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.
