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MMT & The Crisis Response to Coronavirus (w/ Nouriel Roubini) - YouTube
Channel: Real Vision Finance
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ASH BENNINGTON: One of the things that you're
hearing in, for example, on economics, Twitter
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is this phrase, "we're all modern monetary
theorists now".
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Can you talk a little bit about what modern
monetary theory is, how it relates to the
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union of fiscal policy and monetary policy,
and whether it's an appropriate policy response
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to this particular crisis we're in right now?
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NOURIEL ROUBINI: Well, modern monetary theory
was a leftist idea supported by a bunch of
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leftist academic, that essentially said that,
if you're accounted as your own currency in
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your own central bank, you can run large budget
deficits forever, you can monetize them, and
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then you're not going to even have an inflation.
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Now, that extreme view that you can run it
forever under good times and bad times, even
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at full employment, and you can monetize fiscal
deficit doesn't make sense but in a situation
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which you have a collapse of economic activity,
you have a recession and deflation, and there
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is a collapse of velocity, we learned that
lesson during the Global Financial Crisis,
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you can do a variant of modern monetary theory,
budget deficits and the way you monetize them
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is through QE.
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It's not officially modern monetary theory,
but essentially is a monetary theory, and
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you avoid the deflation and you avoid a deep
recession.
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It used to be called MMT, modern monetary
theory or used to be called helicopter drop
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of money meaning the government spends by
issuing bonds, the central bank gives the
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government the cash and then you value drop
it on people like transfer it like what they're
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going to do with the checks right now, used
to be called so people's QE by UK labor, it
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was labeled as a leftist idea.
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Guess what, it has become mainstream.
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People like Ben Bernanke, former Fed Chairman,
Stan Fischer, former Vice Fed Chair, together
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with that used Philipp Hildebrand that used
to be running the Swiss National Bank, he's
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now at BlackRock, the biggest asset managers
in the world, have come up with a proposal
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for an idea that's a variant of essentially
a helicopter dropper, [indiscernible] Turner,
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William Mauter, pretty much mainstream economists.
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I wrote extensively about the idea of MMT
for the next recession already literally a
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year ago and I said, when this stuff is going
to hit the fan, and we're going to have the
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next recession, zero rate is not going to
be enough, negative is not going to be enough.
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Forward guidance, quantitative easing is not
going to be enough.
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We're going to go to MMT.
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Guess what?
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It happened in less than a month, literally,
because the way they talk about it right now,
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Bernanke or Dalio, is not MMT, is not helicopter
drop, they call it coordination of monetary
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and fiscal policy.
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What does coordination mean?
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The Treasury is going to issue $2 trillion
of bonds, notes and bills to finance this
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budget deficit.
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Additional budget deficits on top of the initial
trade on and the Fed is going to buy every
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single note, bill and bonds issued by the
Treasury.
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That's what's called coordination.
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What is it?
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What's the difference between coordination,
and then helicopter drop or between coordination
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and QE with a fiscal deficit is close to zero?
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Deficit then QE, you're buying the bonds in
the secondary market, the government sells
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it to the market and then the Fed buys it
from the market.
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When you do MMT or monetary financing, or
helicopter drop, you're buying it directly
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in the primary market but the impact on long
term interest rate is the same.
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Who cares whether the Fed buys it at issuance
or a month later?
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Substantial doesn't make any difference, even
large deficits and QE is effectively MMT.
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Whether you call it that way, or you call
it something else, or euphemistically coordination
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of monetary fiscal policy, it walks and quacks
like a duck, it's helicopter drop.
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That's what it is, and we're going to see
my same helicopter drop.
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Now, the point that I made however, is the
following one, in the short run, doing a helicopter
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drop makes sense.
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Makes sense because we have had a collapse
not only of supply and disruption of supply
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chains, but also we had a collapse of demand.
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We've had recession and right now, deflationary
pressures, and therefore doing a massive fiscal
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stimulus and monetizing it makes sense when
you have staggered deflation, recession and
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deflation.
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That makes sense in the short run.
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As people say, you can fool some of the people
all of the time and all of the people some
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of the time, but you cannot fool all of the
people all of the time.
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Suppose that you are in a world in which these
budget deficits of 10% of GDP fully monetized
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occur not only this year, but actually in
the downside scenario, by that, the next year
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and the following year, in the short run,
we have a demand shock more than a supply
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shock and that's the way you fight it.
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Think about this shock.
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Over time, this is a negative supply shock
that reduces output and potential output and
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increases costs and essentially, the production
costs and the prices of every type of goods
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and service.
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There is a rupture of global supply chain,
soon enough, we're not going to have enough
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farm workers in California to pick up the
fruits and the vegetables.
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Over time, what this shock is going to lead,
it's going to lead to an exacerbation of the
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decoupling between US and China.
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Even before that, I wrote last year and before
we had a cold war, we have to see the strap,
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we're going to have deglobalization, we'll
have decoupling and fragmentation, all these
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trends are going to be emphasized.
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More [indiscernible], more equalization, more
reshoring, more fragmentation, more balkanization
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of the global economy.
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More tariffs, more protectionism, more defending
your own firms and your own workers, more
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inward policies, more restriction to trade
in goods, in services, in labor, in capital,
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in technology.
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This is a massive negative supply shock to
the global economy.
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You monetize it and you fiscalize it for two
or three years, eventually, you end up into
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not staggered deflation, but in stagflation,
recession, and inflation like the 1970s.
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Look, what happened in the '70s.
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We have to oil shocks, '73 Yom Kippur, 79
Iranian Revolution, we reacted by trying to
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boost economic growth.
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We had deficits and monetization through easy
money.
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We ended up with double digit inflation, and
stagflation.
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By next year, we can be in stagflation.
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The worst of all worlds, high inflation and
recession.
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That's what gets us to a depression, not just
a recession.
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ASH BENNINGTON: Nouriel, one of the things
that I found so interesting as someone who's
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followed your work very closely, you wrote
in a project syndicate piece, and I think
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it's probably worth quoting here, moreover,
the fiscal response could hit a wall if the
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monetization of massive deficits starts to
produce high inflation, especially if a series
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of virus related negative supply side shocks
reduces potential growth.
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One of the things that's very interesting
for people who followed your work during the
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Great Recession, you talked about how there
was a collapse and the response to the Great
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Recession, how there was a collapse in the
velocity of money and that we didn't see these
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inflationary pressures building, this is a
significant shift from that position.
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Perhaps you could talk a little bit more about
what it would look like and how we would start
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to notice that risk case coming online.
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NOURIEL ROUBINI: Well, the Global Financial
Crisis I analyzed, it was a credit shock,
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the latter collapse in aggregate demand, the
big output gap, slacking goods and labor market,
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the wages going down, prices going down, deflation,
and therefore if you did that, effectively
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MMT, that's what we did through the backdoor
through QE and deficits.
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You're essentially avoiding that recession
from becoming a depression with deflation.
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That was the right policy response because
there was a collapse of aggregate demand and
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there was a huge output gap.
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Today is different.
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The type of shocks that are going to eat the
global economy are all negative supply shock.
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As I pointed out, the coronavirus, the breakdown
of global supply chain is going to get worse.
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I fear that we're not going to be able to
produce food, that in many parts of the world
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as the price becomes worse, food workers and
the food supply chain is going to be disrupted.
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If you cannot produce food, then you'll have
a shock to food prices.
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Look at what's happening in China, you had
a small shock that was last year, the swine
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flu, and the swine flu alone led to production
of pigs to collapse by 50%, better kill all
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of them and price of pork went up 100%.
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This was just a little tiny swine flu in China.
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Think about how these pandemics can disrupt
a global supply chains in and around the world,
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and especially food supply chains.
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That's a huge negative supply shock.
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After the crisis, decoupling between US and
China is going to get worse.
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The US is blaming China for this, China's
blaming the United States.
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It's for the Cold War before, it's for the
[indiscernible] trap on technology, on trade,
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on services, on finance, on currency.
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It's going to get worse.
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Look at the rhetoric between the two sides.
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We'll have more balkanization, more decoupling,
more deglobalization, more reshoring that's
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costly, because instead of producing in the
lowest cost parts of the world, we're going
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to produce them expensively at home.
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That's a massive negative supply shock.
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Trade wars, in the turn, the Smoot-Hawley
tariff led to the worsening of the financial
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shock and lead us to the Great Depression.
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Now, we're starting trade wars with China
and the rest of the world.
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They're going to get worse.
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Everybody's going to say, I'm going to protect
my workers, my firms, my tariffs, and so on.
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That's a recipe for a negative supply shock
becomes global.
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We're not even sharing medical supplies.
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Every country wants to have their own ventilators,
their own mask at home.
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We're not even letting export of these things
across country.
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This is the beginning of restricting trade
in goods and services, and [indiscernible]
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labor.
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Trump is going to say I was right bashing
China, I was right to build the wall.
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Guess what?
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You can build any wall you want to, we have
a Mexico or Canada, but the disease is going
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to be beyond the wall.
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It transmits regardless of whether you have
a wall or not.
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This is the nature of global pandemics.
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These supply shocks become global.
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I'm not yet at the point where there are other
supply shocks.
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I really worry there'll be a war between US
and Iran this year in the Middle East.
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We'll have another supply shock on all prices
like we saw in '73, '79 or 1990.
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That's still to come.
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That will be another huge supply shock.
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We're going to be going in a world where most
of the shocks are not aggregate demand, but
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their nature is negative supply shock through
essentially deglobalization, pandemic, oil
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shocks, protectionism, nationalism and inward
policies.
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In that world, you have essentially the condition
for stagflation, recession and inflation like
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the '70s because, as I said, because of the
main struggle of the Global Financial Crisis,
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you monetize, you fiscalize it, you return
the growth, but if it is a negative supply
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shock, you monetize it, you fiscalize it,
and eventually, you end up with stagflation.
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Now, we're not bad enough to end up like Zimbabwe,
or Venezuela, Argentina with hyperinflation.
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Even if advanced economies after World War
I, like the Weimar Republic in Germany had
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hyperinflation or Hungary.
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Those things can happen if you have a total
collapse.
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If we get a depression and in this depression,
we're going to run budget deficits or print
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them, we may end up like Hungary, or Germany
during the Weimar Republic after World War
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I, we could get hyperinflation.
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I don't expect that to happen now, but certainly,
we could get stagflation with rising inflation
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and recession like the '70s if we keep on
kicking the can down the road and stimulate
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the economy, if the persistent sets of negative
supply shock keep coming and coming.
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That's not the risk this year but by next
year, two years from now, that will be a meaningful
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rising risk.
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