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hey everyone well welcome to episode 5 of the podcast i'm really excited about this episode i spent a lot of time on it and i think the topic is important and the message is very timely because if you haven't noticed our government has spent quite a bit of money in the last year and in addition to borrowing trillions of dollars the federal reserve has created out of thin air trillions of new dollars and we're about to pass another 1.9 trillion dollar spending package and to be clear there is no plan to pay for any of this now i'm sure you all have questions about this i know i do like how is this going to impact the future and what does this mean for my kids future and their kids future what does it mean for my investments and what about the risk of inflation so to get answers to these questions i read a book on something called modern monetary theory also known as mmt and the book takes a deep dive into the handful of economic levers that can be pulled by congress in the federal reserve and this book has helped me better understand the consequences of pulling on those levers and it helped me wrap my head around the seemingly ridiculous amount of money that our government is spending printing and borrowing and spoiler alert i'm pretty okay with it and i feel very optimistic about the future and i want to share some of that optimism with you and optimism is critical to successful investing if you invest in stocks you must have the belief that they'll go up in value you must be optimistic that companies will continue to find new ways to grow their revenues become more efficient with costs innovate and build new products and services and find new customers and if you're an investor in the stock market i hope you share this belief because optimism makes owning stocks a hell of a lot easier now what i'm trying to do with this podcast is figure out answers to the questions my clients are asking me and simplify some of the more complicated financial issues that we're facing sometimes this is going to be about taxes or investment strategies and sometimes it's going to be about government but don't confuse that with politics because they're two different things and this episode is about government we need to face the reality that government is playing a big role in our lives right now and i think we should seek to have a better understanding of the relationship our government has with our economy and i think this for reasons that go well beyond the scope of this podcast so let's dive into modern monetary theory and thank you in advance for joining the discussion here's a quick disclaimer i'm certified financial planner justin daring and this is the north country wealth management podcast where we discuss markets investing and the headlines that impact your finances this podcast is for informational purposes only and should not be considered as a recommendation to buy or sell any specific securities past performance is no guarantee of future results and all investing involves risk the views expressed are those of north country wealth management and did not necessarily reflect the views of mutual advisors llc or any of its affiliates investment advisory services are offered through mutual advisors llc doing business as north country wealth management and sec registered investment advisor you're listening to this it's likely you're a stock market investor and because you're an investor in this stock market it's very likely your net worth reached an all-time high this january and once again this february your stock portfolio surged last year your house increased in value you recently refinanced an interest rate that's less than three percent and if you have student loans they're an interest-free forbearance you have cash in the bank because you just haven't been spending that much money and just about every day you consume products and services from google apple amazon and netflix and whether you know it or not you own a bunch of stock in those companies it's very likely you're working from home at least some of the time and you might even wonder if you'll ever go back to the office along with the rest of us you've experienced 10 years worth of disruption inside of a year and you're starting to see your way past the pandemic and the future is looking pretty bright now this was largely the experience of the shareholder class over the last year and the shareholder class as a whole has done pretty well in spite of the pandemic if you're a business owner you got some pretty significant help from the government in the form of forgivable paycheck protection loans your stocks got a boost from the fiscal and monetary stimulus and if you own a house it not only went up in value it got cheaper to pay for the fda took the necessary steps to let pharmaceutical companies fast track a vaccine to market and they were more successful than anyone imagined with multiple highly effective vaccines being distributed to all reaches of the globe without question the government played an enormous role in the economic recovery and those of us who have assets it looks like we're going to come out of this thing stronger than ever now then there are those who are having a much different experience their stock portfolios didn't go up because they don't have stock portfolios and they didn't get the chance to refinance their houses at record low interest rates because they rent and they have credit card bills that are past due they have education debt that they'll never be able to pay back they have health care expenses that go up every year in medical bills that won't go away and their wages have been effectively the same since they started working and in some cases they've even gone backwards and every time the unexpected happens their financial problems compound they got help from the government too but it was crumbs just enough to get by and instead of their wealth compounding in the future looking bright their financial problems are compounding and when that debt snowball starts rolling down the hill it's a tough thing to stop when your income is stagnant now there are some people who say that these unfortunate souls should pull themselves up by their bootstraps and suck it up but that's a pretty hard thing to do when your income is going in the wrong direction and your expenses are going in the other direction and there are a few opportunities that allow you to better manage your misfortune the pandemic has amplified the problems that millions of americans were already facing before the pandemic and most of us understand that poverty begets poverty and even the most selfish person out there can admit that an increasing number of people who are impoverished is not a good thing for any of us and at some point the financial problems of others will become the financial problems of everyone i believe that this is why we have government to allocate resources to area of the economy where there is capacity and need for investment but where do we get the money where do we get the money to address these problems do we tax do we borrow do we print the answer is yes we likely do some combination of all these things but most importantly we invest we invest in our future and right now we have the opportunity to get a huge return on our investment and we hear big ideas from the far left of our political spectrum but these politicians can never quite finish the sentence there's no shortage of ideas out there some of which seem to be fine ideas ideas that would help a considerable amount of americans get back on track toward prosperity but the politicians who propose these ideas almost never say how they'll pay for these ideas and when they do get pressed they'll say well tax wall street or impose a wealth tax on the super wealthy and some versions of those taxes may be implemented at some point and perhaps they should but let's be clear a tax on these individuals would not come close to paying for the proposed ideas of the far left and if we perpetually borrow money to implement these ideas couldn't we go broke as i mentioned i recently read a book and i was moved by it i was moved by it because it convinced me that not only are these big ideas possible but implementing some of them may actually be the most fiscally responsible thing to do now stay with me here the book that discusses these ideas is called the deficit myth modern monetary theory in the people's economy written by economist stephanie kelton and this book has been getting a lot of attention in financial circles and rightly so given the government's recent spending spree and to summarize modern monetary theory in my own words mmt calls for more effective utilization of the awareness that a nation who is an issuer of its own currency can never run out of money and the way that we should be evaluating government spending should not be done through arbitrary self-imposed debt limits mmt says that we should base our debt limits on metrics other than these arbitrary rules of thumb surrounding deficit spending instead we should be focusing on full employment and deploying resources to areas of the economy that have spare capacity for investment areas of deficiency and ultimately inflation is the biggest risk that the government should be managing and it is the signal that the government is spending too much money there's a great quote in kelton's book that creates a helpful visual of this definition she writes that the us is like a six foot tall guy who wanders around perpetually hunched over in a house with eight-foot ceilings because someone has convinced him that if he tries to stand up tall he'll suffer massive head trauma we've been told for years that the u.s is going broke and that we're dependent on borrowing from china to finance our government but in spite of what nearly every politician says the u.s cannot go broke now to contrast this point the state of california just as an example could indeed go broke and so could whatever town you reside in states and municipalities are dependent on tax revenue to finance their governments the difference is that these entities are users of currency unlike the federal government which is an issuer of currency and there's nothing to stop the federal government from creating as much money as it needs here's david gregory quizzing fed chairman alan greenspan about this on meet the press in 2011. are u.s treasury bonds still safe to invest in very much so i think there's a this is not an issue of credit rating the united states can pay any debt it has because we can always print money to do that so there is zero probability of default now let me be clear mmt does not say that there aren't consequences to printing money or unchecked borrowing deficit spending it doesn't say that these things don't matter and i bring this up because many have the impression that mmt is this magical thing it's not it's not a panacea and it doesn't claim to be anything close to this mmt doesn't require any change to our monetary or fiscal system we already have the framework in place but mmt does say that we should change the approach to the way that we view government expenditures instead of obsessing over our national debt and placing arbitrary limits on what we spend we should focus our efforts exclusively on the areas of our economy that have spare capacity so mmt would make the case that at this moment there is spare capacity in our economy and we should be directing money to those areas that are most in need of investment now what do i mean by investing in areas that have spare capacity i'm going to get to this question but first let's take a look at how the government spends money that it doesn't have every year going back to 2001 the government has spent more money than it's taken in expenditures exceed revenues the amount the government spends in excess of those revenues represents the deficit and it is this deficit spending that pretty much happens every year that adds to our national debt now when we hear this it makes us feel uncomfortable because households don't operate this way at some point in time most of us desire to be debt free and as responsible heads of our household we would never entertain the idea of spending more than we bring in year after year after a year but the government does this pretty much every year and what does the government spend its money on let's take a look at the 2016 proposed 4.1 trillion dollar total spending budget and visualize a pie chart for a minute 76 percent of this pie is made up of three massive programs the biggest expenditure is social security and unemployment benefits which makes up 33 percent of our budget another 27 percent goes to medicare and health expenditures and the next 16 percent goes to the military the remaining 24 percent that the federal government spends goes to the following places in order of their magnitude first is interest payments that service the national debt it's essentially the mortgage payment which made up seven percent of the budget in 2016. four percent goes to veterans affairs three percent goes to food and agriculture another three percent of transportation two percent to housing and community a little less than two percent goes to education one percent goes to energy in the environment point eight percent goes to international affairs and in dead last science at point seven five percent now let's zoom in on the bottom of that list if you're looking at a pie chart you'd see that these are just slivers of the pie and based on their insignificance i don't think it's a stretch to say that these are the lowest priority items for our federal government and when you keep zooming in and dissecting the federal budget it's pretty easy to start getting agitated we start keeping score and becoming more aware of who pays into the system and who takes from the system we see waste we see inefficiencies and deficiencies and deficits and he starts seeing the issues that ruin your thanksgiving dinner the federal budget is big and ugly but this big ugly thing is pretty damn important and it's deserving of our scrutiny and skepticism and the idea of having leaders who aren't fiscally responsible is maddening and it should be you should be upset at acts of fiscal irresponsibility but fiscal responsibility does not mean spending as little money as possible or cutting taxes or reducing the deficit or balancing the budget fiscal responsibility considers use of all the financial tools and resources it has at its disposal imagine a financial planner who simply told you to spend less and save more or the cfo of a big company who held this myopic view this is level one thinking and we're better than that now let me provide you with an analogy that we can all relate to over the last 10 or 15 years light bulb technology has dramatically improved led lights last about 10 times as long as those old school edison bulbs and they consume about 75 percent less energy resulting in substantial savings over the life of the light bulb but to replace all the light bulbs in your house does require you to make an upfront investment and even if you finance this purchase on a credit card and only pay the minimum on it each month the purchase would have a tremendously favorable financial outcome on your household now in this example the outdated technology represented a deficiency in your economic household it represented a part of your household that had capacity for investment the decision to spend money on the upgrade was worth it even if you had to borrow money from american express our government faces similar decisions on a much grander scale they can choose to borrow money and invest in areas of deficiency areas that have the capacity for new investment but politicians would have you believe that when the government spends money they're putting those expenses on a credit card they're passing the problem along to future generations there's a lot of fear-mongering among politicians from both sides of the aisle they stoke fear when they talk about the national debt and i think many of them believe it's their duty to talk about the national debt in such cautious terms because when they say it it conveys to their constituency that they're being fiscally responsible and we wan to be reassured of this that our democratically elected representatives are being careful when managing our budget but as i demonstrated in my lightbulb example sometimes spending money is the most fiscally responsible act even if it requires the government to borrow money and to further make my point uncle sam isn't a household he doesn't borrow money at 16.9 apr from american express uncle sam isn't required to make principal payments on the money he borrows uncle sam doesn't need to plan for retirement or a day when his health doesn't allow him to work anymore uncle sam needs to continue to figure out ways to keep incentivizing businesses and people to do creative work that makes the world better and this requires investment and agreement on what we should invest in do you think china is considering cutting its spending on science and education you think they're looking to fossil fuels as a preferred way to deliver energy in the future do you think they'd be okay with their nation's health care expenditures making up 17 of their gdp would they be okay with crumbling infrastructure and tainted water supplies of course not and as the wealthiest nation on earth we shouldn't be okay with it either so how does uncle sam pull this off the answer is really simple it's money and there are a bunch of things out there that are short of money right now and they aren't going to be funded by the private sector and right now uncle sam can borrow money at a piddly 2 percent for 30 years and he only has to make interest payments on this until that 30 years is up the credit card analogy that our politicians often use is flawed and misleading and the analogy will probably continue to be used by politicians because it's really effective fear is an easy thing to sell and we all understand the danger of credit cards but our national debt is nothing like the debt of a household it is much more like a business although unlike a business our federal government can't go bankrupt now let's take a step back here you need to understand what government debt is and what it represents and why the public is willing to lend to our government you've all heard of treasuries and some of you might have even received savings bonds from your grandma for your birthday or for christmas when growing up grandma paid 25 bucks for a savings bond that would turn into 50 bucks if you simply waited until it matured that savings bond represented a loan of 25 dollars that your grandma gave to the government and the fifty dollars that you got paid after hanging on to it until its maturity date represented the government paying back the loan plus interest and that's essentially how the government borrows money it lets people trade their non-interest-bearing dollars in exchange for interest-bearing bonds just think about that for a second the government takes money out of the system by writing ious to people who don't want to spend their money and would rather park it in an interest-bearing investment that at any time they can sell for cash on the open market and they can turn that iou back into cash allowing them to spend freely and how is the government able to get so many people to lend them money well there's a lot of dollars out there and the ones that aren't being spent are often exchanged for instruments that pay interest and when you do this you're lending money to the government if you invest money with me a portion of your account sits in a money market fund this is essentially an ultra-short bond fund made up of short-term government bonds and if you're an investor i can almost guarantee that a portion of your money is invested in government bonds and think of all this money that's sitting in banks the federal reserve requires that a certain amount of bank deposits are kept in reserves in order to meet demands in the event of unexpected events such as unusually large withdrawals and banks are allowed to either keep those reserves in their vault or in an account held at the federal reserve and the federal reserve allows these banks to own treasuries instead of cash that is they're allowed to trade their non-interest bearing dollars in exchange for interest-bearing treasuries and the federal reserve allows foreign banks to do the same instead of demanding that foreign entities hold their reserves in cash they allow them to invest in treasuries and this is how china and japan have ended up owning so much of our debt these countries aren't generously lending us money they're simply trading their non-interest bearing dollars that we sent them for interest-bearing treasuries that's it i mentioned earlier in the podcast that inflation is the barometer that the government should use to evaluate their spending and that too much government spending especially in areas that don't have the capacity for investment can cause inflation now you're all aware of the 1.9 trillion dollar spending package that the government recently passed and no i'm not talking about the bill that will likely be passed this week that's related to the pandemic i'm talking about the spending bill passed by the trump administration in 2017. now you're probably under the impression that this was a tax cut and you're right it was a tax cut but you're not taking into account the other side of the ledger those tax cuts weren't paid for with new revenues or cuts in spending they were financed with new deficits the federal government borrowed money to pay for these tax cuts and that is government spending and what did the government spend that 1.9 trillion dollars on 1.3 trillion dollars went to corporations 83 billion went to wealthy families in the form of cuts to the estate tax and 435 billion went to tax cuts for the wealthiest one percent of americans the trump administration made a huge investment in the wealthy now the problem with this is that there wasn't a whole lot of spare capacity for investment among this group of people in other words they didn't really need the money so did this inefficient allocation of government dollars show up as inflation the answer is yes kind of the newfound cash in the pockets of the wealthy resulted in more dollars chasing the things that wealthy people consume we saw massive inflows into the stock market we saw record-level purchases of art and collectibles we saw a rise in the prices of luxury homes and massive purchases of speculative investments like bitcoin and venture capital and we saw the price of all these things rise considerably even though the improvement in fundamentals didn't necessarily align with their increase in price so no we didn't see the price of toothpaste or gasoline or bread go up because there weren't excessive dollars chasing these things but we did see the price of assets rise and this is known as acid inflation and the government spending certainly contributed the rise in price of these assets when the government spends money on people who actually need the money that money gets spent right away and those dollars find their way into the real economy and those dollars get spent over and over and over again and this is called the multiplier effect this multiplier effect is why some of the recent stimulus money has worked so well in keeping the economy afloat because when the government targets the people that actually need the money it reliably and predictably gets spent right away providing immediate help to those who spend the dollars and the businesses who receive those dollars and ultimately the overall economy wealthy people don't have the same propensity to spend money but they have a much higher propensity to invest their money taxation is one of the levers that our government can pull on and if we were in an environment where not enough money was flowing into capital markets a tax cut for the wealthy should absolutely be considered as a way to get money moving into markets but that is not the environment we're in there's an abundance of money floating around in capital markets at the moment i'm not here to tear apart the trump tax cuts there were some good things in there and there's certainly an argument that can be made for tax cuts on corporations but let's be honest about this significant tax cuts to corporations is a handout to the people who own those corporations and corporations are overwhelmingly owned by wealthy people and cutting estate taxes only helps wealthy people an honest assessment of the government spending by the trump administration would reveal that there was very little investment in the bottom ninety percent now let me be clear i'm not attacking the wealthy and i'm not attacking wealth wealth is a good thing it's a good thing for the world and i'd like to see more people get wealthy and i'd like to see fewer people living in poverty but handouts to the rich is probably not the best way to achieve this now a quick disclaimer i'm not an economist an mmt is a big topic and when it comes to big economic topics like this i don't even know what i don't know but to help improve my understanding of this i reached out to an actual economist justin hey art how are you good see i'm a little i'm a little confused are you calling me about dancing or economics economics art is the father of my good buddy andrew and before my wedding in 2008 art and his wife sherry who are accomplished ballroom dancers were kind enough to give my future wife and i a mini lesson in ballroom dancing but this time around i was more interested in talking to art about modern monetary theory for part of his 40-year career at the minneapolis federal reserve rolnick was the top research economist and advised the bank's president on monetary policy as a research economist he helped policymakers figure out how to best allocate government money an art is best known for his research and advocacy for investment in early childhood education his research has demonstrated that investments made in early childhood education is one of the best investments that our government can make what we ended up doing we converted it into an annual rate of return based on some 40 50 year studies to show how well they kids do as adults and how their kids do are the children of the children we got an 18 inflation-adjusted return well what about if you were to put that into a twin stadium [Laughter] art has argued against public funding of sports stadiums for years and has pushed back on taxpayer funding of the twin stadium in the viking stadium it does seem pretty backwards that sports stadiums get funding before our education system or infrastructure especially considering these are essentially handouts to billionaire owners who would find a way to fund these stadiums anyway and this is the critical point that mmt makes it's not that deficit spending is bad but what they're spending the money on sometimes is bad and rather than fund stadiums the government should be hyper focused on the areas of the economy that have a good rate of return and are in need of capital and usually these two go hand in hand in talking to art it's refreshing to be reminded that there are such dedicated smart people working in government who are non-partisan and not motivated by politics or re-election we're pretty much a bunch of academic nerds right and we we try to stay out of the political space as much as we can we usually do a pretty good job of that and we just say okay what's good for the economy right and we you know the discussion you and i are having this goes on all the time these kind of issues and so it's important for having to have the kind of discussions we're having it'd be great to have these discussions in in committees in in congress to have these these discussions how much can we should we borrow why should we borrow what should we spend on what's critical where's the return that's what i've been trying to do with the early ed stuff and i think people will appreciate that on both sides of the aisle so i have hope i'm i i because i do see here's an area where the two sides can come together on this type of these kind of discussions we're having and art's right these are the discussions that we should be having with one another and i think there's probably more consensus on what our values are than we realize the problem is that artificially imposed budgetary constraints get in the way of productivity and i also think that a lot of people believe that if we're helping those who are in need it means we need to take away from those who have plenty and that's not necessarily true our government's borrowing power is immense and there's no doubt that we should be having a conversation about how to more effectively harness this immense power it's quite easy to figure out the cost of borrowing trillions of dollars but rather than continuing to argue with one another about how deficits are scary let's have a conversation about the other deficits in our economy what are the costs of continuing to deliver subpar education to already disadvantaged communities what is the cost of perpetual poverty what is the cost of not fixing our aging infrastructure or entire communities losing access to clean drinking water what's the cost of entire cities being swallowed by rising oceans what's the cost of losing the middle class or civil war what's the cost of ignorance now to close out this episode i'm going to leave you with an outtake from one of the best things i've heard all year this is the making sense podcast with sam harris and in my show description i'm going to leave a link to the full episode i get a lot of inspiration from sam and i think he does an incredible job of addressing some really divisive topics but he approaches this from the center of the political spectrum and i think this is something we're all craving so here's the clip i hope you enjoy it and thank you so much for taking time to listen we really need careful principled intellectually honest people to help sort through the rubble now and begin building again and these are the types of people i'm eager to speak with on this podcast i realize all of this sounds a little gloomy but it seems important to acknowledge how fully things have unraveled over the last year of course on another level it's amazing that things work as well as they do and to even have the expectation that things will work and to be appalled when they don't is a testament to our progress we expect airplanes to not only take off and land safely but to serve decent coffee we have come a long way in 100 years 100 years from now if we don't annihilate ourselves in the meantime we will view everything i'm complaining about today it's just a few growing pains on the way to a glorious future i really want our children to inhabit that glorious future and it appears to be within reach so much of our suffering is obviously unnecessary so many of our losses are the result of spectacular own goals of course politics is the area where the worst of this happens again and again but the problem is much larger than politics ask yourself what are we doing here as a species for the most part we're creating and consuming culture the near-term goal should be pretty obvious we have to build a culture that is conducive to sanity we need a culture that is at minimum compatible with our long-term survival we have serious problems to solve infrastructure pandemic preparedness that would have been nice right climate change cyber security education wealth inequality our relationship with china wouldn't it be amazing to just get busy and sort this stuff out without all the animosity and conspiracy thinking and dogmatism and perverse incentives and everything else that makes sane policies and compromises impossible the issues are at once so complex and yet so simple and just consider our current moment through the lens of a single variable wealth inequality there are good faith debates to be had about how much inequality is too much but there really is no question that this is a problem that decent compassionate people or even merely self-interested people are now wise to worry about however rich and insulated you are if you don't think that you've lost something when the level of homelessness and crime soars in your city well then you've lost your mind honestly even a sociopath should be able to recognize hat his own selfishness is best fulfilled in a context where others are doing at least reasonably well where the sidewalks haven't come to resemble free fire zones or refugee camps i've been worrying about wealth inequality for at least a decade i wrote a few articles about it in the aftermath of the 2009 crash and it's been a recurring topic on the podcast and i worry about it from a place of not wanting to stigmatize wealth at all i think that people who are railing against the mere existence of billionaires are just confused about economics but everyone who is railing against increased social welfare in all its forms anyone for whom terms like inequality and redistribution have become radioactive is just confused about ethics what kind of world do we want to live in it seems to me there are pretty uncontroversial answers to this question we want to live in a world where people are incentivized to do creative work that makes the world better and better we want cures for terrifying diseases we want to be able to distribute vaccines faster than we are at present and we want a space program just for the fun of it and also to ensure that human life continues indefinitely if we discover there's a massive asteroid on a collision course with earth we want to be able to divert it and save our species and every other species we actually want to be that competent therefore we want to massively fund science and we need a rich civilization to do this we want a future of real prosperity and we are right to want that you can hear more from sam harris at sam harris.org and once again you can find the link to this full episode in the show description thanks again for listening you