Home Politics How Does The Government Create Money Out of Thin Air? – Cullen Roche on the Fed’s Core Function

How Does The Government Create Money Out of Thin Air? – Cullen Roche on the Fed’s Core Function

by Icosuccess

Anthony Pompliano 0:00
I want to talk about a couple of very extreme examples, right, and I’ll start kind of on two different ends of the spectrum. There’s a lot of people that would say, Great, the federal government can print as much money as they want, they should do that. They’re kind of centrally planned type of economy, print as much as you need, spend it how you see fit, and help us be economically stable.

But if you can print your own money, why do I pay taxes, right as kind of like, remove one side of the balance sheet, if you will, or your p&l? And on the other side, just like go at it. I’m assuming that you disagree one with that, and also to it’s the long term effect, but just kind of how do you think about that extreme argument? And then we’ll flip around and talk about the other side of it.

Cullen Roche 0:49
Yeah, so this is like one of the big pieces of like the mmt narrative that I think is very, very wrong. This idea that they they like to claim the taxes, don’t fund spending. Because the government has a printing press that they they don’t need underlying revenue sources. And I just think they’re kind of playing war games with a lot of this. I think the the tax revenue that a government generates is a function of its output, okay? And any underlying economy needs output in order to have viable money.

The only reason people want money is because they really want the stuff that they can get with money, they don’t really want the money, they really want the stuff that money gives them access to, and so you need the stuff to make the money valuable. You can’t that it’s putting the cart before the horse to get that backwards. And so in terms of the government and its tax revenues, the government needs tax revenues because it needs underlying output that generates the income that makes everything valuable.

So It’s like, you know, I like to think of the government basically like a big bank, the the government can create money from thin air just like a regular bank can. But the the bank needs underlying assets and income in order to be viable. Otherwise nobody would trust that bank, the bank would have no creditors. And the government is really similar in that the government needs to have underlying resources and income to some degree, that make everything viable, that makes everything work and supports the underlying credit issuance, because that’s what the government really does.

The government is just a big issuer of credit. And the essential aspect of credit is that people need to some degree believe that that credit is valuable in the long term, otherwise, there’s no reason for them to want to hold it in when you have an economy that starts to produce last year. Or just over time starts to sort of stagnate and doesn’t have the underlying productive resources, the credit system becomes inherently less valuable to the people who are using it. And you what happens is you get a lower demand for money, which results in an increase in the rate of inflation.

Anthony Pompliano 3:22
So we then flip to the other side, there’s a bunch of people who would argue the government is full of people who have no clue what they’re doing. And they should allow the free market to reign, don’t step in, don’t intervene, let boom and bust cycles occur, and your intervention is actually causing bigger problems. Yeah. And so quantitative easing is not needed and kind of all of the other programs How do you think through that argument?

Cullen Roche 3:53
I there’s some truth to that. And it’s probably there’s probably too many generalizations like going back to the earlier example of why the why the Fed is a thing. capitalist economies with private banking systems are for the most part over the course of an entire business cycle very efficient. I mean, banks are much, much better issuers of credit, and they have to compete, and they have to be, you know, diligent about how they issue money because it has to be profitable in the long run, and they have, you know, constraints that they have to be able to meet.

And so private banks are, for the most part, very, very good things because they, they’re kind of they oversee the credit issue, it’s in the economy in a competitive manner, in a way that the government doesn’t, or would not do if the government was running the whole banking system. The problem with private banking is that during periods like 2008, or you know, the thing that really kicked off the Fed Creation, the Panic of 1907 when the whole banking system crashed, and the interbank system really crashed, the clearing houses crashed.

And that created this big knock on effect that created a great big depression, basically, because again, the banks were scared of each other and it had all these knock on effects that were were super negative. And that that just doesn’t make any sense. So So banks in these very, like acute situations are bad at operating a banking system, basically, and it doesn’t make sense to out that banking system to exacerbate everything into a depression, just because they get scared of each other.

So the feds core operational exists reason for existing to me makes a lot of sense that in a period like 2008, the Fed did basically its core job really well all the tangential stuff, the the changing interest rates and the QE stuff. That was all tangential to the fact that they actually kept the banking system really liquid. So they made sure that you mean your business didn’t fail, because JP Morgan and bank of america couldn’t clear a payment. So that core function is really essential.

And I think that the government has, you know, a lot of very operations that it does well, because capitalists aren’t willing to do everything all the time, like we’re not capitalists aren’t willing to necessarily put out fires because putting out fires isn’t very profitable. It’s hard to make money, you know, putting your employees at risk in that way and getting people to collectively pay insurance to pay for a fire department and stuff like that. Your war is the same sort of thing. A war has an inherently negative net present value because it it’s expensive to build things that get blown up and, you know, go out and kill your workforce. It’s hard to make money. running an operation like that.

So capitalists don’t want to do these things that have a sort of negative net present value. And I think those are the those are the instances where government makes a lot of sense. The government can do these things that a free market economy just, it doesn’t have the incentive structure to do it because it’s just too damn hard to make money doing those things. But the where I think the government sometimes overstepped his boundaries is where it tries to, you know, start to do things that start to sort of impact the positive net present value business structure of, of the real economy in a way that starts to alter it to a degree that has a negative long term impact.

And I think that, you know, it’s it’s funny, like going back to interest rates. I think that for the most part, the way the Fed changes, interest rates in my view is For the most part misguided, I mean, I think that the Fed should basically if I had it my way, I would take the Federal Reserve. And I would basically, I would peg the overnight rate at like the core inflation rate.

And I would say that that’s just what it is no more Jerome Powell saying, you know, what do I think the future of the world is going to look like it would just be something automated, the BLS would come out with the CPI number and the overnight number, the overnight interest rate would change. People would earn a real interest rate, a real savings rate on something like treasury bills. And the whole thing would kind of be automated.

So there is there’s merit to these arguments where people say that the Fed is sort of, you know, sticking their finger in the air and kind of trying to predict things that they’re not very good at predicting. And in a lot of ways, probably, you know, if they’re not making things worse, they’re not necessarily making things any better.

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