Dear Hedgeye Nation,
It's not everyday you get to see two iconoclastic investors hashing it out on live TV.
But that's exactly what we delivered to viewers on HedgeyeTV today. Hedgeye CEO Keith McCullough went one-on-one with investor/bestselling author James Rickards to discuss key ideas in his new book, "The New Great Depression: Winners and Losers in a Post-Pandemic World".
More than your average wordsmith, Rickards is a renowned American economist, investment banker and lawyer with over 35 years of experience on Wall Street. Some of you may know him as Long-Term Capital Management's general counsel, and the principal negotiator in their $3.6 billion rescue by the Federal Reserve.
Watch as McCullough and Rickards give a risk management masterclass on the future of U.S. economic policy under the Biden administration, the rise of the New Great Depression, Gold investment strategies, and much more.
Rickards' perspective challenges the complacent "Old Wall" mindset.
And that's exactly what we do here at Hedgeye: we view the world through the lenses others aren't willing to. Just as Rickards says in the interview:
"You have to widen the aperture and get out of your little bubble."
Below we’ve transcribed key excerpts from the eye-opening conversation between Jim and Keith. Please enjoy the entire hour-long interview below.
McCullough: We’re going to have MMT; instead of CTRL + Print on just markets, we’re going to CTRL + Print jobs. We have Janet Yellen and C.C. Rouse, two labor economists, and we have the man in the tower hitting the print button. They quite literally want to print jobs. Janet Yellen’s speech when she was accepting her new position was all about having a job, living wages, etc.
The most important thing though, Jim, is they’re going to try to do it.
Rickards: First of all, you’re exactly right Keith. Janet Yellen is not just liberal labor economist, but what’s called a “Frequentist Statistician,” which means more data, more data, more data. She doesn’t understand what to do unless there’s a ton of data – she can’t deal with new problems because she’s waiting for more data.
All day Janet Yellen stares at the Phillips Curve – which is of course a flat line. Now I never remember a curve that was a straight line in geometry class. So she’s staring at a flat Phillips Curve saying “Okay here comes the inflation, any day now.” But she’s in the Treasury for a reason.
Kelton’s book is not only wrong, but scary.
One of the first thing MMT does is merge the Fed and the Treasury, essentially taking both of their balance sheets and merging them. They say that under no circumstances should borrowing capacity or interest rates be a constraint on spending.
So the whole idea that you spend what you have, or if you don’t have it you have to borrow it or tax it – no, turn it around – spend first, then figure out the rest of it. Just spend whatever it takes; and for every social need you can think of (and there’s a long list… education, health care, child care, etc.) just spend the money.
And if you have a deficit, too bad, just borrow the money. And if the bond market gets wonky, the Fed buys the bonds, prints the money, puts it on their balance sheet, and holds it to maturity - what’s the problem?
And when I first encountered this, I had to stop right there and say, “Well, what is the problem?” That is how it works, and you can do that – there is no legal constraint on the size of the Fed’s balance sheet (other than debt ceilings, which are always waived and rolled over), and there’s no constraint on the Treasury’s borrowing capacity. If the Chinese start dumping Treasuries, you call Jamie Dimon and say, “Jamie, buy some bonds, and if you don’t, I’ll put you out of business.” So there doesn’t appear to be a constraint.
If you believe the Treasury and the Fed should be merged – what better way to do that than to put the former head of the Fed as the Secretary of the Treasury?
This is a huge giveaway that Modern Monetary Theory is now the law of the land.
We have a $1 trillion per year baseline budget deficit; that was going into the pandemic. Congress put $3 trillion on top of that through the CARES Act and a few others – so now we’re up to $4 trillion for Fiscal Year 2020.
Now we’re in Fiscal 2021, and we just had about another Trillion that was done in the last days of the Trump administration. Now Biden is going to come in and do $2 trillion on top of that… We are talking $6 trillion on top of $2 trillion base line deficit – our Debt-to-GDP Ratio is already at 130%, and it’ll soon push 135%.
Who’s in that league? Lebanon, Greece, and Italy – that’s the club the United States is now in.
MMT says don’t worry because it’s all in Dollars, and we print Dollars, so we can never run out of money and can never go broke! I think that literally that is true – but it doesn’t mean that people want the Dollars or that it works.
Here’s the bottom line when it comes to MMT: there’s no legal or accounting boundary, that’s true. But, there’s a confidence boundary.
And it’s not visible; you don’t know you hit it till you hit it – and then things collapse.
People forget that in 1977, the United States issued Treasury notes denominated in Swiss Francs – they were called the ‘Carter Bonds.’ People said “we’ll take the credit but we don’t want the Dollars”. That’s how bad it was in the late 70s. And we could get back there very quickly.
I think it’s important for investors and asset allocators to understand that MMT is not a novelty or a fringe theory – it’s going to be the primary economic policy of the Biden administration.
Stephanie Kelton’s working behind the scenes, Janet Yellen’s the front person (who better than her – she can merge the Treasury and the Fed), Powell’s going to do what he’s told, and so will the big banks.
Here it comes, get ready.