Latest / Merryn Talks Money / Modern Monetary Theory: Free Money or Fiscal Fantasy?

Transcript

Modern Monetary Theory: Free Money or Fiscal Fantasy? · Merryn Talks Money

0:02
Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
0:17
Speaker 2: Welcome to Maron Talks Money, the podcast in which people
0:19
Speaker 2: who know the markets explain the markets. I'm Maren zumset Web.
0:22
Speaker 2: This week I am speaking with Simon french Managing Director,
0:26
Speaker 2: chief Economist and head of research. That's not a title,
0:28
Speaker 2: Simon and head of Reacher and head of research of Liberum.
0:32
Speaker 2: Loyal listeners of the show will have heard John and
0:35
Speaker 2: me talking about modern monetary theory MMT as it's known
0:39
Speaker 2: in past episodes, but what we have never done is
0:41
Speaker 2: taking the time to actually delve into this, tell you
0:44
Speaker 2: what it is, explain what it means, whether it's being
0:47
Speaker 2: used in the past, whether we think it should be
0:49
Speaker 2: used in the future, what it means, what it doesn't mean,
0:51
Speaker 2: and more relevant right now, why some of our politicians
0:54
Speaker 2: are picking it up. So the Green Party which is
0:58
Speaker 2: pulling well, actually slightly less now but was putting rather
1:01
Speaker 2: higher now down to about eleven percent, but still important
1:03
Speaker 2: if there's any any kind of combination of political parties
1:06
Speaker 2: at the end of the next election. Zach Polanski has
1:08
Speaker 2: been talking about MMT in whenever he talks about economics
1:13
Speaker 2: and saying that we are getting economics completely wrong in
1:15
Speaker 2: the UK. There is another way. We do it this
1:17
Speaker 2: way and all our problems will magically disappear. So let's
1:22
Speaker 2: start at the very beginning, Simon, what is modern monetary theory?
1:28
Speaker 3: Well, thank you for the opportunity to explain it. So
1:30
Speaker 3: modern monetory theory, thank you. Ah. Yes, Modern nitory theory
1:34
Speaker 3: is the idea that if you have your own sovereign
1:37
Speaker 3: currency and the ability as an issue through your central
1:41
Speaker 3: bank to produce as much money as you like, there
1:46
Speaker 3: isn't an effective constraint on financing. The only constraint in
1:51
Speaker 3: the ideas of modern monetary theory is that if you
1:53
Speaker 3: produce too much it could be inflationary. The counter to
1:58
Speaker 3: that from modern monetary theory rists is you can use
2:01
Speaker 3: fiscal policy and let's call it for what it is,
2:03
Speaker 3: tax increases should inflation rear its ugly head.
2:07
Speaker 2: Okay, so very simple terms. You do not have to
2:10
Speaker 2: borrow money from the markets. There is no need for
2:12
Speaker 2: the bond market to exist at all. You simply print
2:17
Speaker 2: the money that you want to tell the Bank of
2:18
Speaker 2: England to print as much as you like, and then
2:21
Speaker 2: you spend it on whatever you want, welfare, infrastructure, all
2:24
Speaker 2: the things that the UK economy apparently so desperately needs.
2:28
Speaker 2: And all you have to do is figure out exactly
2:33
Speaker 2: how much resources available in the UK economy, so you
2:36
Speaker 2: print exactly the correct amount of money, because if you
2:39
Speaker 2: were to print too much, you would get inflation. But
2:42
Speaker 2: if you do make a mistake, that's okay because then
2:46
Speaker 2: you just put up taxes to dampen down economic activity
2:49
Speaker 2: and the inflation disappears. I love this. This is so simple,
2:53
Speaker 2: and we would have everything that we need.
2:55
Speaker 3: Let's just do it. If only was so simple. So
2:58
Speaker 3: I think there are a couple of counters with which
3:01
Speaker 3: I'll put on the table early on in this podcast,
3:04
Speaker 3: which is first, we had a little bit of an
3:07
Speaker 3: experiment with MMT during the pandemic, there was a lot
3:11
Speaker 3: of money printing or in digital form. Of course, it's
3:15
Speaker 3: even easier than that, is a stroke of a key
3:17
Speaker 3: on your keyboard in order to produce this money. Inflation. Really,
3:20
Speaker 3: it's ugly, head. And what did governments do across the world?
3:23
Speaker 3: Did they raise taxes in order to bring back inflation? No,
3:27
Speaker 3: they didn't. Largely fiscal policy remained also expansionally alongside monetary policy,
3:32
Speaker 3: which is one of the reasons why across Western economies
3:35
Speaker 3: the price level today is between twenty five and thirty
3:38
Speaker 3: percent higher than it was just five years ago. The
3:42
Speaker 3: idea that fiscal policy can respond in short order has
3:48
Speaker 3: been slightly disproven in practice. And then there's also the theory.
3:53
Speaker 3: The theory is why munty policy is and interest rates are
3:57
Speaker 3: chosen as the lever with which to manage the macroeconomy
4:02
Speaker 3: is because it isn't as distortionary as fiscal policy. What
4:05
Speaker 3: does that mean in plain English? The I mean I
4:10
Speaker 3: don't need to tell you Marin that when you change
4:13
Speaker 3: tax rates, people respond. People plan in terms of their
4:18
Speaker 3: lifestyle choices, their retirement choices, their astalication choices. And therefore,
4:24
Speaker 3: if you tweak fiscal policy, which is effectively what one
4:27
Speaker 3: monetary theory says you should do in order to offset
4:30
Speaker 3: that unlimited monetary constraint, you start to have second order
4:35
Speaker 3: effects on behavior, quite inefficient, unproductive activity. And that's why
4:40
Speaker 3: the consensus over the last forty to fifty years is
4:43
Speaker 3: to be news monetary policy is your key lever with
4:47
Speaker 3: which to ration the money supply.
4:51
Speaker 2: Okay, so if we take the first one of those
4:53
Speaker 2: that we had an experiment with this during the pandemic,
4:55
Speaker 2: we printed piles of money, we created inflation, and the
4:58
Speaker 2: fiscal authorities then didn't deal with that properly. I mean
5:01
Speaker 2: you could say, I mean, if I were, for example,
5:03
Speaker 2: Gary Stevenson or another populist pretend economist, I would say, well,
5:07
Speaker 2: that's just because it wasn't real MMPT. And if we
5:10
Speaker 2: were to put this in properly and governments were to
5:13
Speaker 2: properly understand it, this wouldn't have happened.
5:16
Speaker 3: Why is communism sort of ringing in my ears? Because that,
5:19
Speaker 3: of course is the excuse, is what. We haven't really
5:21
Speaker 3: tried communism properly. Have we? Similarly with the MMT. I mean, look,
5:24
Speaker 3: what better control experiment than the extraordinary expansion in the
5:29
Speaker 3: money supply that took place in a pretty unconstrained way.
5:32
Speaker 3: It is pretty close to a perfect control experiment. And
5:37
Speaker 3: certainly those who say that this was all an energy
5:42
Speaker 3: price shock are kind of missing the ramp up that
5:46
Speaker 3: took place in the second half of twenty twenty one
5:49
Speaker 3: before Ukraine was really on most investors' agenders and dislocated
5:52
Speaker 3: the energy price markets. Who you're already seeing. If you
5:55
Speaker 3: like the legacy of money supply pushed into the economy
5:59
Speaker 3: and a lack of fiscal response. I just think it's
6:01
Speaker 3: the both the lack of political leadership with which to
6:07
Speaker 3: raise taxes and also the fact that fiscal policy is
6:13
Speaker 3: rarely introduced as quickly as munaged policy. You have fiscal events,
6:18
Speaker 3: different styles of physical events in different countries, but it
6:23
Speaker 3: doesn't lend itself to a quick response. And what you
6:25
Speaker 3: need is a lever that when it recognizes a pickup inflation,
6:28
Speaker 3: can respond quite quickly to dampen that down.
6:31
Speaker 2: Okay, so there's really no way that a mentique can
6:35
Speaker 2: work with human nature and with politics.
6:39
Speaker 3: I think that's right. I mean, there is a element
6:43
Speaker 3: of this which in terms of m MT, which has
6:47
Speaker 3: some or had perhaps some validity when we were in
6:52
Speaker 3: a very very low inflation, low interest rate environment, which
6:56
Speaker 3: is the risk of deflation disinflation and the spectra of
7:00
Speaker 3: that did require policymakers to look at alternative models. But
7:07
Speaker 3: when the facts change, you must change your view on
7:11
Speaker 3: the appropriateness, particularly at this point in the cycle of
7:16
Speaker 3: doing something which is a big expansion of monetary supply
7:21
Speaker 3: at a time when I mean, you speak to a
7:25
Speaker 3: lot more investors than I do who are worried about
7:27
Speaker 3: the debasement of f currencies and what that does to
7:32
Speaker 3: the allocat the efficiency of the financial system of course
7:36
Speaker 3: to promote growth, but also the prices of other assets
7:41
Speaker 3: fixed assets. There's a real risk of misallocation if you're
7:45
Speaker 3: pursuing at this MMT at this point in the cycle.
7:48
Speaker 2: Well, and it seems to me that one of the
7:49
Speaker 2: most difficult bits of this is the bit we discussed
7:51
Speaker 2: at the beginning, which is that you have to actually
7:54
Speaker 2: understand how much resource there is available in your economy.
7:57
Speaker 2: And this kind of thing is absolutely impossible to even
8:00
Speaker 2: begin to guess at you know, you need the market
8:02
Speaker 2: to do that. You can't have a central authority trying
8:04
Speaker 2: to figure that out.
8:06
Speaker 3: That's right, and well, let's make it specific to the UK.
8:09
Speaker 3: I think my reading of the UK economy is it
8:12
Speaker 3: is pretty supply side constrained at the moment as a
8:15
Speaker 3: result of decisions around energy policy, most saliently, but also
8:23
Speaker 3: in the labor market. Increasingly we are starting to see
8:28
Speaker 3: constraints on labour supply, partly through the on costs associated
8:31
Speaker 3: with employing labor, and then also quite capital constraint. I mean,
8:36
Speaker 3: we're making this recording at a time when question marks
8:40
Speaker 3: over whether capital will has freely flow around the world
8:44
Speaker 3: in a Trump world, as we've seen in the in
8:47
Speaker 3: previous decades. But the UK also has rather outsourced its
8:51
Speaker 3: allocation of capital for a long time. So you've got.
8:54
Speaker 2: Three outsourced its allocation of capital.
8:57
Speaker 3: Well. In effect, it has allowed it institutional savings industry
9:02
Speaker 3: to move from position of having a home bias like
9:05
Speaker 3: existing pretty much every other major, every other major economy,
9:09
Speaker 3: to a situation where it is increasingly allocating on the
9:13
Speaker 3: geographical benchmark. That's fine if everyone else does it. No
9:17
Speaker 3: one else has done it. The UK is an outlier,
9:20
Speaker 3: and therefore it's constrained in terms of its ability to
9:24
Speaker 3: deploy capital into its domestic economy to fuel growth. So
9:28
Speaker 3: you think about those three elements energy, labor, capital constricting
9:34
Speaker 3: the real resources of the economy and therefore actually its
9:37
Speaker 3: ability to absorb a big expansion in the money supply
9:42
Speaker 3: without creating inflation. I think is probably more constrained now
9:46
Speaker 3: than any time in my professional career, and I've been
9:48
Speaker 3: a professional economist for almost quarter of a century.
9:50
Speaker 2: And of course you could fix all those supply constraints,
9:54
Speaker 2: couldn't you. You could fix the energy problem simply by
9:57
Speaker 2: changing direction. It wouldn't be immediate at this point, but
9:59
Speaker 2: it is definitely fixable with maybe one high profile resignation.
10:04
Speaker 2: You could fix the labor bit by changing the cost
10:07
Speaker 2: of employing LABE. You could stop putting it up and
10:09
Speaker 2: maybe put it down a bit. And you could change
10:12
Speaker 2: some of the welfare parameters that keep people out of work.
10:16
Speaker 2: And on the capital allocation area, you could change that
10:19
Speaker 2: simply by regulating to persuade force penchul funds in particular
10:25
Speaker 2: to keep capital in the UK, by shifting the ice
10:28
Speaker 2: for alliances around which you and I.
10:29
Speaker 3: Have discussed before.
10:30
Speaker 2: All these these three things could be changed.
10:33
Speaker 3: Yeah, on the last one, I've probably gotten a bit
10:35
Speaker 3: of a journey since we first spoke about this. I
10:37
Speaker 3: think mandation enforcing was perhapswear was a few years ago.
10:40
Speaker 3: I think actually it's still The more I've researched this area,
10:43
Speaker 3: the more I just look at the incentive structure the
10:46
Speaker 3: used to under the PEP, the Personal Equity Plan and
10:51
Speaker 3: indeed in them for runner of the ISO for Great
10:53
Speaker 3: Younger Listeners correct and also in the pensions through the
10:57
Speaker 3: Dividend Tax Credit. There used to be an inbuilting incentive
11:01
Speaker 3: it is one of incentives rather than necessary force maundation.
11:04
Speaker 3: But we've gone so agnostic that perhaps it was appropriate
11:09
Speaker 3: a time when people were at least paying lip service
11:11
Speaker 3: to the global rules of the game. But in an
11:14
Speaker 3: environment where they're not, I think that policy environment is
11:17
Speaker 3: not for purpose. But going back to your three points,
11:20
Speaker 3: let's be really pragmatic about the ability of a U
11:24
Speaker 3: turn on the cost of energy, the cost of employment
11:29
Speaker 3: and the allocation of capital. The proponents of MMT are
11:33
Speaker 3: not the proponents of making that journey. If you think
11:36
Speaker 3: it's largely coming from the Green Party and the left
11:38
Speaker 3: of the Labor Party, they want to double down on
11:42
Speaker 3: those whilst they're pretty quiet on capital allocation, but certainly
11:46
Speaker 3: on the first two when you look at liberating the
11:48
Speaker 3: energy market, putting an abundance of energy into the UK
11:51
Speaker 3: economy to increase its supply side. Whether they want to
11:55
Speaker 3: move away from the on costs of labor to making
11:58
Speaker 3: a more flexible, more dynamic labor market, they want to
12:00
Speaker 3: go in the opposite direction that to me, my economic
12:04
Speaker 3: model would suggest you are constricting the supply side even more,
12:09
Speaker 3: making and perhaps this is the uncomfortable truth for the
12:12
Speaker 3: left of UK economics and politics is it would make
12:16
Speaker 3: the likelihood of success of m MT even lower than
12:22
Speaker 3: their proposal.
12:38
Speaker 2: Okay, let's go to the second major objection that you
12:42
Speaker 2: have that fiscal policy to control an excess supply of
12:47
Speaker 2: money is very difficult to do, very difficult to do.
12:49
Speaker 2: There is a blurred line, isn't there between monetary policy
12:53
Speaker 2: and fiscal policy anywhere and before behaviors at these things
12:55
Speaker 2: are very different, and monetary policy is somehow neutral. But
12:59
Speaker 2: one of the things that one of the reasons why
13:01
Speaker 2: Japan didn't come to the same kind of QI policies
13:04
Speaker 2: as the West in the beginning was because they felt
13:06
Speaker 2: very strongly that if you print a pile of money,
13:08
Speaker 2: you change monetary policy into a fiscal policy because effectively,
13:12
Speaker 2: by creating inflation and acid marks, for example, you readistribute wealth,
13:17
Speaker 2: which is the job of physical policy, not of monetary policy.
13:20
Speaker 2: So these lines are very blurred.
13:21
Speaker 3: They are, And you know what, that's absolutely correct of
13:24
Speaker 3: you to pick me up on that is, I shouldn't
13:27
Speaker 3: present this as black and white. That monitor policy certainly
13:30
Speaker 3: it's current guys or it's more recent guys, has no
13:33
Speaker 3: allocative impact. It does, but it's one of degrees. I
13:36
Speaker 3: think in aggregate, if you look at the two major
13:40
Speaker 3: policy leavers for central bankers, so balance sheet and policy
13:47
Speaker 3: deposit rates, they are less allocatively impactful than if you
13:53
Speaker 3: like single taxes evat income taxes, wealth taxes. And also
14:00
Speaker 3: if one thinks of the type of taxes that the
14:05
Speaker 3: left want to raise, they are largely ones that have
14:09
Speaker 3: something of an intellectual contradiction because they largely want to
14:12
Speaker 3: be taxes on wealth. It appears on assets. And in
14:17
Speaker 3: order to do that in a globalized world with interconnected
14:22
Speaker 3: financial systems, and indeed with a relatively porous movement of people,
14:27
Speaker 3: you would have to introduce capital controls or some form
14:30
Speaker 3: of capital controls. This is whispered on the left, but
14:34
Speaker 3: it would almost certainly be necessary for the effectiveness of
14:36
Speaker 3: the tool. So they want to strain one factor of
14:40
Speaker 3: production capital, limit its movement across borders. And yet on
14:44
Speaker 3: another side of the effects of production on people movements,
14:48
Speaker 3: they want a much more liberal movement of people across borders.
14:51
Speaker 3: So that's labor. And where's the intellectual consistency. I mean,
14:55
Speaker 3: maybe people don't bother about intellectual consistency anymore, but I
14:58
Speaker 3: think I do. I think if you believe in a
15:00
Speaker 3: more liberal flow of factors production all of them, it'd
15:06
Speaker 3: be all of them. But this one appears on capital
15:09
Speaker 3: to be wanting to constrain movements and on labor trying
15:13
Speaker 3: to increase those movements. That seems quite a difficult position
15:17
Speaker 3: to adopt.
15:17
Speaker 2: I mean, there is a sense, isn't there the capital
15:19
Speaker 2: controls in some form will be with us in the
15:21
Speaker 2: next couple of decades. Minimum. There was a lot of
15:23
Speaker 2: discussion in the run up of the budget, the last
15:26
Speaker 2: appalling budget about an exit tax yes for people leaving
15:29
Speaker 2: the UK, which seems absurd to people who have been
15:33
Speaker 2: brought up in a global environment, but was perfectly normal
15:37
Speaker 2: idea in the seventies, for example, it was.
15:39
Speaker 3: And maybe that is the journey we are on, and
15:42
Speaker 3: certainly look that you and I think listeners can be
15:45
Speaker 3: clear where we sit on this particular issue. But if
15:49
Speaker 3: you are going to go in that direction, then I
15:53
Speaker 3: think recognizing that left unchecked in terms of the then
15:59
Speaker 3: control environment, the tax environment, you would get a pretty
16:03
Speaker 3: abject failure. So you would need to take preemptive action.
16:06
Speaker 3: One of the things that I've written about in recent
16:09
Speaker 3: weeks is if we're going to get a movement to
16:12
Speaker 3: the left amongst the current Labor government after the local
16:16
Speaker 3: elections in May.
16:18
Speaker 2: We have to stop you right there and say, are
16:19
Speaker 2: you assuming that Kirs Damer might not make it very
16:22
Speaker 2: long after the local elections, they'll go very badly and
16:24
Speaker 2: we'll see a regime change in the Labor government.
16:27
Speaker 3: Can see what you're doing there is to make me
16:29
Speaker 3: commit to what I think is going to happen. My
16:32
Speaker 3: economic predictions are much better than my political predictions, although
16:35
Speaker 3: that's not a particularly high bar. But one thing I
16:37
Speaker 3: would say is that when speaking to investors, that is
16:40
Speaker 3: something they are laser focused on, the idea that actually
16:43
Speaker 3: the setup for the UK isn't too bad this year,
16:46
Speaker 3: with guilt yields at least, the spread coming down, the
16:50
Speaker 3: mortgage refinance headwindsday easing, further energy costs, a time of
16:54
Speaker 3: recording relatively benign and yet wide expectation there'll be a
16:59
Speaker 3: leadership Channe shift to the left. What's interesting is whether
17:03
Speaker 3: the Left have learned anything from the rights identity crisis
17:07
Speaker 3: in the last parliament, when Liz Trust and the Mini
17:10
Speaker 3: Budget introduced a very different economic policy from the other
17:14
Speaker 3: side of the Aisle, or at least notionally from the
17:15
Speaker 3: other side of the aisle. I think this time they
17:18
Speaker 3: may put in preemptive measures the left if they go
17:22
Speaker 3: down this route. And one of the things you could do,
17:24
Speaker 3: for example, on guilts, would be to make them exempt
17:28
Speaker 3: from inheritance tax, to try and crowd in capital in
17:31
Speaker 3: a market you think would potentially dislocate. These are the
17:34
Speaker 3: type of things that if you're going to introduce something
17:36
Speaker 3: like MMT, you know, do a real pivot to the left.
17:39
Speaker 3: You need to recognize the policy environment as it's set
17:42
Speaker 3: up at the moment, would do meet to pretty quick failure,
17:45
Speaker 3: as liztrus find out. Be interesting to seehere the left
17:48
Speaker 3: of learned any lessons from that.
17:50
Speaker 2: Yes, it will be interesting.
17:53
Speaker 3: Don't hold back, Marin, isn't it Well?
17:56
Speaker 2: We are on the subject of bond markets, Mac. Have
18:00
Speaker 2: you been watching Japan.
18:02
Speaker 3: Yes, with interest for a number of years. Actually, I
18:05
Speaker 3: know the movements have been quite extreme in recent trading sessions,
18:09
Speaker 3: but this has been a couple of years in the making.
18:11
Speaker 3: I've read a couple of columns about this.
18:14
Speaker 2: Yeah, yeah, Javanese Japanese bondy ell is really really sore
18:17
Speaker 2: at this point. You know, you look at look at
18:19
Speaker 2: the chart and it looks a bit like the silver chart, right,
18:20
Speaker 2: a little bit parabolic there at the end. What does
18:23
Speaker 2: that mean, what's going to happen?
18:24
Speaker 3: Well, there's a couple of things going on in Japan.
18:26
Speaker 3: I think if it was just the long end of
18:28
Speaker 3: the curve, I would say that there's long end dislocation
18:30
Speaker 3: going on around the world at the moment, which is
18:34
Speaker 3: partly an institutional shift away from defined benefit pension schemes,
18:38
Speaker 3: of which Japan, the UK, and the Netherlands at the
18:40
Speaker 3: forefront of that. So the long end sell off in
18:42
Speaker 3: those three countries has been the most pronounced, partly because
18:46
Speaker 3: the dB pension schemes are leaving the markets in terms
18:49
Speaker 3: of ready buyers of that, and fair play to issuing
18:52
Speaker 3: authorities in those countries, they've reduced duration of new issue
18:56
Speaker 3: and so it's okay, it's interesting when you look at
18:58
Speaker 3: your terminal the thirty to forty year year, but actually
19:00
Speaker 3: it's not that relevant for government financing. What's interesting Japan
19:03
Speaker 3: is how the short end is also selling off quite
19:05
Speaker 3: asymmetrically to the rest of the world. What does that
19:09
Speaker 3: tell you? It tells you that you know, suddenly you're
19:10
Speaker 3: repricing the inflation risk in Japan. Now that's a problematic
19:14
Speaker 3: situation for Japanese financing, given debt to GDP is two
19:18
Speaker 3: hundred and twenty five percent, which is about twice the
19:21
Speaker 3: wider G seven average. But your question was around I
19:25
Speaker 3: got there in the end, thank you, thank you was
19:28
Speaker 3: what does that mean for us the world, well, for
19:30
Speaker 3: ust of the world. It means that this we talk
19:33
Speaker 3: about exporting of capital, and in the UK context, in
19:35
Speaker 3: the Japanese context, they've been exporting capital the famed carry
19:39
Speaker 3: trade to the rest of the world, offering fairly loose
19:42
Speaker 3: financial conditions for other major economies. Now suddenly to be.
19:48
Speaker 2: Clear that you can borrow, you can borrow in yen
19:50
Speaker 2: very cheaply. You have been able to borrow and yen
19:52
Speaker 2: very cheaply, and lots of people have taken advantage of that.
19:54
Speaker 2: They borrow cheap yen that's elsewhere, and then you know
19:57
Speaker 2: they make this bread.
19:58
Speaker 3: Correct. Now, if you you are a cio in Tokyo
20:01
Speaker 3: currently looking at the nominal will come to real yields
20:07
Speaker 3: in a second, but norminal yields available suddenly for the
20:09
Speaker 3: first time in more than a generation, repatriating that capital
20:14
Speaker 3: to get nominal returns in your domestic economy is as
20:18
Speaker 3: an attractive trade and notwithstanding the sort of weakness of
20:22
Speaker 3: the end, but I think still there is a perhaps
20:26
Speaker 3: of something of a money illusion effect which would likely
20:28
Speaker 3: to bring capital back into Japan. And the counter to
20:31
Speaker 3: that is some of the capital tailwinds, the financing tailwinds
20:35
Speaker 3: the rest of economy are benefited from Japan are unwinding
20:39
Speaker 3: and potentially unwinding in quite quick order. Now, the real
20:44
Speaker 3: yield is important, so just for inflation, it is the degree.
20:48
Speaker 3: At the moment the short end of the curve. Generally,
20:52
Speaker 3: inflation expectations and yields have moved in tandem. But if
20:57
Speaker 3: that starts to dislocate and you start to get really
21:00
Speaker 3: fields emerging the short end of the Japanese curve, then
21:03
Speaker 3: you start to get some really interesting dynamics, because what
21:05
Speaker 3: has become what you start to see a steady repatriation
21:09
Speaker 3: of capital might become quite a quick repatriation of capital.
21:12
Speaker 2: And then what happens, well.
21:13
Speaker 3: Then I do think you start to see some actual
21:17
Speaker 3: fundamental repricing of of assets in the Western world with.
21:23
Speaker 2: What type of assets.
21:24
Speaker 3: Well, to some extent, public markets have quite relatively efficiently
21:31
Speaker 3: repriced their assets to a higher interest rate environment after
21:35
Speaker 3: twenty twenty two. I think in private markets where those
21:39
Speaker 3: revaluations have not taken place, or there's certainly been financing
21:44
Speaker 3: opportunities to roll over it to evaluations that haven't really
21:47
Speaker 3: been tested, that amplifies the pressure, honestly. And therefore, do
21:53
Speaker 3: you see a situation where you start to see some
21:56
Speaker 3: of those stresses that we saw emerge a timescale here
21:59
Speaker 3: about with Silicon Valley Bank, Can some of the concerns
22:05
Speaker 3: of a funding there start to rear the head again?
22:07
Speaker 3: I think that's a real, real and it's fascinating.
22:10
Speaker 2: Is something you look at the valuations of private companies.
22:12
Speaker 2: When I was looking the other day at the evaluations
22:14
Speaker 2: of publicly listed AI related companies and the private ones.
22:18
Speaker 2: So if you look at open AI, Anthropic etc. If
22:20
Speaker 2: you look at them as a multiple of sales actual
22:22
Speaker 2: money of all, you look at them as multiple of sales,
22:25
Speaker 2: those private companies that are expecting to IPO this year
22:29
Speaker 2: are currently priced at astronomically higher levels than the publicly
22:33
Speaker 2: listed once So it's fascinating to see what happens when
22:35
Speaker 2: they come to IBO. Does that press stand and if not,
22:39
Speaker 2: then what.
22:40
Speaker 3: So we probably the big names, the names you've just
22:43
Speaker 3: reeled off, there's probably a combination of enough hype and
22:49
Speaker 3: indeed an expectation of very rapid inclusion in the major
22:52
Speaker 3: indictries passive money for maybe some of those deals to
22:57
Speaker 3: go through. I think what you worry about out, what
23:00
Speaker 3: you would worry about if you're a portfolio manager is
23:03
Speaker 3: the middle and long tail of companies that's similarly elevated
23:07
Speaker 3: valuations who won't have that perhaps sort of rock star
23:13
Speaker 3: attraction of getting those kind of valuations. Maybe we don't
23:19
Speaker 3: care about that anymore, but I care about it from
23:21
Speaker 3: a growth I care about it from a growth standpoint
23:23
Speaker 3: because if we still, if we keep on crowding capital
23:26
Speaker 3: into a small number of very very large players, it's
23:29
Speaker 3: not great for economic conventions.
23:31
Speaker 2: But that's way as well as if you do get
23:33
Speaker 2: less that you do get anthropic and over an AI listing.
23:35
Speaker 2: These are such huge humding our IPOs that the amount
23:39
Speaker 2: of institutional and retail capital that will flow to them
23:41
Speaker 2: will leave very little left over for any small or
23:44
Speaker 2: medium sized companies that want to come to market.
23:46
Speaker 3: Yeah, I think for me that is the concern with
23:50
Speaker 3: the level of concentration we're seeing in the allocation of
23:52
Speaker 3: capital on both geographic grounds and indeed on sector grounds.
23:56
Speaker 2: We have veered away from MMT, haven't we We have
23:59
Speaker 2: this podcast they quite work.
24:02
Speaker 3: How do we bring it back to m I think
24:04
Speaker 3: we bring it back to empty because the idea of
24:08
Speaker 3: a unconstrained money print money print is very, very attractive
24:16
Speaker 3: in kind of sound bite economics, little clips for Instagram
24:21
Speaker 3: or or for TikTok, But actually when you delve into
24:24
Speaker 3: the detail here, the risk is an allocation of capital,
24:32
Speaker 3: which we were talking about in terms of to large companies,
24:35
Speaker 3: private companies in the public and the private realm. Think
24:39
Speaker 3: about it in terms of the allocation of capital from
24:43
Speaker 3: the public sector. One of the things I think that
24:48
Speaker 3: the reasons why fiscal policy is and the bond market
24:53
Speaker 3: is a good check on governments is it makes them
24:56
Speaker 3: ask themselves a value for money question at the outset,
25:01
Speaker 3: is this a good use of money? Because at some point,
25:06
Speaker 3: whether it is taxes later or borrowing right now, taxpayers
25:10
Speaker 3: have to pay for this. There's no getting away from that.
25:13
Speaker 3: You can change the ordering, which is what MMT does,
25:16
Speaker 3: but ultimately, at some point that liability has to be covered.
25:19
Speaker 3: And I do think that disciplines of the bomb market
25:23
Speaker 3: mean that in spent the first twelve years of my
25:25
Speaker 3: career in Whitehall means the ministers ask themselves the question
25:29
Speaker 3: is that but maybe not enough, but cerately not enough.
25:33
Speaker 3: But is this, given the alternative ways in which not
25:38
Speaker 3: just we could spend it, but the private sector could
25:41
Speaker 3: spend it, households could spend it, businesses could spend it,
25:44
Speaker 3: is this the most efficient allocation of capital? And MMT
25:48
Speaker 3: for me, weakens that that if you like that discipline,
25:54
Speaker 3: which is really really good for allocative efficiency. Too little
25:59
Speaker 3: of a discussion is about the quality of public spending.
26:02
Speaker 3: Too much is about the quantum of public spending.
26:04
Speaker 2: Nicely brought back Simon.
26:06
Speaker 3: Thank you, We got there. It was just about didn't we.
26:08
Speaker 2: Yeah, Thank you so much for joining us today. That
26:10
Speaker 2: was an excellent explanation of something that I think is
26:13
Speaker 2: increasingly important. Thanks for listening to this week's Merin Doorg's Money.
26:25
Speaker 2: If you like our show, rate review, and subscribe wherever
26:28
Speaker 2: you listen to podcasts, and keep sending questions or comments
26:31
Speaker 2: to Merin Money at Bloomberg dot net. You can also
26:34
Speaker 2: follow me and John on Twitter or x I'm at
26:36
Speaker 2: Mariners w and John is John Underscore Stepic. Simon is
26:40
Speaker 2: very active on Twitter Simon, what's your.
26:42
Speaker 3: Handle French economics, Friench.
26:44
Speaker 2: Economics, So do follow him and listen to what he says, because.
26:46
Speaker 1: He's very good.
26:48
Speaker 2: This episode was hosted by me Maren Summerset where it
26:50
Speaker 2: was produced by Summersadi and Moses and sound designed by
26:53
Speaker 2: Blake Maples and Aaron Casper. And special thanks of course
26:55
Speaker 2: to Simon French