Jeff Snider (Deflation/Inflation, Money Printing, Free Market vs. Socialism, Yield Curve Control)

the rebel capitalist show all right guys it gives me a great deal of pleasure to welcome someone back to the rebel capitalist show one of my favorite individuals to interview he needs no introduction whatsoever his name is jeff snyder jeff welcome back to the rebel capitalist show thanks for having me back george it's always a pleasure to to talk with you yeah now i know that whenever you do a podcast with our mutual friend emil kalinowski he is a wordsmith to say the least he always has these really cool names for you the starts off like the batman of the bond market or i don't know how he comes up with these but one thing i need you to promise me ask emil if he can start referring to me as the vince mcmahon of macro vincent i like it you know all you have to do is pay him because that's what i do i pay him a a particularly significant stipend and he he definitely comes up with those names for me okay only he can do it so i'll have to get the stamp of approval from him on the vince mcmahon of macro thing you know i'm gathering all these macro experts and putting them in the ring to duke it out but i was listening to a couple of your most recent podcasts on the making sense show which is if you're not subscribing to that viewer or listener make sure you go to youtube or itunes and subscribe right away but it's making sense euro dollar university and one of the more recent podcasts you guys started talking about the yield curve control and what the fed's been referring to and you've got some very interesting opinions on this such as they might not they can say they're doing it but the mark the market might do it for them and then you had some interesting insights going back to the 1940s the last time they tried this yield curve control and there was inflation but you said it was kind of transitory it wasn't really permanent there's a lot of nuance there that i'd like to dive into sure and i think what i say is a lot more uh abrupt and blunt is that there's absolutely no need for yield caps or yield curve control because you know the only the only reason you would use that kind of attack uh that kind of a program is if the bond market is particularly the treasury market is in danger of selling off in any significant fashion something worse than 1994 for example that's just not the case and in fact you know every time that we see these yield caps imposed or at least announced to the world they're really not needed it's it's central bankers trying to do something else by making you think they're important and central in the bond market yeah so how do you reconcile that with a chart that i saw the other day and i'm probably just not connecting the dots properly but this chart showed the fed's treasury purchases recently relative to the rest of the world and you just see the it's basically the fed's balance sheet just goes parabolic and the rest of the world is buying these treasury is pretty much flat so if the fed wasn't there buying those treasuries would the yield spike and if not why has it spiked since they stopped buying treasury i mean i mean yeah they bought treasuries but they're buying treasury number one to expand their balance sheet so they can create bank reserves as a as a remainder um right so that's that's really what's going on with the fed and number two if the fed wasn't buying those treasures who's to say nobody else would and that's really the the implicit assumption behind the idea that yield caps are needed it's the idea that hey if the fed wasn't there to do it then nobody else would buy these things and then the charging market would fall apart and interest rates skyrocket and it would be a disaster for everyone everywhere the way they tell it the biggest danger to the world today is rising interest rates which is you know part of my my friends here complete horseshit yeah well see i i fall victim to that myself because when i see that that chart i think to myself my gosh the fed is creating all this excess demand and therefore increasing the price lowering the yield but what you're saying is they're not create although they're buying it they're not necessarily creating extra demand no look at the price of all the treasures look at the yields are today you know the fed has cut back it's it's perch it's uh the pace of its purchases significantly since middle of may and here we are almost two months later and yields are where they are they're lower than they were before the u.s government despite the fact that auction levels have been greatly increased has absolutely no trouble selling its debt whether the fed is buying or whether the fed isn't buying and that's really the point here the fed isn't the independent variable in this equation it's demand for treasuries outside of the fed which prices yields markets are showing that it's a persistent bid and by the way look i'm george we heard all this stuff before not that long ago 11 years ago in 2009 ben bernanke without ben bernanke's quantitative easing then you know the reckless obama administration was going to blow up the treasury market and that never happened either look at look at what happened to the bond market and yields uh post 2009 you know the the private banking system around the world had absolutely no trouble absorbing what was back then taken to be this enormous massive unbelievable increase in government debt and it was absorbed perfectly and easily simply because the conditions behind all of these things hasn't changed we're still in inflationary circumstances where the demand for the safest most liquid instruments is going to be high no matter what the supply is yeah and you know what i'm not considering jeff that you just made me realize when i look at that chart is i'm not considering the supply side of the equation i'm just looking at the demand side of the equation or how much the fed was buying prior to may but i'm not thinking about all the additional treasuries that are being sold at auction because of these deficits they've been running yeah you've had record record of auction amounts par values auctioned at the middle of the curve the front end the back end everywhere and you know some of the middle curve numbers the record low the tenure not that long ago record low record low auction yield so the demand for treasuries is there whether or not the fed buys them too and again the fed isn't buying treasuries to support the treasury market they they might think that's a benefit of doing so but their big concern is bank reserves creating reserves on the other side which means they have to buy something that's why they're buying mortgage bonds for example there's no housing crisis there's no mortgage bubble crisis the reason they're buying mortgage bonds is because they have to buy something so the fed is buying assets and it doesn't really tell you that much about the demand for those assets apart from what the fed is doing bureaucratically yeah but what's going through their head because i mean i was looking at excess reserves the other day and i mean how much is enough if you're the fed it's gone from what i think 1.5 trillion up to like 3.5 trillion do we need to get to 10 trillion before there's enough excess bank reserves or what what's going through their mind japanese really i mean we've learned absolutely nothing from i say we they've learned absolutely nothing from the japanese example the japanese have gone through this exercise for the last 20 years and it's always okay what's the right amount of bank reserves that will fix our problem and you know what the answer is no amount of bank reserves will fix their problem because bank reserves are not the problem they're not the solution so no matter how many bank reserves the fed creates it it won't make much of a difference the problem is this is the private monetary system not the public input into that monetary system yeah and jeff on that note i've been trying to get my mind around the the bank reserves don't have a causal effect with the broad money supply and i i totally understand that but what happens i look at a chart of the fed's balance sheet and then i look at a chart of m2 and it's right there's your problem okay okay why am i making a mistake there m2 was obsolete as a concept 60 years ago um m2 doesn't really describe the money supply of that so i'm not using that in my videos from now on f1 m2 and all of those you know they the federal reserve undertook a project to do to better to try to update the m numbers in 1960. by 1971 1972 1973 they realized it was it was pointless they couldn't keep up with monetary evolution so by you know 1974 they were already saying look m1 and m2 don't use them we don't use them because they're worthless they don't tell us anything they're not they're not comprehensive enough and they're not complete pictures of the effective money supply in the actual monetary system so that's your problem you look at m1 rm2 and you see the fed adding to it and you think well the money supply went up well no the only thing that changed was m1 and m2 which means nothing that means very little so once you realize don't look at m1 or m2 because they're misleading you which by the way the fed is actually hoping happens then there's really not much of a problem because what the fed does what the really does in in reality outside of these m statistics is they're trying to coax and nurture some kind of a rebound in the private monetary system outside of the m's that you can't observe there are no statistics for real effective money today so we really don't have any idea what money supply is doing except by when the monetary system has these tremendous effects on the markets that we do observe like the treasury curve for example if there's if there's com you know uninterrupted massive demand for treasury securities we can infer from that that the banking system therefore the monetary system is looking at that monetary system we don't see in thinking i need to hold the safest most liquid instrument and you're not going to hold the safest most liquid instruments if you think the fed is being successful and creating money and that there will be plentiful money and inflation and economic growth ahead you do it because of the exact opposite okay so let's go back to that because i remember on a podcast you saying that you're kind of in the friedman camp that you see inflation as a monetary phenomenon and i hopefully i'm not putting words in your mouth there but uh if so then if m2s just kind of like my accountant used to say with quickbooks uh to to use some more french since i'm hearing saint barts you say dog [ __ ] and dog [ __ ] out right so if m2 is dog [ __ ] in then if if we're trying to figure out uh you know what the the monetary not the monetary base but the the broad money is so we can figure out if we're in risk of inflation um and if inflation is a monetary phenomenon you're saying the only way to really measure that is we have to infer it through the the yield curve through the yield curves or euro dollar futures money curves the way the dollar behaves any number of financial markets because the the participants the financial agents that are the big players in those markets are the monetary system it's a bank the euro dollar system is a bank centered system so if the banks are moving these various markets around in a specific fashion they're telling you what's going on in the in the monetary system it's not direct communication such as that we would like from you know these these bright dividing statistics that you know m1 m2 m3 whatever it might be but we can reasonably infer from all of these markets and how they co-behave and correlate what the banking system is actually doing and therefore trying to tell you about the real conditions in the monetary system that have nothing to do with what j powell and the bank reserves are doing in fact again you know i think you started to make the point once you realize this what you see is that the bankers the level of bank reserves is a reactive phenomenon to what's going on in that hidden system that's why for example i showed recently the dollar went up in value at this in the same direction that the level of bank reserves did and then since the middle of may the dollar has been somewhat lower while the level of effective bank reserves has been lower too so there's a direct relationship between the direction of the dollar and the level of bank reserves which is the opposite way it's supposed to be right if the fed is printing so much money why isn't the dollar pushed low while it's printing money and the fed is put is pulling money out of the system as it's supposedly been doing since the middle of may with lower level of bank reserves why is the dollar not higher and the answer is because bank reserves don't really matter they just show you what the fed is doing not what the system is doing right and so we we know the system the commercial banking system creates money supply does the government also create money supply in the real economy when they spend it with the with the fed monetizes it do they create additional deposits no not at all i mean the fed is just doing what it always does and the charging department is doing what it always does it's simply doing it to a much greater degree these days you know the treasury general account for example that's something that's been around for a long time it just it was never used before 2008. so it's not like they're adding money supply in fact when the balance in the treasury general account goes up they're actually subtracting bank reserves from use from banks so um no i yeah the fed isn't creating money is giving the treasury isn't making money i'm saying if if the trade let's use the tga as an example if they're if it's at 1.6 trillion if they spent that all into the economy just did stimulus checks as an example like unemployment wouldn't that increase the amount of deposits in the economy in the banking system as well as bank reserves right but it's not it's not re it's not an addition it's it's already it's it's it's offsetting hopefully offsetting what has already been taken away you think about what's going on in the economy right now we have massive amount i mean trillions upon trillions of lost income loss uh revenue lost profits lost investment that the government is hopefully trying to offset by doing what you said which are these stimulus checks which are nothing more than you know limited levels of replacing or offsetting what's already been lost so they're not adding anything to a system they're trying to fill in uh you know what is already a gigantic hole and that and that hole is a result of a destruction of of credit or just destruction of loan from people paying back debt and not taking out more debt it's a result of both things the destruction of money in the system which is what we saw in march the first half of march as well as economic destruction as a result of trying to shut everything down completely all across the world i mean that's an unbelievable level of economic destruction deflationary destruction that you know the government is just simply hoping that they can buy enough time to keep everything at minimal levels so that we don't run into the second and third order effects that will hamper and probably impede the recovery it hopefully happens sometime before the middle of the decade right okay so let's just say that lending and the amount of credit in the system was equal it that it didn't change and the the tga fills up to a trillion so they're taking deposits yeah okay so they're taking deposits out of the system and then when they spend it they're just spending those deposits back into the system as well as the bank reserves and so that's why the the net effect really hasn't changed as far as the amount of deposits in the system exactly and really that's the point is that you know when you look at it from a fed perspective it looks like you're adding but when you look at it as a comprehensive perspective is you're switching one for the other you're just moving stuff around okay let's let's move on here i don't want to get too fixated on that topic so when you're talking about deflation jeff i think people put you in that camp how are you defining that because when i hear people talk about inflation deflation it seems as though they just take this broad stroke approach and there's a lot of nuance there that people miss as an example people think deflation therefore they think the dollar is automatically going up on the dxy that the prices of goods and services are going down and asset prices are going down but what i've seen throughout the i mean the 1970s a good example of that as the cpi asset prices can be moving in different directions and more recently i've seen where the cpi and the dollar can be moving in different directions so how do you define deflation well first of all i'm not in the deflation camp i'm looking at the way the world actually is and the the evidence is putting me in that and that pushing me in that direction so you know i'm not a deflationist or an inflationist if i see if i see things turn around i'll i'll be i'll become the quickest inflationist you've ever seen so i mean it's it's really what the again what the markets are telling us what the economy is telling us and what they're all pointing to is deflationary pressures and you're right george we have to be very specific about what we're talking about because deflation itself is actually means something specific and i'm as guilty as anyone for using it too broadly to to to describe exactly the stuff that you're talking about but if we're talking about specifically monetary deflation it's not strictly the opposite of monetary inflation there are specific effects that monetary deflation have if you go back to say for example the early 1930s that obvious monetary deflation what that did to the economy was because there was a shortage of money it meant that consumers and businesses and all sorts of economic participants had to liquidate their own assets whether for you know consumers they had to sell their own furniture just so that they had enough cash to buy groceries for example and what that does is it drives the price of everything downward because if everybody's trying to liquidate their own assets not only does it i don't just drive the price of stuff down it undercuts the profitability of production itself which is the true insidious part of deflation which means that when prices get forced so low because of a monetary shortage your businesses only lose money whenever they produce no matter how much they produce and the only way that businesses can respond to that situation is as john maynard king said in the 1920s they have to start cutting wages or results in mass unemployment so specifically monetary deflation ends up being mostly a labor market phenomena so when you see mass unemployment and you see widespread wage cuts which doesn't really happen as much anymore but it does happen in certain circumstances those are symptoms of monetary deflation and that's what we're really seeing ongoing right now across a lot of a lot of the world it's not specifically asset markets it's not specifically what the dollar is saying or the treasury curve or things like that but we're seeing massive levels of labor market destruction that you know we haven't seen since the 1930s in my mind and maybe i'm not seeing it correctly but that when we're talking about unemployment going through the roof we're talking about the demand side of the equation what if the government comes in with just this limitless ubi let's call it to pump up demand i mean i remember i think i was talking to lynn alden and she was saying that over the past couple months that average incomes in the united states have actually gone up up because people are making more money on unemployment so i mean even if unemployment goes let's say 20 25 like it was in the 1930s if the government is just giving out all these stimulus checks does it affect demand and if it doesn't is that still deflationary when we could see the supply side of the equation shrinking a lot faster now you have to go back and think about friedman in the 1970s talking about you know not just rational expectations but the permanent income hypothesis which says that if we if consumers or business or workers or whoever are getting stimulus checks they will adjust if they're temporary if if they're temporary they might splurge but then they'll still be cautious and they'll still pull back spending so what you might end up getting is a temporary surge in spending an income but consumers are not stupid they know that the checks are going to run out and they're going to prepare for the day when the checks run out and the way that they prepare for that day is by increasing their saving which ends up being harmful toward economic activity so you know a temporary increase in stimulus is really again only intended to buy time for the private economy the regular economy to come back and provide consumers again with regular income permanent income that they can then count on to go back to the way they used to be before and what happens especially nowadays what we're seeing is that yeah the government has come in with and flooded the place with all of these stimulus checks unemployment the the helicopter payments that were had that came out you know a couple months ago but yet consumers know that these are one-time things or they're you know they're they're temporary stimulus measures and so they've already started saving we see it in consumer credit we see it in the savings numbers consumers are already adjusting their behavior because look i mean they have to be realistic about the labor market actually is so even if you're not even if you're not one of the unfortunate workers who have lost a job you could still have a job but be worried that you might be next on the unemployment line that's going to change your behavior you're going to react to that by by acting very differently it's going to reduce aggregate demand throughout the economy okay is there a point where that psychology changes if the government says that they're going to make this more permanent or is there a barrier to them making it more permanent is government payments under ubi the same as a job that's really the question is it a good enough substitute where a consumer says i used to be working and i used to get x number of dollars now i'm not working but the government's going to pay me x number of dollars are those things actually equivalent do they make a difference in terms of behavior and i would argue that the ubi or anything like that while possibly a marginally useful substitute is not a substitute for a robust labor market because a robust labor market isn't just x level of income it's opportunity it's the promise of greater and growing levels of income it's it's a dynamic marketplace where it allows consumers to act in the way that the economy needs them to act they can be reasonably assured that they're going to have you know not just what they make today but some kind of better future for themselves and they'll act accordingly that loosens the proclivity to spend yeah okay that makes a lot of sense so when we're talking about the destructions of deflation earlier in the 1930s what keynes was talking about how do we or how should i look at the deflation that we had in the late uh 1800s where we have and from what i've seen obviously the data is sparse to say the least but from what i see you've got like maybe a two or three percent deflation but then you've got gdp up in nominal terms you've got wages up in nominal terms you've got interest rates around four percent nominal it seemed like although we had deflation we had a pretty strong economy so is that a different type of deflation or am i reading the numbers incorrectly what do you think yeah i mean you're right about a couple things there starting with the fact that economists have argued over whether the long depression actually existed or not the long depression was really supposedly a result of the united states going back on the gold standard after the civil war reimposing fixed money supply that pre-war parity and retiring all the you know the greenbacks that were issued to pay for the civil war and you know i don't think there's really been a satisfactory agreement i mean both camps have really dug in pretty hard on their own respective positions because there simply isn't enough data to say for sure which one was the right one um contemporary sources refer to it as a boom well some actually do call it a long depression so even even um you know what what what limited view we have of the situation on the ground back then there really is an agreement as to what actually happened of course the end result of the long depression was silver agitation which suggests that maybe there was something to it you know that maybe the money supply needed to be loosened because it was too tight but the other point here is i think the better the more important point is that there are different kinds of deflation monetary deflation as we described it before was ends up destroying a labor market productive deflation as we've experienced throughout our history throughout the history of you know the post enlightenment period is not the same thing at all productive deflation is what capitalism brings through the mass production of goods um right it's essentially that we get better about producing things innovations combining capital labor in more efficient ways that allow us to produce more and better and and you know products and services that increase the level of living standards by reducing the prices for a large majority of the population so productive deflation is not at all the same thing as monetary deflation in fact we expect productive deflation is sort of our background behind everything so um you know we have to be careful about making sure that we're talking about one or the other not both at the same time yeah exactly so wouldn't that really kind of shine a light on the the fed trying to create this crazy two percent inflation target if that's still their target where we could have the economy improving to your point if we had the productive deflation but then they're sitting there fighting this productive deflation heaven forbid prices go down so consumers get a break with with more whatever they're trying to do to create inflation aren't those at odds yeah and far be it for me to argue the point for central bankers but what they're actually saying is that look we can't tell the difference in a short run scenario between productive deflation and monetary deflation so therefore what central banks intend to do is to add to or actually invite a modest level of positive inflation to act as a cushion so that central bankers have enough time to sort out which is which so we have you know what they talk about is altitude we have a little inflationary altitude between inflation and outright monetary deflation so the central bank can have time to get its act together to forestall the the worst kind with the monetary deflation that's really all it is central banks and economists because they can't sort out one from the other it's you know it's incredibly difficult to do especially in a real-time basis that's really what inflation targets are all about targeting a little bit of positive inflation to get people to expect a little bit of positive inflation as a cushion against monetary deflation that is hard to spot at least that's the theory you know i'm not arguing for it that's just what the that's what what's behind the monetary policy objectives what's your opinion of the cpi and how accurate or inaccurate it is i think it has limited use i think it's pretty inaccurate um and that it's you know in some ways it's a it's a you know a quixotic quest that's not really worth the trouble however as i've pointed out recently it does seem to correspond with certain periods at certain time periods that make it at least somewhat useful i'm talking about the core cpi the seasonally adjusted course cpi which only tends to fall during these very obvious economic of shortfalls and contractions recessions the worst recessions as a matter of fact so you know there's limited use to the cpi but overall i think especially on the inflationary side you know you have to take it with you know as one element in a broader survey is it being confirmed by for example the bond market so if you see the cpi run up are is the bond market responding as if the cpi is actually telling you something specific and which brings us back you know we talked about before the 1940s that's really what happened in the 40s especially uh you know 1947 1948 when the european economy started to open up and the us economy demobilized it created this massive supply shock which pushed the cpi up to i think about 12 13 in the back half of 1947 which i mean 13 i mean it sounds like the 70s jeff i'm sorry to cut you off right there but i just want to point out to everyone that that 90 percent of the people or economists out there i i would think would attribute the inflation to the yield curve control that the fed did but you're saying that's not true is actually a supply shock that did it well i don't i i'm pretty sure the literature the academic literature from the federal reserve agrees with my with my view of it too if you read all of the defense the fed economist um you know the academic papers that have been written it's pretty clear it was a supply shock not a monetary shock however at the time the federal reserve was worried about on unwinding its yield cap that in doing so combined with a supply shock it might become an inflationary environment so a temporary supply shock burst of inflation they thought was in danger of becoming out of control inflation like we saw in the 70s and so the fed reacted to that by trying to reimpose the yield cap on bonds when it really didn't need to because as opposed to the cpi being double digits bond yields didn't really move all that much in fact um you know the ones that aren't kept private corporate bond yields move basically you know 50 to 60 basis points in a year and a half hardly the kind of signal you would expect from a bond market if inflation was imminently not just breaking out but to become a sustained phenomenon so the bomb yeah yeah we see the 12 cpi but we're not buying it as anything more than a temporary thing which by the way was proven exactly correct because within a year the federal reserve was selling those bonds that it bought back to the marketplace because demand had come up become overwhelming again and yields fell as the economy fell into recession in 48 and 49. okay got it that makes sense so earlier in the conversation we talked about you really not being in the deflationist camp you're just kind of calling it like you see it what would make you change your mind and say you know what things have changed xyz has changed therefore i think we're going to get some consumer price inflation moving forward what would need to happen for jeff snyder to have that view i would i think we'd need to revamp the entire system i don't think that short of that i don't think we're going to i mean you would see you would see the change in the behavior of the way the curves work i mean if there was any kind of be realistic possibility with the system we have now which i don't think is possible but you know i could be wrong if we if we were starting to see a nascent inflationary environment start to develop you'd see it in the curves and you wouldn't see it you know it wouldn't come out of the blue i mean you would see it you know they would start to take different shapes they would move in different ways you'd see corroborating activity in the dollar and certain other things where you would look at it and broadly think that okay something has really changed here and then i wanna and i'm jumping all around here but i'm trying to fill in the gaps in my head so when we talked about m2 really being kind of bogus and if i'm if i'm not mistaken they use m2 to try to figure out what velocity is so is it safe to assume that velocity the charts that i'm seeing on the fred website are just as bad as m2 the concept of velocity is even worse i mean velocity is not something that you can observe or it's inferred from an equation of exchange which has never been proven as a valid equation so essentially what you have is a tautology m times v is whatever m times v is because m times v is always whatever m type v is it's really that meaningless so what you see is m2 go way up and because velocity is not a real concept and it's simply a remainder an equation velocity necessarily has to has to fall because that's what really happens uh it's not really describing anything meaningful or real it's just it's a it's a meaningless equation that people use because well people use it it's never been proven to be an equation and therefore again and velocity is nothing more than a tautology next question here and this is a video that i'm working on currently let's just say and i know this is probably unrealistic but uh whatever the probabilities are and well it's at least very un realistic short term but longer term let's say the dollar is no longer the reserve currency so if that if we could just wave the magic wand and boom the dollars uh no longer uh seen as this uh you know global reserve currency what happens to the u.s economy well i i don't think i buy the premise of the question because the one doesn't necessarily follow you can't just wave a wand and um the dollar is no longer value you know the dollar maybe uh right so what what types of exorbitant privilege has the united states had since bretton woods that that people would understand just looking at the economy as it exists today i'm not sure it's an exorbitant privilege i think it's an exorbitant burden um but you know i think really you can't realistically expect to go from a exactly to b in other words whatever the next reserve currency regime is going to be there's going to be a transition phase and we shouldn't automatically assume that because the dollar might be replaced then it will be bad for the u.s economy i mean yeah okay so we don't price oil in u.s dollars anymore is that necessarily a bad thing well it could be if you're you know specifically benefiting from that arrangement but we have to look at in terms of the whole entire systemic process is that by moving to a reserve currency regime that actually works it might unlock other areas of growth that are previously unappreciated we might have an economic boom in in industries and areas that we don't have now so it might be that we move from a reserve currency it's not harmful to the us it's beneficial to everyone and so that's why you know i'm not rejecting necessarily your premise i i think that we have to think about these things in a more comprehensive fashion because you know the way things are now with the us dollar unofficially or officially the reserve currency the euro dollar the actual reserve currency and that it doesn't work and it's it's causing all this economic disruption and dysfunction that just ditching you know the system as it is now and transitioning is to anything else almost anything else might be better for everyone well that's an interesting take yeah i was looking at it more on surface at surface level just thinking okay over the last whatever 40 50 years we've probably had lower interest rates which would mean maybe higher home prices and you know maybe higher stock prices the dollar what has been called maybe artificially overvalued relative to other currencies because there's more demand for it outside the u.s economy therefore how does that trickle down throughout the domestic economy that's kind of what i was trying to think through but your point if i'm hearing you correctly is though although there may be some downside there may be some upside that we don't even know about that would count act as a counter balance i would even go one further george i would say that if we had a better reserve currency regime instituted in the 60s and 70s when it should have been that we might have had better quality growth this entire time we might have had interest rates where they are housing prices where they are but no bubbles no credit growth we might have had a better quality of economy and economic trends leading up to 2007-2008 i said 2007 and 2008 never happened so you know again that's why i say you know the reserve currency system as it was might have been a burden not a benefit um and that's i think we need to think along these lines that if doing something differently isn't necessarily mean that it causes somebody harm it changes things and there are definitely be winners and losers but broadly speaking to do something right should create a system where there's more winners than losers and that the losers eventually become winners if given enough time i think that would have been the case had we done the reserve currency system right in the 60s and 70s rather than what was called benign neglect which was hey let's just let this euro dollar thing run rampant which it did rather than do that to do something more uh inherently stable and sound we might have had a better you know you know the 1990s are supposed to be this you know apex of economic growth this this level of prosperity that we should aim to but it might have been even better it might have been more sustainable which is what we were supposed what we were told in the 90s was that this new economy promise was supposed to continue that kind of economic environment rather than just end it so you know i think there's there's more to the story than that what would have made the system better you talk about going back to bretton woods and that if the system would have been different maybe it would have been better but what specifically would have made the the euro dollar system better and maybe we can backtrack and kind of help the viewers and listeners understand how the bretton woods system brought on the birth of the euro dollar system and then take that through 2008 and the whole thing being broken yeah and that's an interesting question because i think you know first of all the euro the bretton woods system was the pendulum swung way too far to the other direction which was we had this background behind it which is you know globalizing economy tremendous amount of innovation that wanted to be unlocked you had the destruction of world war ii all these things that combined to where we needed a reserve currency to function to to allow this globalization this trend globally to happen this positive trend that was a benefit to everyone around the world which required an amount of currency that the u.s couldn't supply under the bretton woods standards which was to to make go uh to make us dollar physical currency u.s dollars convertible into gold which was limited but the gold the gold the reason that we had that convertibility the reason it was limited by gold was because you needed to inject some kind of discipline onto the system so that it wouldn't it wouldn't you know it wouldn't get out of its original mission which was to supply currency to provide this grease to the wheel so to speak and so the the bretton wood system was too restrictive it didn't supply enough currency to the rest of the world so that it could could fluidly continue down this path to go just pat the globalization and con in increased trade and what the euro dollar system was it threw off the restrictions of gold and went in the complete opposite direction to where there was no restraint there was no discipline at all it simply just became especially in the 90s and 2000s it became the the object just was simply to get bigger bigger bigger no matter how insane you did it and so what we want to do is find somewhere in the middle where we do we preserve the aspects of discipline rigidity and some elements of the bretton wood system that keeps keeps um the banking system essentially honest and honest is probably too too much of a word but you know what i'm saying it's you know we're not just funding any kind of speculative insanity that's out there because you at least know that if i do something wrong i might be out of business some kind of brutal capitalistic free market discipline needs to be imposed yeah it's going to stay it sounds like free market capitalism there jeff be careful what you wish for right exactly that's really historically what made especially the classical gold standard worked the best was that you know businesses and banking institutions in the most part in the majority they had to be more honest and more realistic about what they did because they knew at the end of the day they could be out of business and that's what was really missing in the euro dollar system especially under benign neglect was you know too big to fail those prospects that hey if we screw up who cares no you know we'll get bailed out or you know it won't make any difference because somebody else there's there's more than enough money out there that somebody will fund our stupid ideas for as long as we need them to and so we need to go back to somewhere in the middle where we have some level of discipline but yet able not you know able to supply enough monetary currency that the system is not too constrained and held back which is what we've seen since 2007 and 2008 because the pendulum swung way too far in the other direction again it's almost like we're back to the you know to the very depression area where the monetary system is is a drag on everything rather than a tool to allow economic growth to happen and to happen in a sustainable fashion yeah see but that what's crazy about that argument jeff is it sounds very much like an mmt type of argument where you know that's that's kind of their thing is that we should just allow the powers of fiat currency to unleash the growth potential of the the us economy as this uh sovereign nation that can print its own money i know that's not what you're saying i know that's not what you're saying but uh it's a really good point though it does sound like it's a similar thing but there's a huge huge difference the difference is the mm tiers are saying that that decision about the money supply and the level of monetary resources systemically should be made by some enlightened philosopher sitting in some central bank office somewhere who is you know has all this you know computer screens all over and is monitoring the uh system and supposedly under this technocratic technocratic ideal which is unrealistic it's just it's not gonna you're not gonna have one person be able to make enough of a right decision for and i hate to use the term right but enough of a decision to create a stable equilibrium for the most complex dynamic economy that humans have ever ever seen you know by the way that economy is no longer a national economy it's a global economy with all of these different parts and pieces that are always moving that never stands still it's completely dynamic marketplace and so no the i'm tears are saying that we put a we put a couple you know committee a bureaucratic committee in a room and they'll decide what the right about level of money is for the economy it's complete craft i mean the federal reserve has been you know central banks modern central banks have supposedly been that ideal for this long and they show you time and again that it's impossible because they screw up and screw up and screw up that's all they ever do what i'm saying is that we regulate the money supply not we the the money supply is regulated by decentralized processes the markets the markets tell you when there's enough money when there's not enough money i want to just unpack that a little bit further because you talk about how it's just totally unrealistic and it's actually damaging to have this tops down approach and you hear people like me throw out words all the time like mal investment misallocation of resources there's no price signals how do those in um in moral hazard as well how did those play into this top-down approach or the central banks trying to micromanage the economy uh through psychology or however they try to do it well they're necessary consequences to the approach aren't they i mean really you can't have the central top down approach without them otherwise what's the point i mean that's that's the entire purpose of the central approach is to say there will be no downside we'll keep things and running along an optimal path and that's really the fatal conceit here is that these the the proponents of this type of economic management always believe that using the right formula or the right level of i mean the right series of data and the right combined in the right way through the to the magic of some you know perfect algorithm will determine what the optimal path is what we realize you what what you're just talking about you know a brutal discipline what jumper called creative destruction is that nobody has any idea what optimal is we don't know what it is and there are times what you know real science and real economy and free markets these are trial and error processes they are not they're not somewhere you can just pick in a room and say growth needs to be this much this year this much next year it's really it's a trial and error process and that means we have to let things fail that means we have to let people try to experiment and do you know sometimes stupid things if for no other reason to become an example for other people and what not to do so it's not as simple as just hey looking at a bunch of data and thinking this is the right course we have to start from the understanding again going back to adam smith the invisible hand we don't really know what the optimal outcome is because there's no such thing right and how did price signals play into that jeff as far as making it easier for the capitals of the free market approach compared to making it harder for the tops down approach and is is that why uh like communist russia failed was they didn't have price signals and there's no price discovery no taking the last one first you know that's not why russia failed i mean it was part of it but that's not i mean that's a that's a more intense discussion but you're right price signals are a huge part of the capitalist doctrine because they tell you they give you a signal hey don't do this or yes do more of this that's what really prices are if the prices of something you know somebody figures out something really good and starts making a ton of money you know the price signal should say hey we need more of this let's let's have more people do that and if the price signal is hey this guy's an idiot it has a really stupid product and do something is doing something really wrong then that shows everybody else hey don't do that and so from a systemic position don't allocate scarce resources to that right it tells you hey this is how we operate more efficiently by by avoiding the bad ideas and you know following the people who have good ones and if you're a top-down management your idea of good and bad might not really be good and bad it's just your idea of good and bad and so the economy gets caught up sometimes in these loops where it doesn't really know good from bad and sometimes we reward more bad than good and that's an inefficient way of doing things yeah like the bailouts in 2008 exactly i mean 2008 was a perfect time to have this you know this conversation about a new reserve currency instead the government said no we're just going to try to go back to the way things were as if they had any idea why that was bad or good you know it was just we need to preserve the status quo because hey the status quo has us on top of it you know yeah that's that's a good point at the end of the day with the politicians it's all about uh power unfortunately what we're talking about here jeff is very kind of uh i would call it austrian i guess and i don't know if you've ever or if i've ever heard you answer this question would you put yourself in any specific camp as far as a school of thought or is a lot like the inflation deflation where you just call it as you see it would you say i'm more of an austrian keynesian monetarist what do you think i'm not a strict ideolo ideological observer through any school i've taken good ideas from all of them i think the austrians on mel investment have it perfectly right i think the monetarist especially the interest rate fallacy that has it correct i think there's there's some you know people hate it when you say oh john maynard keynes is the worst ever no i think there's a lot of keys that people should read and should appreciate there's even a lot that karl marx said yeah i would even go so far as to say karl marx i mean some of his critiques of capitalism you should understand what he was saying and why he was saying those things i think it's a mistake to put yourself in one ideological camp it's easy to try to you know because it's easier for somebody to provide you with a worldview that's already pre-packaged for you to then start trying to interpret things but i think if you're really honest about what you're trying to do you should be free and open to all because they all have really good ideas and i think they're they're they're pragmatic ideas and sometimes they're really relevant to the situation and and if you start you know rejecting ideas because they have the wrong label on them oh it's keynesian i can't possibly listen to that you're doing yourself a very big disservice yeah i completely agree that's why i love to have just a variety of people on the show and and talk to them whether i quote them quote agree with them or not just to improve my own thinking i want to i know you've been very generous with your time jeff were about 50 minutes into this so i i want to make sure that i hit that i've heard you talk to a meal about in several of your most recent podcasts which again i want to give you a plug there you guys you have to follow jeff and emil their podcast is making sense euro dollar university you can find it on itunes i believe and definitely on the youtube channel the alhambra youtube channel but you guys were talking about marxism and i actually when you did the first show on it it was kind of off topic uh for you guys and it just blew me away i was in medellin listening to it and i had to listen to it like two or three times just to absorb everything but it was so fascinating so i don't want to give away the punch line can you walk us through what you guys talked about on that podcast briefly and then what you've talked about i think in an additional podcast and how it's so important especially in today's day and age where the buzzword is late stage capitalism that uh proponents of free market capitalism such as myself and such as yourself and a meal should really need to understand the marxist view of the world today yeah well you know it may have sound like it was out of the blue for us but i've been writing about this trend towards socialism for many many many many years because i i've seen it coming and you know i'm not trying to pat myself on the back i think what really i i think i you know i spent time reading through what the socialists actually believe and you know you could kind of see that hey you know it's not the hardcore revolutionaries that we necessarily have to worry about it's the fact that they've been able to attract supporters and sympathizers who may not know exactly what they're supporting and sympathizing with because the economy over the last dozen years has fed into these narratives and what those narratives are just to put it quite simply you know i'm going to oversimplify here is what karl marx actually said was communism does not compete with capitalism communism replaces it the capitalists are provide a useful service to the communists by creating through what we just talked about all these all these wonderful technologies industrialization that was unlocked through the capitalist you know environment free market way of doing things what the communists said was that eventually because capitalists had to exploit workers in order to achieve this mass production marvel that eventually they would run out of workers to exploit that's late stage or end stage capitalism the level of inequality between the capitalists and its workers would become so great that would become the signal for the revolutionaries to transition from a capitalist end-stage capitalism that exhausted itself to the socialist revolution true communism which is where all of that wonderful technology is expropriated by the workers and therefore you know redistributed amongst uh according to everyone's needs you know the famous doctrine from each accord from it from everyone's ability to each according to his needs and so that was really that's that's really the point and marxists have said all along that they're just waiting for this period when capitalism exhausts itself and that will be the trigger for the socialist upheaval which begins the revolution and the redistribution of all the property and process and they thought they had they had seen it in the 1930s but you know then of course that didn't actually happen and so they've been waiting for marks to be proven right they they constantly say you know marx wasn't wrong he was just early so here we are after the post 2008 environment and it seems like damn it maybe he was right yeah but what's really fascinating in addition to what you were just talking about is everything that has happened since 2008 that you and i would associate with a lack of capitalism they associate with capitalism such as the bailouts in 2008 that we were referring to they see that as oh see there you go it's capitalism they're they're you know the fed's bailing out the capitalists or with worse well see it's that just proves it's end stage because they have to bail out the banks because capitalism has failed and it plays right into their narratives the stock market is another one also because if i'm not mistaken they they uh i saw another video that i incorporated into a white video based on your guys's podcast but they see this as once the capitalists squeezes the workers so much that they've exhausted all their buyers they can't increase profits then the only thing they can do is take their wealth and put it into financial assets which creates boom and bust cycles so you know they see these uh these crashes stock market the housing crash and again it plays right into their narrative you know it's essentially that you've impoverished your workers as much as you possibly can and that's that's that's it there's nothing else you can do except try to hold it together with a bunch of jerry rigged you know um unstable financial whatever government force you know corrupt police state whatever it is you know whatever the marxists you know a tribute to the your ability to stay in power is that once capitalism reaches its final stages that's what happens the capitalists will do everything to remain in their power and it no longer provides the benefits to society which is why we trigger the socialist revolution to more equitably redistribute all the property and benefits and technology that's what they're saying and yeah everything that's happening since 2008 plays right into that narrative right and correct me if i'm wrong but they have like a sense of urgency because in their minds if they don't steal the means of production away from the capitalists asap the capitalist is going to make society worse and worse and worse they're basically going to destroy what they built unless we the communists go in and save them from themselves as quickly as possible using whatever means necessary there are certain marks of strains of thought that believe that there are others that don't think so i think i think the ones that believe it more are trying to com you know create a sense of urgency rather than there being an actual sense of urgency because remember that's really what's going on here i think most of the people who you might survey and say they're sympathetic to socialism don't really know what they're being sympathetic about they just see that the economy of the last 12 years sucks it really hasn't boomed and oh by the way i remember in college my marxist professor talking about late stage capitalism and describing it and it really seems like everything i see around me is consistent with what the marxist has been saying not what jay powell and janet yellen and ben bernanke have been saying and so you know that the revolutionaries have their ranks have been swelled by sympathizers who think that the marxists have been preaching about what's going on and the common you know the common arguments that people you know pro-capitalist people deploy is well you know don't don't these whining crybabies know how good they have it and what the marxists say is well yeah we know that's that's the whole point mark said capitalism creates wealth and so yeah we know how good we have it now that you've created all this all this all this wealth for us we're going to take it from you yeah yeah and then also too going back to the rebuttal that most people have and why they don't take marxism seriously is because well just look at what happened to russia look at everywhere socialism or communism has been tried it's obvious that it's failed but you had some insight to this that i think is incredibly important and i'll have you expand on it but i remember in the podcast you're saying that the chinese sent people or economists into russia once it failed i believe in the early 90s and their takeaway from that trip was not that communism had failed but that they just tried it too soon can you expand on that well i think most pure ideological marxists agree with that because what karl marx actually said i mean if marx had been alive in 1917 when the russians did their communist revolution he would have been abhorred he would have said no this is not what you're supposed to do in fact the russians under lenin and some of the menshevik leaders had a tremendous amount of debate about whether or not they should proceed with the revolution because what mark said was you need a capitalist industrialist economy in order to transition into a socialist economy right otherwise what's the point you have to let the capitalists create all this wealth and wonderful technology otherwise when you do if you transition to from a pre-industrial society you won't have any doubt you won't have any technology to run your perfect time oh well fake right so that's you know mark said we don't want a revolution in russia or china we want revolutions in the west we want revolution in germany and england and the united states that's where these revolutions need to start and what happened in the 20th century was that communism revolutions and communism were all the wrong places they would all to the pre-industrial societies and so the hardcore marxists say well communism didn't fail it was never tried where it was supposed to have been tried it's what the russians did and then the chinese eventually after 1949 did was they tried to make up for that deficiency by jumping would they realize they jumped the gun and imposed the socialist system upon a quasi-socialist system upon a society and economy that wasn't ready for communism and so they tried to deal it with it with by you know inducing sometimes capitalist reforms you know 1921 for example national economic plan under lenin was essentially capitalism in soviet russia um you were right point the early 1990s um you know deng xiaoping his southern tour was in january of 1992. well the soviet hardliner communists initiated their failed coup in august of 1991 and gorbachev was out later that year i mean you know these things are all related together and what it really says is that you know the hardcore socialists say well yeah socialism has never really been tried it's never been instituted where it's supposed to be instituted which is right here in the united states or throughout europe and so you think you're making an argument by saying hey socialism has always failed and what they're saying is yeah well mark said the same thing yeah again it just feeds into their narrative like they're like duh we know it's it's yeah like that's not everything you're saying is like yeah we know that you our professors told us this in college and you have what you're really supposed to be answering for is you know why is jay powell always wrong he's supposed to be the the template or the talisman for capitalism you know he's our perfect representative what capitalism is supposed to be and the guy's clueless yeah so but then on this marxist thing you you also and i don't want to put words in your mouth but you feel as though that's why maybe the chinese now are are taking a more hard-line approach to how they handle areas like hong kong because maybe they're seeing that capitalism has run its course as well and i'm not saying that it has i'm just saying it's in there through their lens of the world yeah i think well there's there's a one contradictory thing to it and it depends on how you view xi jinping in his view of socialism but there's no doubt that the 19th party congress which was held in october of 2017 they basically said yeah we've ridden our capitalist um you know our post southern tour 1992 um market reform agenda as far as it will go so in you know october 2017 they basically said our experiment with capitalism has reached its end stage and so what do we do from here now traditional hardcore marxist ideology says you're supposed to allow the majority to come in which is the third of the represents under deng xiaoping which was that okay we've reached end stage capitalism now we transition into the pure socialist communist ideal which is less authoritarian because the workers are so happy to have everything redistributed to them but that's not what she has done she has gone the other way he said yes i think we're at late we're we've reached the end of our capitalist road here but he's become more authoritarian not less and so it's a little bit of a you know contradiction there where the the pure socialist doctrine says they're supposed to do one thing and he's doing the exact opposite which i think tells me that you know yeah he might believe it's end-stage capitalism but that might not necessarily mean for china what it's supposed to mean under you know traditional marxist doctrine i think what he's saying is we need the rest of the world to transition before we do and that's where it gets really interesting and perhaps dangerous yeah or just what is it absolute power corrupts absolutely type thing you know he gets in power he's like well i've kind of changed my mind a little bit i like this power thing yeah there's always that right i mean dictators don't like you know handing over their powers of dictators and that's you know this is one of the theor that you see a lot of theoretical problems with communism right because the marxists say that you have to go through uh capitalist democracy stage but then you have to take you know to take off you know get past that capitalist democracy stage you need authoritarian group of revolution an elite corps of revolutionaries to implement authority through authoritarian means this transition into socialism what we know from human behavior is that the authoritarians once they reach the apex of power don't like giving power back to anyone let alone the people doesn't matter how committed they are in ideology what they'll say is oh well we're not ready yet and then tomorrow oh we're not ready yet oh we're not ready to hand over power yet you know they can keep it going forever that's one of the problems that you know with the the russian revolution is that joseph stalin of course kept saying oh we're not ready yet i'm going to continue to be the supreme dictator for a little bit longer just a little bit yeah it's just the thing with marxism it just or socialism it requires people human beings to not be hardwired at all like it requires that hardwiring to be malleable and i just don't think it is i think we're hardwired the way we are and it's just never going to change i i think the the question that most people at least americans are asking themselves right now jeff and we'll kind of end with this one is we we understand what the marxist view is we we see this kind of playing out in the united states as far as its popularity and it's kind of the core with the riots and the looting we've seen it's it's it's a little different on surface level and i don't want to dive into that but at its core you know if you see kind of how they speak words they use it is very marxist so will socialism win out in the united states if you had to make a prediction what do you think no i'm i'm long-term optimistic i don't think socialism wins out because i think people are more realistic and once the marxists show you who they are there's something about them that is as you were just saying that the you know human evolution has hardwired to reject and really what you think about marxism requires an evolutionary step in humanity to become exactly you know this robotic you know everybody is the same and we're all we all dress the same we all live the same i mean that's not how people are hardwired and so you know there's a social component to marxism too that i don't think that people will accept even if they might be sympathetic to the idea of you know when people say we talk about oh we're going to do the economy more equitably we're going to redistribute goods more equitably that sounds like it could be a good thing especially given the last 13 years of lack of economic growth i mean you could be sympathetic to that kind of argument but when we start moving towards it you know starting to put you know pen to paper and say what does that really mean i think people are smart enough to realize or at least you know emotionally invested enough to realize that this is not what they signed up for and at least not what they were sympathetic about and i actually believe that at some point we'll get the economy growing again just like we did in the 50s and 60s and that will take care of a lot of the sympathy once you have real economic growth and opportunity it re that's what refutes the marxist argument that's what effectively refuted it in the 40s and 50s and 60s was once the economy gets going again then you say see it wasn't end stage capitalism there isn't a limit to the future there isn't a limit to the amount of wealth capitalism create because human innovation will not be bottled except for these temporary periods where it takes a bit of a detour yeah all right i think that's a great place to end we'll end on a positive note i like that a lot so jeff what an amazing conversation every time i talk to you buddy it just totally blows my mind so for i know we've mentioned your podcast with emil kalinowski a couple times but uh tell all the viewers and listeners where they can find out more about what you do yeah i met alhambra investments which is a registered investment advisor they can find me i post you know a couple times a day at alhambrapartners.com and we're working on with emil and a couple other people this uh something we call euro dollar university the podcast being the first step which we hope to be a more comprehensive reference library and list to help people understand and interpret some of these things that we're talking about you know yield curve and euro dollar futures type money all this kind of stuff so it's available for people to make their own decisions their own informed decisions about what's really going on in the world all right jeff thanks a lot i appreciate your time can't wait to do it again thanks george always a pleasure [Music]

Channel: George Gammon

Views: 38,742

Rating: 4.890306 out of 5

Keywords: jeff snider, jeff snider real vision, jeff snider eurodollar, jeff snider repo, jeff snider repo market, jeff snider interview, jeff snider eurodollar system, jeff snider dollar collapse, jeff snider gold, jeff snider stock market, jeff snider macrovoices, jeff snider alhambra, jeff snider fed, jeff snider central banks, jeff snider dollar, eurodollar, eurodollar explained, money creation, money creation explained

Id: C67NPdXO7GA

Length: 67min 20sec (4040 seconds)

Published: Wed Jul 22 2020