The Fed Is Not Independent | Steve Hanke and Jimmy Connor
Summary
Monetary Policy Critique: The guest argues central banks abandoned the quantity theory of money, causing policy errors that drive inflation and asset cycles.
Money Supply & Inflation: Post-COVID U.S. money growth peaked near 26% YoY, leading with a lag to 9.1% CPI, followed by contraction and disinflation as policy tightened.
Neutrality of Money: Advocates for neutral monetary policy to minimize sectoral distortions and inequality, adding neutrality as a third policy goal alongside price stability and growth.
Inequality Dynamics: Non-neutral money inflated asset prices, disproportionately benefiting asset owners; billionaire wealth as a share of GDP rose significantly post-2020.
Policy Risks: Warns that politically driven rate cuts (e.g., a 300 bps cut) could push long-term yields higher, worsening government interest costs.
Fiscal-Monetary Link: Deficits are framed as deferred taxes; interest expense is now the second-largest U.S. budget item, burdening future taxpayers.
Global Comparisons: Switzerland is praised for disciplined money growth and low inflation, contrasted with Argentina and Venezuela where money mismanagement fuels high inflation.
Market Implications: Liquidity surges typically boost stocks, real estate, and hard assets; the guest emphasizes tracking broad money growth over stock-picking.
Transcript
[music] Steve, thank you very much for joining us today. I recently read your newest book, Making Money Work. So, I wanted to sit down with you and spend a few minutes just discussing some of the concepts in it. I want to start off by asking you, what was the motivation for writing this book? Well, the motivation uh was was ramping up for let's say 40 years or something like that and and the motivation really is a critique of the of the US Federal Reserve as well as other central banks like the Bank of Canada and the Bank of England and the European Central Bank and the and the the real motivation was that the central banks have basically thrown out the quantity theory of money that that that that changes in the money supply affect asset prices, real economic activity, and inflation. That's the quantity theory of money and and they they've basically thrown that out and and they they don't pay any attention to the money supply as a result of that. If you conclude that the money supply doesn't have any effect on anything, wh why why report a measurement of the money supply? So if you look at back in the 1980s for example when Paul Vulkar was a chairman of the of the Federal Reserve in the United States, he he he embraced the quantity theory of money and he concluded that the only way to fight the stagflation that we had at the time in the United States and kill inflation, which President Reagan gave him a license to to kill. Reagan said, "Do whatever you have to do to kill inflation." And he said, "Well, the way to do that is to squeeze the money supply and slow it down because the money supply being growing at a excessive rate is what's causing the inflation. So, as a result of that, everybody watched the money supply and it was printed in the newspapers. You could find it. every everybody waited with baited breath for the release of the new money supply numbers and now now you can't even find them. And the reason for that is that the the Fed and these other central banks don't pay any attention to it. They they don't embrace that theory. They they have another model and the model is a neocanesian macroeconomic model that they've had for about 30 years that that don't it doesn't include an aggregate measure for money. That's that's the nub of the motivation really is to to to modernize if you will the quantity theory of money and put it back in the picture. In other words, we're we're advancing things from where they were with Milton Freriedman and the Montorist. So, it's getting the Montorist back in the picture and in a in an updated and and modern way. So, I I think it's a it's it's a cutting edge book if if if this is what you're interested in, money and banking and and macroeconomics. I mean macroeconomics as far as I'm concerned it has two components. One one component is capital theory and that's that's another book that I was published just right ahead of the one that you've held up there making money work and and that was called capital interest and waiting. I co-authored that with Leland Jerger the great polymath Leland Joerger. So that's capital theory. And if you combine capital theory with the quantity theory of money, you got the whole macro picture. So, so those two books uh were really an attempt to modernize and uh refresh, shall we say, macroeconomics and and and in a in a way attack the neocanesian model of macroeconomics, which which I think has completely failed by the way. And Steve, just so we can provide a a visual for our viewers, can you just quantify the growth in the money supply precoid up until now just so we can see the correlation between the money supply and also the inflation that we are experiencing? Well, yeah, the the with CO that that remember the date there, the date line would be February of 2020. And and the the Federal Reserve as well as most of the other central banks, but the Federal Reserve led the charge and accelerated the money supply dramatically and and and the the growth rate based on the quantity theory of money. The money supply should be growing in the United States at about 6% per year. That's a rate consistent with hitting the Fed's 2% inflation target. If they want to hit the 2% inflation target, they have to leave the money supply growing at a pretty steady rate around 6% per year. And uh what happened after CO the the thing shot up. It was o over at one point peaked out at about 26% year-over-year growth rate. That's the highest growth rate we've ever experienced since the Fed was founded in 1913. And and as a result of that, then we had there there was about a a a 12 month lag. Then then the the the money supply peaks out in 2021. And then in 2022, by the middle of 2022, the inflation rate peaked out at 9.1%. And using the quantity theory of money, John Greenwood and I anticipated that it it would go up as high as 9%. Well, it went up to 9.1%. We were pretty close. So So that was that was on the upside. And then they they started squeezing monetary policy and tightening it up. And and then there was a contraction starting in about April of 2022 and until this past summer, the money supply actually was was contracting. So, the stock of money in the in the summer of this year was about where it was in April of 2022. Now, it's gone up just a little bit, but the money supply growth rate is still only growing at 4.8% in the United States. So, it's still tight. >> So, that's that's that's a roller coaster. Up and goes the money supply. Then up with a lag goes inflation. Down goes the money supply. And then with a lag, down goes inflation. >> And you mentioned that the Fed no longer looks at the money supply or believes in the quantity theory of money. Why? >> Well, that there I think two factors. One factor is that that all the young people in the research department at the Fed uh have been trained in graduate schools that that use neocanesian models. So they they don't study the qu they don't even study the quantity theory. If you're interested in macroeconomics, you learn all all these neocanesian models. And so so so their toolkit is is supplied with lousy tools basically. That's that's one problem. The other problem is the fact that the Democrats on the research staff at the Fed out outnumber the Republicans by a factor of 50 to one. So they're they're almost all Democrats. Now if in the United States enemy number one of any Democrat any red-blooded Democrat would be Milton Freriedman and Freriedman was a dean of the quantity. He was Mr. Montorist. He he was dominating this the scene because there was the the Keynesian revolution came and started with the publication of the general theory by John Maynard Kanes in 1936. if following that the Keynesians came in which aren't aren't really the same thing as canes but anyway they they they were motivated and inspired by the general theory and canes and they came in and they've developed all these models and so forth that was a Keynesian revolution and and then there was a counter re revolution where led by the monitorist and Milton Freriedman at the University of Chicago and and then Freriedman kind of faded away and and there was an another counterrevolution and that's the Neocanesians. So that's the the these models and and and what dominate the training of of e people professional people in economics has a big influence. If if you if you have a bunch of stuff in your toolkit, that's those are the tools you use. If that's what you're if that's what you're taught, that's what you you learn how to use, that that's what you use. So, we're we're we're we're Sukuri and I have done with making money work. We we've we've thrown out all all of all these neocanesian tools and and put something new in the toolbox and it's called making money work that book that you held up and and that is a a a modern souped up version of what what we used to call money and banking. You touched on Milton Freriedman and one of the overarching beliefs of Freriedman was for free markets and limited governments for the simple reason that free markets can allocate resources more efficiently than governments. But right now it looks like we're going through a time where the government is becoming more and more more involved in all aspects of our lives. How do you feel about that? >> Oh, there's there's no question about it. We we have just think about two things. The the the trade and tariff wars that were involved in now you're up in Canada. You know very well what that's all about because they been in this big flap with Trump and and uh now the prime the new prime minister as well as the old prime minister. But but any and so you've got international trade and and every day Trump is coming up with some new threat, some new tariff or or he's carving out exemptions from the tariff and micromanaging trade and so forth. That's one aspect. But the other aspects what's called industrial policy which which is a cousin really of the protectionist and tariff war international trade interventions. So all of it what's called interventionism. We we used to call it socialism but now we it's it's got a new you know a new suit of clothes and and it's it's called inter I call it interventionism. So you you've got the politicization of of everything everything going on in the economy now. It has the politicians fingerprints all all over everything. So So you know Milton Freriedman and free markets are out. Marks and socialism and interventionism are are in. Now they they a lot of the populists wouldn't call themselves Marxists, but if you look at the Communist Manifesto, which which I require all my students to read, it's it's a great document, by the way. It's it's a most well-written clear manifesto I've ever seen. And and that's why the thing has legs and it it still exists. You read the Communist Manifesto, it's very clear exactly what the game plan is. And and that is the game plan of President Trump, the the most powerful leader and most active leader in the world right now. Uh he he is he isn't in actually embraced the Communist Manifesto without even knowing it. I'm sure he's never read the damn thing. Milton Freriedman had some amazing quotes and one of my favorites is if you put the government in charge of the Sahara Desert in five years there would be a shortage of sand. >> Yeah, that's one of my favorites, too. I love that. Well, M Mil Mil Mil Milton not only was a great economist, one one of my mentors, by the way, uh, but he he had a he had a certain uh demeanor that was that was very agreeable. So, so that in other words, you you you just find it hard to not like the guy, you know, that that that was that was one factor. The other factor is is rhetoric and and he was a great student of rhetoric and and he wrote in in kind of a Hemingwayist type of you know simple short sentences you could understand what the guy was writing and and and if you heard him talk he he could he could come up with a good quip like the one you just annunciated a minute ago. So he was very effective. He he was a lot he was he was very competent, very likable and and had away with uh with with the rhetoric. He he could he could deliver a message. >> One of the principles that you put forth in the book is for the neutrality of monetary policy. Can you elaborate on this and what exactly do you mean? >> Okay. The historically there particularly the Austrian econom economist which I'm really part of the Austrian school of of economics laid a laid a great stress on the fact that money entering the system uh is is not neutral. It it affects different sectors of the economy in different ways and it affects different stages of production that that is early manufacturing ver versus the final polishing up and final production of a product. So in in different ways and it affects different income classes in different ways. So it's non-neutral and and and and and that creates a great deal of trouble with the pricing and allocation of resources. The the further you go away from neutrality, the more non-neutrality you have, the more it gums up the economy, screws up the economy, slows the economy down, reduces the potential growth rate in the economy. So, Suki and I have delved into this and and modernized it and and have empirical data and so forth. And sure enough, you find out that ch changes in money supply and and changes in monetary policy in general, that is changes in bank regulation, ch changes in the quantity of money being produced, all all these things affect neutrality. And the the best simple way to look at it is look at look at what happened with with COVID. We we had in January of 2020 before CO the month before CO hit billionaires wealth in the United States as a percent of GDP was 14.1% of GDP. Then you had this explosion in the money supply. The next thing, asset prices went up. And and what what do I mean by asset prices? The stock market boomed, real estate went up, land prices went up, all real all hard assets went up. Well, who who owns assets? Who who has balance sheets that are positive and own assets? Rich people do. And rich people became very rich after the explosion in the money supply in 2020 and 2021. And now today the billionaire's wealth is a percent of GDP. It's gone up from 14.1% in January of 2020 to 21.7%. uh billionaire's wealth as a percent of GDP is 21.7% now. So so this nonneutral policy has has actually uh created a tremendous amount of income inequality in the United States. Everybody all all especially all the lefties ring their hands about income inequality. you you you go to the the Liberal Party in Canada. You're up there in Canada, you know, and and uh I hope this I hope the snow isn't flying up there yet, but at any rate, the the liberals will ring their hands and whine about income inequality. Well, income inequality, the biggest contributor of income inequality is non-neutral money supply, is the central banks. But they they don't understand this. They they they they think somehow it's a the rich ripping off the poor. God only knows what slogan they might have. No, it's a fact that the central banks goose the money supply. And if you goose the money supply, asset prices go up and people who own assets benefit. They get a huge capital gain. So So that's the neutrality thing. You you want to design monetary policy and that means bank regulations and central bank policies in such a way that the money supply increasing is as neutral as you possibly can get it. It's it's not favoring one group or another group. It's not favoring one sector of the economy or another sector of the economy. it it's not s it's not favoring industries at the first early stages of producing a final product versus those who are finishing the final product at the end of the line. So that that's the whole idea of neutrality and as I say theoretically the Austrians have dealt with this uh in in great detail kind of a theoretical level what what Sukurk and I do and making money work. We we we have empirical data and get down to where the rubber meets the road and and apply the idea. It first you have to ask the question well is monetary policy neutral or non-neutral? Well, it's non-neutral and we show that and I've just given you a huge example of that with the income distribution in the United States. But we we go through the thing in quite some detail and and so monetary policy for us is is a little different than the goals now for monetary policy are for what? Price stability and stable growth in the economy. Okay, we have that as goals, price stability and stable growth. But three, we add a third goal and that is neutral money. So monetary policy should be focused on price stability, real economic growth stability and neutrality. >> I was going to ask you if you were rewriting the rules of monetary policy, what would be the first rule? you just mentioned that neutrality would be a very important one. Um to your point also about the billionaires, I recently read an article which said back in 2015 in the US there was 500 billionaires. 10 years later there's 2500 billionaires. Just in the ski town of Aspen there's 100 billionaires. Can you believe that? >> Yeah. Well, you know when I when I was growing up it was a big deal to be a become a millionaire. We used to talk about millionaires, not billionaires. But no, I No, I can I can believe it. I can believe it. and and and we can go back to the US Federal Reserve, the central bank and say that that is one of the main causal factors, the monetary policy is one of the major co causal factors of that explosion in the number of billionaires a and the chunk of wealth that they hold in proportion to the size of the US economy. And you mentioned that the US has totally failed on monetary policy or the quantity or embracing the quantity theory of money. Is there one country that comes close to making money right or making money work? >> Oh, the Swiss are pretty good. I I would say just off the top of my head, the Swiss are pretty good. they they they they they tend to keep the quantity of money growing uh in in Hanky's golden growth rate range, a range consistent with the Swiss inflation target, which by the way, the the low end of their target is zero. And and they're they're pretty close. There's there's essentially there's very little inflation in Switzerland. >> Maybe we should move there. Well, that was not a bad idea. I've I've thought I've thought about that a few times. Either that or Likenstein is not bad, too. And and they use the Swiss Frank, by the way. They they they are essentially what we call dollarized. Likenstein does not issue have a central bank. It doesn't issue its own currency. It it uses the Swiss Frank. I want to ask you about the the Fed and Fed independence. The president has been very vocal about the Fed lowering interest rates and Jay Powell J. Powell's term in 2026. Supposedly, he's going to be replaced by somebody who's less hawkish or less restrictive. How do you feel about the Fed losing its independence? And how do you feel about monetary policy being controlled by the White House? Well, number number one, it's a fiction that the Fed is is independent. I mean, in in in certain in in in kind of, shall we say, legalistic ways, if you're a lawyer, which most people in Washington DC are lawyers, of course, then then you say, well, yeah, it it has a great deal of independence. The Fed does from from from an a very narrow legalistic point of view. De facto, that's that's not true. the the Fed never really has been independent and and the White House among other institutions has has an influence on it. Now, now when when I was on President Reagan's Council of Economic Advisors, as I indicated before, Reagan basically gave uh Vulkar a blank check and said, "You know, Paul, you you you figure out how to kill inflation and just go do it. I I'm not going to bother you. And and he basically didn't, by the way, that that during that period of of Reagan's uh particularly Reagan's first term, remember, Vulkar actually squeezed the the monetary policy and tightened it to too much. And and and actually we had two recessions in in Reagan's first term. We had two recessions in a four-year period. and and Reagan, of course, he he didn't really like it, but he he never got on Vulkar's case about the thing at all because inflation was coming down. So I No, you so so that's that sets the table. Now the the the next thing you ask, you said, "Well, what do you think about the White House getting directly involved?" And I overtly and directly involved as Trump does is as as far as I'm concerned and not not very helpful, let's put it that way. A and his ideas, by the way, are just off the top of his head. uh wanting to lower the Fed funds interest rate, the overnight interest rate that the Federal Reserve charges uh by 300 basis points, three percentage points. It would be the stupidest thing I I've ever heard of because that that would lower those Fed funds rates. That's an overnight rate. But what would happen the long the longer duration rates on the yield curve would end up going up. So it it would be counterproductive because long rates would go up if if they reduced the short rates by 3 percentage points and that means that the interest on government debt actually would go up to to roll over the government debt would go up. And now by the way interest on the debt now with all these deficits that we've run and the debt we've accumulated now the the second item on on the line items in the federal budget. The first big expenditure is social security and then number two now is interest. Now what what is the interest? By the way this is an interesting aspect. and and and we do talk about this in making money work that you you have to look at the fiscal policy and integrate that with the monetary policy, but deficits once you run them, they're they're just deferred taxes. Pe people say, "Oh, you don't have to pay the the debt back and so forth." That's nonsense. interest being paid is the tax that's deferred by running the deficit and running up the debt in the first place. Why are you paying interest? You're paying interest on the debts that you've accumulated in the past. So today we're we're being taxed today for payment and servicing of the deficits and debts that we ran in prior years. So so the the the the debt always carries a burden with it but but the burden isn't something that comes up today when the deficit is occurring today. It it comes in the future when when the poor future taxpayer who who might not even be alive at the time you run the deficit in the first place is stuck paying the bill. I it's it's it's it's equivalent to buy now pay later kind of plan. So far, our discussion has been focused on the US economy, but uh I'm reading a lot about Argentina that's been in the news lately. Uh they just did a $20 billion uh currency swap with the US. Uh Venezuela is also going through some uh I guess you could call it hyperinflation. What are these uh economies or governments or central banks not doing that they should be doing and how can they benefit from some of the concepts that you've put forth in your book? >> Well, if they were following the rules in the book, they would number one Argentina the the the peso wouldn't be the problem that that it is right now. Point number one. And point number two, uh, Venezuela has the highest inflation rate in the world right now. And that that wouldn't be that that wouldn't be a problem. I mean, again, it it's all about the money supply. Inflation is always and everywhere a monetary phenomena. And and and I've looked at all over the world. There's never been a significant inflation, an inflation that over 4% per year lasting more than two years that that wasn't preceded by a significant increase in the money supply. So, it's just that simple. >> Steve, as we wrap up, what's the one big takeaway you want people to learn from your book? I think the big takeaway is start if you're interested in macroeconomics and and the course of the economy where it's going there's only one reliable model and that's the quantity theory of money and and we present that quantity theory of money uh and and and and if you are looking at the quantity theory of money you've got to be able to measure the quantity correctly. We get into the measurement and and the fact that most central banks don't even measure it the right way and then we also talk about the fact that uh you know basically money dominates and you got to make certain that it's neutral. It's not it's not favoring one one group one sector of the economy or another. Well, Steve, I want to thank you very much for spending time with us today and sharing your thoughts on making money work. I would highly recommend this book to anyone who wants to understand the importance of money within our economic system and how the growth of money supply is highly correlated with inflation. Steve, once again, thank you. >> Thank you, Jeremy. Great to be with you. >> [music]
The Fed Is Not Independent | Steve Hanke and Jimmy Connor
Summary
Transcript
[music] Steve, thank you very much for joining us today. I recently read your newest book, Making Money Work. So, I wanted to sit down with you and spend a few minutes just discussing some of the concepts in it. I want to start off by asking you, what was the motivation for writing this book? Well, the motivation uh was was ramping up for let's say 40 years or something like that and and the motivation really is a critique of the of the US Federal Reserve as well as other central banks like the Bank of Canada and the Bank of England and the European Central Bank and the and the the real motivation was that the central banks have basically thrown out the quantity theory of money that that that that changes in the money supply affect asset prices, real economic activity, and inflation. That's the quantity theory of money and and they they've basically thrown that out and and they they don't pay any attention to the money supply as a result of that. If you conclude that the money supply doesn't have any effect on anything, wh why why report a measurement of the money supply? So if you look at back in the 1980s for example when Paul Vulkar was a chairman of the of the Federal Reserve in the United States, he he he embraced the quantity theory of money and he concluded that the only way to fight the stagflation that we had at the time in the United States and kill inflation, which President Reagan gave him a license to to kill. Reagan said, "Do whatever you have to do to kill inflation." And he said, "Well, the way to do that is to squeeze the money supply and slow it down because the money supply being growing at a excessive rate is what's causing the inflation. So, as a result of that, everybody watched the money supply and it was printed in the newspapers. You could find it. every everybody waited with baited breath for the release of the new money supply numbers and now now you can't even find them. And the reason for that is that the the Fed and these other central banks don't pay any attention to it. They they don't embrace that theory. They they have another model and the model is a neocanesian macroeconomic model that they've had for about 30 years that that don't it doesn't include an aggregate measure for money. That's that's the nub of the motivation really is to to to modernize if you will the quantity theory of money and put it back in the picture. In other words, we're we're advancing things from where they were with Milton Freriedman and the Montorist. So, it's getting the Montorist back in the picture and in a in an updated and and modern way. So, I I think it's a it's it's a cutting edge book if if if this is what you're interested in, money and banking and and macroeconomics. I mean macroeconomics as far as I'm concerned it has two components. One one component is capital theory and that's that's another book that I was published just right ahead of the one that you've held up there making money work and and that was called capital interest and waiting. I co-authored that with Leland Jerger the great polymath Leland Joerger. So that's capital theory. And if you combine capital theory with the quantity theory of money, you got the whole macro picture. So, so those two books uh were really an attempt to modernize and uh refresh, shall we say, macroeconomics and and and in a in a way attack the neocanesian model of macroeconomics, which which I think has completely failed by the way. And Steve, just so we can provide a a visual for our viewers, can you just quantify the growth in the money supply precoid up until now just so we can see the correlation between the money supply and also the inflation that we are experiencing? Well, yeah, the the with CO that that remember the date there, the date line would be February of 2020. And and the the Federal Reserve as well as most of the other central banks, but the Federal Reserve led the charge and accelerated the money supply dramatically and and and the the growth rate based on the quantity theory of money. The money supply should be growing in the United States at about 6% per year. That's a rate consistent with hitting the Fed's 2% inflation target. If they want to hit the 2% inflation target, they have to leave the money supply growing at a pretty steady rate around 6% per year. And uh what happened after CO the the thing shot up. It was o over at one point peaked out at about 26% year-over-year growth rate. That's the highest growth rate we've ever experienced since the Fed was founded in 1913. And and as a result of that, then we had there there was about a a a 12 month lag. Then then the the the money supply peaks out in 2021. And then in 2022, by the middle of 2022, the inflation rate peaked out at 9.1%. And using the quantity theory of money, John Greenwood and I anticipated that it it would go up as high as 9%. Well, it went up to 9.1%. We were pretty close. So So that was that was on the upside. And then they they started squeezing monetary policy and tightening it up. And and then there was a contraction starting in about April of 2022 and until this past summer, the money supply actually was was contracting. So, the stock of money in the in the summer of this year was about where it was in April of 2022. Now, it's gone up just a little bit, but the money supply growth rate is still only growing at 4.8% in the United States. So, it's still tight. >> So, that's that's that's a roller coaster. Up and goes the money supply. Then up with a lag goes inflation. Down goes the money supply. And then with a lag, down goes inflation. >> And you mentioned that the Fed no longer looks at the money supply or believes in the quantity theory of money. Why? >> Well, that there I think two factors. One factor is that that all the young people in the research department at the Fed uh have been trained in graduate schools that that use neocanesian models. So they they don't study the qu they don't even study the quantity theory. If you're interested in macroeconomics, you learn all all these neocanesian models. And so so so their toolkit is is supplied with lousy tools basically. That's that's one problem. The other problem is the fact that the Democrats on the research staff at the Fed out outnumber the Republicans by a factor of 50 to one. So they're they're almost all Democrats. Now if in the United States enemy number one of any Democrat any red-blooded Democrat would be Milton Freriedman and Freriedman was a dean of the quantity. He was Mr. Montorist. He he was dominating this the scene because there was the the Keynesian revolution came and started with the publication of the general theory by John Maynard Kanes in 1936. if following that the Keynesians came in which aren't aren't really the same thing as canes but anyway they they they were motivated and inspired by the general theory and canes and they came in and they've developed all these models and so forth that was a Keynesian revolution and and then there was a counter re revolution where led by the monitorist and Milton Freriedman at the University of Chicago and and then Freriedman kind of faded away and and there was an another counterrevolution and that's the Neocanesians. So that's the the these models and and and what dominate the training of of e people professional people in economics has a big influence. If if you if you have a bunch of stuff in your toolkit, that's those are the tools you use. If that's what you're if that's what you're taught, that's what you you learn how to use, that that's what you use. So, we're we're we're we're Sukuri and I have done with making money work. We we've we've thrown out all all of all these neocanesian tools and and put something new in the toolbox and it's called making money work that book that you held up and and that is a a a modern souped up version of what what we used to call money and banking. You touched on Milton Freriedman and one of the overarching beliefs of Freriedman was for free markets and limited governments for the simple reason that free markets can allocate resources more efficiently than governments. But right now it looks like we're going through a time where the government is becoming more and more more involved in all aspects of our lives. How do you feel about that? >> Oh, there's there's no question about it. We we have just think about two things. The the the trade and tariff wars that were involved in now you're up in Canada. You know very well what that's all about because they been in this big flap with Trump and and uh now the prime the new prime minister as well as the old prime minister. But but any and so you've got international trade and and every day Trump is coming up with some new threat, some new tariff or or he's carving out exemptions from the tariff and micromanaging trade and so forth. That's one aspect. But the other aspects what's called industrial policy which which is a cousin really of the protectionist and tariff war international trade interventions. So all of it what's called interventionism. We we used to call it socialism but now we it's it's got a new you know a new suit of clothes and and it's it's called inter I call it interventionism. So you you've got the politicization of of everything everything going on in the economy now. It has the politicians fingerprints all all over everything. So So you know Milton Freriedman and free markets are out. Marks and socialism and interventionism are are in. Now they they a lot of the populists wouldn't call themselves Marxists, but if you look at the Communist Manifesto, which which I require all my students to read, it's it's a great document, by the way. It's it's a most well-written clear manifesto I've ever seen. And and that's why the thing has legs and it it still exists. You read the Communist Manifesto, it's very clear exactly what the game plan is. And and that is the game plan of President Trump, the the most powerful leader and most active leader in the world right now. Uh he he is he isn't in actually embraced the Communist Manifesto without even knowing it. I'm sure he's never read the damn thing. Milton Freriedman had some amazing quotes and one of my favorites is if you put the government in charge of the Sahara Desert in five years there would be a shortage of sand. >> Yeah, that's one of my favorites, too. I love that. Well, M Mil Mil Mil Milton not only was a great economist, one one of my mentors, by the way, uh, but he he had a he had a certain uh demeanor that was that was very agreeable. So, so that in other words, you you you just find it hard to not like the guy, you know, that that that was that was one factor. The other factor is is rhetoric and and he was a great student of rhetoric and and he wrote in in kind of a Hemingwayist type of you know simple short sentences you could understand what the guy was writing and and and if you heard him talk he he could he could come up with a good quip like the one you just annunciated a minute ago. So he was very effective. He he was a lot he was he was very competent, very likable and and had away with uh with with the rhetoric. He he could he could deliver a message. >> One of the principles that you put forth in the book is for the neutrality of monetary policy. Can you elaborate on this and what exactly do you mean? >> Okay. The historically there particularly the Austrian econom economist which I'm really part of the Austrian school of of economics laid a laid a great stress on the fact that money entering the system uh is is not neutral. It it affects different sectors of the economy in different ways and it affects different stages of production that that is early manufacturing ver versus the final polishing up and final production of a product. So in in different ways and it affects different income classes in different ways. So it's non-neutral and and and and and that creates a great deal of trouble with the pricing and allocation of resources. The the further you go away from neutrality, the more non-neutrality you have, the more it gums up the economy, screws up the economy, slows the economy down, reduces the potential growth rate in the economy. So, Suki and I have delved into this and and modernized it and and have empirical data and so forth. And sure enough, you find out that ch changes in money supply and and changes in monetary policy in general, that is changes in bank regulation, ch changes in the quantity of money being produced, all all these things affect neutrality. And the the best simple way to look at it is look at look at what happened with with COVID. We we had in January of 2020 before CO the month before CO hit billionaires wealth in the United States as a percent of GDP was 14.1% of GDP. Then you had this explosion in the money supply. The next thing, asset prices went up. And and what what do I mean by asset prices? The stock market boomed, real estate went up, land prices went up, all real all hard assets went up. Well, who who owns assets? Who who has balance sheets that are positive and own assets? Rich people do. And rich people became very rich after the explosion in the money supply in 2020 and 2021. And now today the billionaire's wealth is a percent of GDP. It's gone up from 14.1% in January of 2020 to 21.7%. uh billionaire's wealth as a percent of GDP is 21.7% now. So so this nonneutral policy has has actually uh created a tremendous amount of income inequality in the United States. Everybody all all especially all the lefties ring their hands about income inequality. you you you go to the the Liberal Party in Canada. You're up there in Canada, you know, and and uh I hope this I hope the snow isn't flying up there yet, but at any rate, the the liberals will ring their hands and whine about income inequality. Well, income inequality, the biggest contributor of income inequality is non-neutral money supply, is the central banks. But they they don't understand this. They they they they think somehow it's a the rich ripping off the poor. God only knows what slogan they might have. No, it's a fact that the central banks goose the money supply. And if you goose the money supply, asset prices go up and people who own assets benefit. They get a huge capital gain. So So that's the neutrality thing. You you want to design monetary policy and that means bank regulations and central bank policies in such a way that the money supply increasing is as neutral as you possibly can get it. It's it's not favoring one group or another group. It's not favoring one sector of the economy or another sector of the economy. it it's not s it's not favoring industries at the first early stages of producing a final product versus those who are finishing the final product at the end of the line. So that that's the whole idea of neutrality and as I say theoretically the Austrians have dealt with this uh in in great detail kind of a theoretical level what what Sukurk and I do and making money work. We we we have empirical data and get down to where the rubber meets the road and and apply the idea. It first you have to ask the question well is monetary policy neutral or non-neutral? Well, it's non-neutral and we show that and I've just given you a huge example of that with the income distribution in the United States. But we we go through the thing in quite some detail and and so monetary policy for us is is a little different than the goals now for monetary policy are for what? Price stability and stable growth in the economy. Okay, we have that as goals, price stability and stable growth. But three, we add a third goal and that is neutral money. So monetary policy should be focused on price stability, real economic growth stability and neutrality. >> I was going to ask you if you were rewriting the rules of monetary policy, what would be the first rule? you just mentioned that neutrality would be a very important one. Um to your point also about the billionaires, I recently read an article which said back in 2015 in the US there was 500 billionaires. 10 years later there's 2500 billionaires. Just in the ski town of Aspen there's 100 billionaires. Can you believe that? >> Yeah. Well, you know when I when I was growing up it was a big deal to be a become a millionaire. We used to talk about millionaires, not billionaires. But no, I No, I can I can believe it. I can believe it. and and and we can go back to the US Federal Reserve, the central bank and say that that is one of the main causal factors, the monetary policy is one of the major co causal factors of that explosion in the number of billionaires a and the chunk of wealth that they hold in proportion to the size of the US economy. And you mentioned that the US has totally failed on monetary policy or the quantity or embracing the quantity theory of money. Is there one country that comes close to making money right or making money work? >> Oh, the Swiss are pretty good. I I would say just off the top of my head, the Swiss are pretty good. they they they they they tend to keep the quantity of money growing uh in in Hanky's golden growth rate range, a range consistent with the Swiss inflation target, which by the way, the the low end of their target is zero. And and they're they're pretty close. There's there's essentially there's very little inflation in Switzerland. >> Maybe we should move there. Well, that was not a bad idea. I've I've thought I've thought about that a few times. Either that or Likenstein is not bad, too. And and they use the Swiss Frank, by the way. They they they are essentially what we call dollarized. Likenstein does not issue have a central bank. It doesn't issue its own currency. It it uses the Swiss Frank. I want to ask you about the the Fed and Fed independence. The president has been very vocal about the Fed lowering interest rates and Jay Powell J. Powell's term in 2026. Supposedly, he's going to be replaced by somebody who's less hawkish or less restrictive. How do you feel about the Fed losing its independence? And how do you feel about monetary policy being controlled by the White House? Well, number number one, it's a fiction that the Fed is is independent. I mean, in in in certain in in in kind of, shall we say, legalistic ways, if you're a lawyer, which most people in Washington DC are lawyers, of course, then then you say, well, yeah, it it has a great deal of independence. The Fed does from from from an a very narrow legalistic point of view. De facto, that's that's not true. the the Fed never really has been independent and and the White House among other institutions has has an influence on it. Now, now when when I was on President Reagan's Council of Economic Advisors, as I indicated before, Reagan basically gave uh Vulkar a blank check and said, "You know, Paul, you you you figure out how to kill inflation and just go do it. I I'm not going to bother you. And and he basically didn't, by the way, that that during that period of of Reagan's uh particularly Reagan's first term, remember, Vulkar actually squeezed the the monetary policy and tightened it to too much. And and and actually we had two recessions in in Reagan's first term. We had two recessions in a four-year period. and and Reagan, of course, he he didn't really like it, but he he never got on Vulkar's case about the thing at all because inflation was coming down. So I No, you so so that's that sets the table. Now the the the next thing you ask, you said, "Well, what do you think about the White House getting directly involved?" And I overtly and directly involved as Trump does is as as far as I'm concerned and not not very helpful, let's put it that way. A and his ideas, by the way, are just off the top of his head. uh wanting to lower the Fed funds interest rate, the overnight interest rate that the Federal Reserve charges uh by 300 basis points, three percentage points. It would be the stupidest thing I I've ever heard of because that that would lower those Fed funds rates. That's an overnight rate. But what would happen the long the longer duration rates on the yield curve would end up going up. So it it would be counterproductive because long rates would go up if if they reduced the short rates by 3 percentage points and that means that the interest on government debt actually would go up to to roll over the government debt would go up. And now by the way interest on the debt now with all these deficits that we've run and the debt we've accumulated now the the second item on on the line items in the federal budget. The first big expenditure is social security and then number two now is interest. Now what what is the interest? By the way this is an interesting aspect. and and and we do talk about this in making money work that you you have to look at the fiscal policy and integrate that with the monetary policy, but deficits once you run them, they're they're just deferred taxes. Pe people say, "Oh, you don't have to pay the the debt back and so forth." That's nonsense. interest being paid is the tax that's deferred by running the deficit and running up the debt in the first place. Why are you paying interest? You're paying interest on the debts that you've accumulated in the past. So today we're we're being taxed today for payment and servicing of the deficits and debts that we ran in prior years. So so the the the the debt always carries a burden with it but but the burden isn't something that comes up today when the deficit is occurring today. It it comes in the future when when the poor future taxpayer who who might not even be alive at the time you run the deficit in the first place is stuck paying the bill. I it's it's it's it's equivalent to buy now pay later kind of plan. So far, our discussion has been focused on the US economy, but uh I'm reading a lot about Argentina that's been in the news lately. Uh they just did a $20 billion uh currency swap with the US. Uh Venezuela is also going through some uh I guess you could call it hyperinflation. What are these uh economies or governments or central banks not doing that they should be doing and how can they benefit from some of the concepts that you've put forth in your book? >> Well, if they were following the rules in the book, they would number one Argentina the the the peso wouldn't be the problem that that it is right now. Point number one. And point number two, uh, Venezuela has the highest inflation rate in the world right now. And that that wouldn't be that that wouldn't be a problem. I mean, again, it it's all about the money supply. Inflation is always and everywhere a monetary phenomena. And and and I've looked at all over the world. There's never been a significant inflation, an inflation that over 4% per year lasting more than two years that that wasn't preceded by a significant increase in the money supply. So, it's just that simple. >> Steve, as we wrap up, what's the one big takeaway you want people to learn from your book? I think the big takeaway is start if you're interested in macroeconomics and and the course of the economy where it's going there's only one reliable model and that's the quantity theory of money and and we present that quantity theory of money uh and and and and if you are looking at the quantity theory of money you've got to be able to measure the quantity correctly. We get into the measurement and and the fact that most central banks don't even measure it the right way and then we also talk about the fact that uh you know basically money dominates and you got to make certain that it's neutral. It's not it's not favoring one one group one sector of the economy or another. Well, Steve, I want to thank you very much for spending time with us today and sharing your thoughts on making money work. I would highly recommend this book to anyone who wants to understand the importance of money within our economic system and how the growth of money supply is highly correlated with inflation. Steve, once again, thank you. >> Thank you, Jeremy. Great to be with you. >> [music]