Marshall Auerback on modern monetary theory and wealth preservation

0:18i love i know you have a lot of years in the financial industry and i'd love to just get a little bit of background on yourself to get us up to speed and what are your recent focuses right now okay well yes i've been in at this for over 25 years i started in asia in the 1980s i spent time in both hong kong and japan where i think i saw the

0:41bursting of a few interesting bubbles so i got very used to the dynamic market dynamics both bull and bear markets i subsequently moved over to the to europe in london where i worked over there and also in new york i covered emerging markets later on i began to evolve and get more involved in policy matters and academic matters so i've looked at

1:07the market from the perspective of being both a market theoretician practitioner and also quasi academic the last few years i've been involved in a in a think tank and now i have an academic affiliation with the levy institute that's great and yeah there's especially on the academic side and politics right now is a lot of decisions being made at least throughout america

1:29and i know that you've also devoted quite a bit of time to the modern monetary theory mmt can you explain a little bit about mmt and then how it applies to everyday consumers in this market right now yeah i mean there's been a lot of good work done over the last several years the most recent being stephanie kelton's a book on modern monetary theory but i

1:51think the major takeaway is the idea that many of the constraints that we talk about when we're looking at fiscal policy government fiscal policy in particular are is basically more they're more apparent than real that there are real resource and inflationary constraints that should drive policy but there's no fixed or a priority idea of what is financially sustainable

2:20you don't have to look at the government finances the way you would look at a household finance especially not in a situation where we live in a world of currencies where governments issue currency without constraint we don't operate on a gold standard anymore so countries that issue their own currencies have considerably more freedom in the conduct of fiscal policy

2:42than has hitherto been surmised in many of the traditional economic textbooks and i think that's becoming increasingly apparent especially in today's world where you know the old playbook about fiscal policy has just gone out the window yeah especially right now you know it seems there's a lot of printing going on and stimulus needed because of the pandemic

3:05and that you know fiscal policy is obviously making a shift in the market in terms of where people are looking to get yields you know as the interest rates are sort of lower there's assets moving around a lot of cash flow was moving into equities and despite the crash earlier this year it seems like the market's been doing well on the way to the election

3:26yeah that's right i think other than you know you get you hit you get hiccups like today but you know it's a very interesting period because remember in the mid 1990s when when when robert rubin was the treasury secretary for the clinton administration and there was this argument that you know we have to keep public expenses under control because if you don't the

3:45so-called bond vigilantes will react they'll drive up yields and you'll have a financial calamity on your hands and now what you've got a situation the market is actually falling today because of not only the adverse news on covet the apparent revival but also they have tended to react badly whenever there's been a sense that fiscal policy will not be forthcoming i

4:07think increasingly people are aware that when there's a major gap in economic output you need that fiscal push to keep sustain economic momentum and so there is far less concern about the bond vigilantes if you like and with that you know to sustain the economy you need to add this stimulus in but it keeps interest rates low and it seems like the fed is wanting to keep

4:33the rates low for you know it was 2022 and then they mentioned 2026 and it seems like it could go for years and years and what impact do you see that i think they certainly don't plan to raise short-term rates and i think that's they can certainly control the short-term rate structure by what they do in terms of raising or lowering the discount rate

4:54but i think that's also a byproduct of fiscal policy i mean this idea that somehow excessive government spending crowds out private expenditures and drives up rates i think has been shown to be nonsensical what generally tends to happen is you know the government spends a lot of money they inject that money into the banking system into the reserves

5:14and that inexorably drives interest rates lower so it's not a surprise to me that given these massive stimulus that we're actually seeing lower prevailing interest rates and then we it is we won't really see an uptick until we see an uptick in economic activity and i think we've still got a profound deflationary undertow so i don't think that's a

5:32you know given the lost economic output that we have to worry about that situation just yet well they say that the trend is your friend and the market seems to continue going up as the rates stay low but it doesn't seem sustainable you know is there sustainability there or you know what do you do are you cautious moving forward into the markets post-election well i am cautious about

5:56the markets really in part because first of all the stimulus is starting to slow down the effect of it especially in the us they pretty well have just given up on passing any kinds of new stimulus packages so you know you're getting great depression like levels of depression and a considerable amount of economic insecurity which means that the traditional impetus

6:21to drive economic growth going forward is not there absent economic growth you don't get the same kind of earnings growth that you would before and it's very very hard to sustain the current market multiples if you don't have any earnings growth so i am concerned and i think also my other concern is that the quality of the spending in terms of its issue distributional

6:44aspects are not going to the right areas and they're not helping to sustain a what i would call a durable economic environment for sustainable growth and i think that's something that people are becoming increasingly concerned about as well definitely you know it seems like the spending was going to you know corporate debt you know blue chip companies corporate debt even

7:08at some point and yeah amazon certainly doesn't need money right now and also it's going to companies where look their models might not be viable i mean for example there's been billions that have gone to boeing or the airline industries and you know as we've seen this these are industries that have been decimated by the pandemic it's going

7:28to take a long time before those kinds of industries recover if at all and likewise in things like restaurant leisure so that being the case if you're just going to continue to bail out companies that have no kind of viable economic future then it means that fiscal policy effects but it becomes a stop gap rather than a stimulus definitely and what's your take on

7:53you know using that fiscal policy to try and keep those companies alive versus some silicon valley entrepreneurs say you know let them let them die let the cycle happen and let the private industries take over you know either buy up and reinvent the industry and make it better because as you say you know you can put stimulus in there but if it's going to

8:13continue dying eventually something will happen where the industry sort of fixes itself well that's true although you there's two things that you have to bear in mind that there is this major gap in economic output and so you want fiscal policy to help to support provide a floor for demand so that you can get the kind of readjustment that you're talking

8:36about i think the state does have to take a more dynamic role in terms of industrial policy in terms of helping to facilitate employment in new sectors of the economy or at least those that aren't are more likely to recover quicker if you simply just drop it down to sinkholes you say that's that's not going to solve the problem and but at the same time if you have you

9:01know tens of millions of people who are unemployed then businesses won't be investing because there won't be kind of end demand for their their products no matter how profitable the industries are so you need to fill that gap somehow or else you're going to get deflation dynamics as you did in the 1930s all across the world yeah it's super interesting times right now because

9:23the unemployment first-time unemployment claims are continuing to rise and know the economy doesn't seem to be doing well but the market is doing well and you know some of the politicians try to say like oh look it's it's growing so we're doing well but really we're we're not doing that well if you look that's right and i think also you know there's been so many

9:42interventions and the incentives have become so heavily skewed that you know the capital markets are not really accurate gauges anymore of economic health i mean i really do think it is becoming like a casino and you know you if you have central banks saying we're going to effectively underwrite everything by buying every single corporate bond in sight

10:00then that's not really a sign of economic health it's it's it's actually the opposite so this is why i would have preferred fiscal policy to be targeted less towards the companies and more towards individual people whether that be have been through you know nationalizing payroll or at the very least providing a minimum income supplement so that people can survive

10:24during these tough times so that when businesses are ready to invest again there is at least a decent floor a decent level of economic activity so that you're not doing it from the throes of a horrible depression definitely and you know we mentioned unemployment do you see a proper path for using fiscal policy to try and drive unemployment back to

10:49where it was pre-pandemic yeah well we've done this before you know in the 1930s we had this thing called the new deal it worked very well i know some people will say that it didn't but actually if you look if you calculate the data directly then fdr managed to reduce unemployment from 1932 to 1936 from almost 30 down to 10 that's still very high

11:13but it does show that it government can at least fill the gaps in demand to help generate employment and some people can say well those aren't real jobs i would disagree i mean i think you could for example embark on a very very large scale of public works expenditure which would not only enhance productivity but provide a lot of high paid highly skilled jobs for a

11:38number of people i'd rather see that than say have the money go straight to economic bailouts to specific companies but unfortunately the way our system is working right now if you have it seems that if you're politically well connected and well banked then you're more likely to get assistance from the government as opposed to it being a function of

11:55actual economic need and you mentioned sort of you know having a guaranteed minimum salary like a universal basic income essentially do you think that is the proper move or maybe it's a necessary move you know coming into 2021 through ubi i'm actually more in favor of one of the principal mmt ideas is a job guarantee program where effectively you have the

12:18government step in as an employer of last resort that's much more the type of policy i would i would prefer to see i think it's important to maintain some sort of nexus between work and getting assistance from the government i think not only from the point of view of social solidarity so you don't want you don't want people to think that

12:37there's a bunch of second-class scroungers or something like that fair or unfair but also because i think there are certain good habits that are inculcated when you have people experiencing the discipline of day-to-day work and you preserve social capital and many of the long-term problems associated with long-term unemployment whether that be disease alcoholism

13:02depression etc or just degradation of skills that tends to be diminished if you have programs which actually target employment directly as opposed to targeting assistance per se definitely and it's an interesting fact because it seems like you know before the unemployment was fairly low but there was also discussion of a lot of americans just had low-paying jobs or

13:28they would have two or three jobs that are all paying minimum wage and even though they're employed they're really not that well off yeah that's right and that and that goes to the point this hasn't been another problem that we've had for decades and that you know especially in north america and europe you know we've outsourced a lot of high quality

13:44manufacturing jobs to asia so that's a problem i've never actually believed you could just have a non-existent manufacturing sector and just say well we're just going to do services it doesn't work like that and the other problem which is much more prevalent today in the so-called gig economy is that the labor itself is becoming contract labor so

14:05People that would be normally classified as employees are being con classified as independent contractors which is enabling a number of companies to avoid paying them the traditional benefits associated with employment whether that be health care or vacation leave maternity leave et cetera and i think that is creating a new kind of underlying insecurity for economic

14:31insecurity for a number of workers you know in the in the us it's estimated that up to 55 60 million people out of a population of 300 million are engaged in what we would call contract labor in the gig economy and i think that's led to what the economist albania has as manoa has called precarity capitalism so it's a it's a new stage of even more

14:55economic vulnerability you have a handful of jobs of people in jobs that are providing secure and steady employment that's not the way it is for a large number of people right now yeah the it's definitely shifted in the workforce as well and we're running out of time marshall but do you have any advice for people that are looking to stay ahead in the economy as we approach the

15:15end of 2020 and beyond well i think it's a time not to be too brave i would say that i think the markets are looking very very toppy and so you know if you've made good profits over the last year it might be good to take some off the table i know it's a long-term business but the downturns when they come can be pretty nasty so

15:37i would say now is the time to maybe the husband some of that cash conserve it a little bit and wait for a better opportunity sometime hopefully in the next several months definitely great advice marshall thank you so much for your time it's been a pleasure speaking with you all the best moving forward and let's follow up in the near future thanks thanks for having me ashton