicopter drop, they call it coordination of monetary and fiscal policy. What does coordination mean? The Treasury is going to issue $2 trillion of bonds, notes and bills to finance this budget deficit. Additional budget deficits on top of the initial trade on and the Fed is going to buy every single note, bill and bonds issued by the Treasury. That's what's called coordination. What is it? What's the difference between coordination, and then helicopter drop or between coordination and QE with a fiscal deficit is close to zero? Deficit then QE, you're buying the bonds in the secondary market, the government sells it to the market and then the Fed buys it from the market. When you do MMT or monetary financing, or helicopter drop, you're buying it directly in the primary market but the impact on long term interest rate is the same. Who cares whether the Fed buys it at issuance or a month later? Substantial doesn't make any difference, even large deficits and QE is effectively MMT. Whether you call it that way, or you call it something else, or euphemistically coordination of monetary fiscal policy, it walks and quacks like a duck, it's helicopter drop. That's what it is, and we're going to see my same helicopter drop. Now, the point that I made however, is the following one, in the short run, doing a helicopter drop makes sense. Makes sense because we have had a collapse not only of supply and disruption of supply chains, but also we had a collapse of demand. We've had recession and right now, deflationary pressures, and therefore doing a massive fiscal stimulus and monetizing it makes sense when you have staggered deflation, recession and deflation. That makes sense in the short run. As people say, you can fool some of the people all of the time and all of the people some of the time, but you cannot fool all of the people all of the time. Suppose that you are in a world in which these budget deficits of 10% of GDP fully monetized occur not only this year, but actually in the downside scenario, by that, the next year and the following year, in the short run, we have a demand shock more than a supply shock and that's the way you fight it. Think about this shock. Over time, this is a negative supply shock that reduces output and potential output and increases costs and essentially, the production costs and the prices of every type of goods and service. There is a rupture of global supply chain, soon enough, we're not going to have enough farm workers in California to pick up the fruits and the vegetables. Over time, what this shock is going to lead, it's going to lead to an exacerbation of the decoupling between US and China. Even before that, I wrote last year and before we had a cold war, we have to see the strap, we're going to have deglobalization, we'll have decoupling and fragmentation, all these trends are going to be emphasized. More [indiscernible], more equalization, more reshoring, more fragmentation, more balkanization of the global economy. More tariffs, more protectionism, more defending your own firms and your own workers, more inward policies, more restriction to trade in goods, in services, in labor, in capital, in technology. This is a massive negative supply shock to the global economy. You monetize it and you fiscalize it for two or three years, eventually, you end up into not staggered deflation, but in stagflation, recession, and inflation like the 1970s. Look, what happened in the '70s. We have to oil shocks, '73 Yom Kippur, 79 Iranian Revolution, we reacted by trying to boost economic growth. We had deficits and monetization through easy money. We ended up with double digit inflation, and stagflation. By next year, we can be in stagflation. The worst of all worlds, high inflation and recession. That's what gets us to a depression, not just a recession. ASH BENNINGTON: Nouriel, one of the things that I found so interesting as someone who's followed your work very closely, you wrote in a project syndicate piece, and I think it's probably worth quoting here, moreover, the fiscal response could hit a wall if the monetization of massive deficits starts to produce high inflation, especially if a series of virus related negative supply side shocks reduces potential growth. One of the things that's very interesting for people who followed your work during the Great Recession, you talked about how there was a collapse and the response to the Great Recession, how there was a collapse in the velocity of money and that we didn't see these inflationary pressures building, this is a significant shift from that position. Perhaps you could talk a little bit more about what it would look like and how we would start to notice that risk case coming online. NOURIEL ROUBINI: Well, the Global Financial Crisis I analyzed, it was a credit shock, the latter collapse in aggregate demand, the big output gap, slacking goods and labor market, the wages going down, prices going down, deflation, and therefore if you did that, effectively MMT, that's what we did through the backdoor through QE and deficits. You're essentially avoiding that recession from becoming a depression with deflation. That was the right policy response because there was a collapse of aggregate demand and there was a huge output gap. Today is different. The type of shocks that are going to eat the global economy are all negative supply shock. As I pointed out, the coronavirus, the breakdown of global supply chain is going to get worse. I fear that we're not going to be able to produce food, that in many parts of the world as the price becomes worse, food workers and the food supply chain is going to be disrupted. If you cannot produce food, then you'll have a shock to food prices. Look at what's happening in China, you had a small shock that was last year, the swine flu, and the swine flu alone led to production of pigs to collapse by 50%, better kill all of them and price of pork went up 100%. This was just a little tiny swine flu in China. Think about how these pandemics can disrupt a global supply chains in and around the world, and especially food supply chains. That's a huge negative supply shock. After the crisis, decoupling between US and China is going to get worse. The US is blaming China for this, China's blaming the United States. It's for the Cold War before, it's for the [indiscernible] trap on technology, on trade, on services, on finance, on currency. It's going to get worse. Look at the rhetoric between the two sides. We'll have more balkanization, more decoupling, more deglobalization, more reshoring that's costly, because instead of producing in the lowest cost parts of the world, we're going to produce them expensively at home. That's a massive negative supply shock. Trade wars, in the turn, the Smoot-Hawley tariff led to the worsening of the financial shock and lead us to the Great Depression. Now, we're starting trade wars with China and the rest of the world. They're going to get worse. Everybody's going to say, I'm going to protect my workers, my firms, my tariffs, and so on. That's a recipe for a negative supply shock becomes global. We're not even sharing medical supplies. Every country wants to have their own ventilators, their own mask at home. We're not even letting export of these things across country. This is the beginning of restricting trade in goods and services, and [indiscernible] labor. Trump is going to say I was right bashing China, I was right to build the wall. Guess what? You can build any wall you want to, we have a Mexico or Canada, but the disease is going to be beyond the wall. It transmits regardless of whether you have a wall or not. This is the nature of global pandemics. These supply shocks become global. I'm not yet at the point where there are other supply shocks. I really worry there'll be a war between US and Iran this year in the Middle East. We'll have another supply shock on all prices like we saw in '73, '79 or 1990. That's still to come. That will be another huge supply shock. We're going to be going in a world where most of the shocks are not aggregate demand, but their nature is negative supply shock through essentially deglobalization, pandemic, oil shocks, protectionism, nationalism and inward policies. In that world, you have essentially the condition for stagflation, recession and inflation like the '70s because, as I said, because of the main struggle of the Global Financial Crisis, you monetize, you fiscalize it, you return the growth, but if it is a negative supply shock, you monetize it, you fiscalize it, and eventually, you end up with stagflation. Now, we're not bad enough to end up like Zimbabwe, or Venezuela, Argentina with hyperinflation. Even if advanced economies after World War I, like the Weimar Republic in Germany had hyperinflation or Hungary. Those things can happen if you have a total collapse. If we get a depression and in this depression, we're going to run budget deficits or print them, we may end up like Hungary, or Germany during the Weimar Republic after World War I, we could get hyperinflation. I don't expect that to happen now, but certainly, we could get stagflation with rising inflation and recession like the '70s if we keep on kicking the can down the road and stimulate the economy, if the persistent sets of negative supply shock keep coming and coming. That's not the risk this year but by next year, two years from now, that will be a meaningful rising risk.