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Money, Zombies, and Bitcoin: An Interview with Mark Blyth

Caucasian man in purple shirt leaning against wood wall outdoors on blue-skyed day with clouds.

He predicted Trump. He predicted Brexit. GQ describes him as a “sharp-tongued, no-nonsense Scotsman.” He’s an economist for people who, if given a choice between speaking with an economist or punching one in the face, would likely choose the latter. Mark Blyth is the Rhodes Professor of International Political Economy in the Department of Political Science at Brown University. His research focuses on how uncertainty and randomness impact complex financial and economic systems, and why people continue to believe stupid economic ideas despite buckets of evidence to the contrary. He is the author of many books, including Austerity: The History of a Bad Idea, which was selected by the Financial Times as a Best Book of 2013 for demolishing conventional wisdom on the response to the 2008 Financial Crisis and European Debt Crisis. In is most recent book, Angrynomics, Blyth and his co-author Eric Lonergan attempt to make sense of why citizens across the Democratic West appear so damned pissed off all the time, despite their politicians telling them that they’ve never had it better. 

*Guest Interviewer Noah Pirani 23′ is a concentrator in International Affairs and Economics.

Noah Pirani: 2020 was one of the most extraordinary episodes in US monetary policy in US history. Through direct lending to corporations and even purchases of high-yield corporate bond ETFs, the FED increased its total assets by over 3 trillion USD to maintain the sound functioning of financial markets. You have this wonderful analogy for describing quantitative easing (QE) as trying to fill a kettle by grabbing a giant fire hose, sticking it through the letterbox, and turning it on full blast until some of it gets into the kettle. Why are the tools at the disposal of central banks so either inadequate or inappropriate for responding to the economic crises in the 21st century?

Mark Blyth: The Fed really only has two tools at its disposal. It can either they can buy and sell assets, or it can, crudely speaking, raise and lower the price of money via short-term interest rates. Should it have other tools? Probably. But the Fed is absolutely terrified of anyone in Congress revisiting the 1913 Federal Reserve Act, which created its mandate in the first place, because that would mean politicizing the Federal Reserve System in a series of Congressional audits that the Fed wants nothing to do with. So, they’ve got two tools, and they’re not going to ask for more. In normal times, when they do normal things, those tools are normally enough. But we haven’t been living in normal times since the 2008 Financial Crisis, when the Fed basically abandoned its official mandate- which is to maintain price stability- and actually engineered massive price instability in order to incentivize market actors to buy and hold assets that they normally wouldn’t. When you do that, and the only way you’re able to stimulate growth is via incredibly price-destabilizing monetary policy, you’re going to have side effects. It’s not effective and its incredibly expensive, hence the kettle analogy. And to the extent that it works, it tends to increase inequality in an already unequal society by insuring the returns to asset owners. Also, if you think about the scale of the interventions, the size of the fire hose if you will, they tend to go up over time. What we’ve seen since 2001 with the dot-com bust is a policy of cutting interest rates to accommodate shocks that continued through the Iraq War period, then through the Global Financial Crisis at which point rates inevitably hit zero and the Fed starts to engage in QE. And each time the “ask” on the Fed has gotten bigger. So come March 2020, the Fed had to put up $1.34 trillion in over the course of just a few days in order to calm the treasury market. There is a question lurking out there in the darkness as to when it becomes too big of an ask, and I don’t think anyone has a good answer to it.

NP: It feels to me like we’re falling down a slippery slope. In 2008 it was AIG that was too big to fail, and in 2020 its United Airlines. I read this statistic recently that blew my mind: in 2020, 20 percent of the largest American corporations were classified as zombie companies, that is to say, 20 percent did not earn enough profit in any of the past 3 fiscal years to cover their annual interest expense. 40 years ago, that figure was just 2 percent. Is it fair to say that by distorting the price discovery mechanism of the market, the Fed is preventing the process of creative destruction that legitimates capital markets?

MB: The short answer is quite probably. The real question is, is this a structural or cyclical phenomenon. If it’s cyclical, then when the economy starts growing again and the interest on the debt is fixed a very small increment above zero, then in principle the Fed can support all of that private debt on its balance sheet and pay it off over time. That’s not an issue. But if it’s a structural issue then we’ve got a problem. That doesn’t just stop a process of creative destruction in the Schumpeterian sense, but it also insures firms against failure. Lending to corporations at zero real interest rates encourages them to issue debt that they can park on their balance sheet. If that balance sheet gets big enough, then they don’t need to worry too much about making profits because they’ll either be too big or too indebted to fail. And you can’t have capitalism without failure. We seem to have created a system whereby we don’t just insure individuals against labor market vagaries through unemployment insurance, but we’re now willing to protect firms that can’t turn a profit because of their structural importance to certain industries or the labor market. This isn’t just a U.S. phenomenon. In fact, there are even more zombies in Europe, particularly in countries like France, Spain, and Italy. All that being said, there is a smart and a stupid way to do this. If you decide you do have to bail out say the airline industry, I would rather the state did so using warrants (basically options to purchase the companies’ shares at a specified price in the future). That way, when the firm’s value recovers, the state actually gets a return on the bailout. Instead, what we’ve been doing is essentially just handing over cash to private firms. That’s the stupid way. 

NP: Way back in 2015 you co-authored an op-ed in The Guardian arguing in favor of “QE for the people,” that is, empowering central banks to make payments directly to households. Why should helicopter money become a fixture of macroeconomic policy in the post-covid world?

MB: It costs less, it’s way more effective as insurance, and it seems to bottom out recessions faster than any of the alternatives. And, it doesn’t have the inequality skew that QE does. It turns out that it’s a lot easier to stimulate an economy when you put cash directly into people’s pockets instead of bailing out the top 10 percent of asset owners and praying some of the wealth trickles down to the bottom 90 percent. Spoiler alert: it never does. Stimulus checks are just one way to do it. There is an argument that expanded unemployment benefits or furlough payments- which is what the EU has chosen to do instead- are more efficient because they have less of a freezing effect on job churn. I’m willing to have that argument; I don’t have strong feelings about it. But if I have a straight choice between QE or helicopter checks, then I’m voting for the latter. 

NP: Let’s talk about the public debt, a topic that’s usually talked about in a way that gets you riled up. In the last few weeks, jitters in the treasury market have inspired many commentators to argue against the US Debt’s sustainability. I can’t turn on Bloomberg for five minutes without Ray Dalio coming on to tell me how all this debt monetization and money printing is debasing the US dollar and laying the seeds of a new world order. Explain to me why you think that the dollar’s structural power in the international monetary system makes it such that persistent foreign demand for US debt places a ceiling on the rate at which the US can finance its borrowing?

MB: Sure. Before we get into that, let me just say a few words about the issue of inflation. The Fed has had an inflation target since 2012; it’s never hit it. So, is it possible that right we’re seeing the beginnings of price increases in multiple sectors even before the stimulus has hit? Absolutely, we had a bloody pandemic. There’s going to be lots of blockages, bottlenecks, and supply shocks leading to temporary price increases until the world gets moving again. Is it also the case that housing prices are going up? Yes, because we turned it into an asset class and build fewer houses now than we did in the mid-1990s with a bigger population. So, guess what, housing prices are going to go up. Now, do these constitute a general rise in overall prices and actual inflation? Absolutely not, not without real wages accelerating beyond productivity growth (which we haven’t seen 50 years). I think a lot of what’s going on here is that people have been trained to look for inflation using the tools and paradigms of the 1970s and 80s, when really those decades were more aberrations than they were the norm. 

About the dollar, I mean come on, what are you going to buy instead? Bitcoin? Really? There’s a structural bias world economy towards becoming an export-oriented nation with low consumption and high savings rates. If you’re late to the development game, you’re dependent on the rest of the world buying your exports. The U.S. does the lion’s share of the importing. Those countries- think Germany and China, for example- end up with a pile of dollars in their banking system that they can’t spend domestically or else they’ll lose their export competitiveness. So, their banks can do two things. They can buy U.S. debt, which lowers our cost of borrowing and hands us back our dollars to rinse and repeat the cycle. Or they can recycle those dollars through interbank lending and dollar-denominated international debt products, hence the Eurobond market. That’s why non-US banks generate about 80 percent of all offshore dollar lending. Ultimately what this does is create a structural setup whereby exporters earn dollars that they have to give back to us in the form of borrowing from us, because that’s what enables the U.S. to further increase its consumption of their exports, and that’s what their growth model depends on. And on the other side of that trade, there’s a whole bunch of people who want to invest in America because of differential growth. That’s to say, our stock market grows faster, our companies grow faster, our companies are the digital monopolies of the global economy. All of that takes place in dollars: 80 percent of global reserves and 70 percent of world trade is US dollars. It’s not going anywhere. I think the only alternative that could really threaten this is if you had a fully convertible Chinese digital currency that everybody was willing to hold, which is exactly what China is trying to develop. But there’s a catch. Most investors like to hold assets in a country where rule of law is guaranteed and if you’re Jack Ma you don’t disappear for four months. So, all that is to say that I think that dollar centrality will persist whether people like it or not. 

NP: Your co-author Eric Lonergan calls money is a hedge against future uncertainty. If that’s the case, what do you call Bitcoin?

MB: A gambler’s fear index for rich people. About 95 percent of bitcoin owned by the top 2.5 percent of wallets on the blockchain. Just $90 million in inflows or outflows can change its price by 1 percent. The notion that bitcoin is a harbinger of the democratization of finance is complete horseshit. The same goes for the idea that it’s a hedge against inflation in a world in where if you’re a developed economy with liberalized capital, product, and labor markets, it seems extremely difficult to generate it. It’s all a very strange, ideological fetish. That being said, like any asset, so long as people believe that it’s going to appreciate and other people think so too, then it becomes rational to own it. I know plenty of fund managers who are long crypto assets, and they think the whole thing is a pile of nonsense. But so long as other people are buying it and there are real gains to be made, why would they not do it? It tells you something fundamental about finance, which is that oftentimes finance doesn’t really care about the fundamentals, it cares about what people’s expectations are because that’s where the real money gets made. 

NP: On the other end of the spectrum of the very serious people on the editorial section of the WSJ who stay up at night worrying about inflation, there’s Modern Monetary Theory (MMT), a relatively new school of economic thought which basically posits that the macroeconomy would be better managed by government spending and taxation, with the corollary that deficit spending really shouldn’t be a concern in countries like the US that can spend, tax, and borrow in their own fiat currency. Is Mark Blyth an MMT-er?

MB: No, but I’m sympathetic to it for dispelling many myths about how sovereign financial systems actually work and overturning ridiculous shibboleths about what we should do about the economy. Contrary to popular belief, when it comes to spending, debt, and savings, governments are nothing like households. It’s absolutely true that the United States in particular does not raise taxes first in order to spend money. That’s complete nonsense. Every time the Pentagon wants a new toy, it’s not as if somebody goes off behind the back of the couch at the Pentagon to find the money to do it. It’s authorized, payment, and then you worry about backfilling it with taxes. But because taxes are popular and we never actually do that, it results in a persistent pile of debt that shrinks so long of the growth rate on the economy is greater than the fixed interest rate at which its issued. 

Now, does that mean that ultimately because you’re a sovereign nation you can spend as much as you want? If you’re the US and don’t have an actual constraint on your current account because you print the world’s reserve currency, if you have control of both houses and the White House for multiple terms, and if everyone all of a sudden got on board with the idea of the government having a much greater role in the economy, then probably. But that’s a series of very big ifs. Does MMT apply to countries that have an actual current account constraint? That’s where I’m more skeptical. The caveat on MMT is that a country must be able to adequately provision itself. If you’re a country that depends on imports and you have an open capital account- which is mostly because the costs of capital account closure are so high in the modern world- then if you start to print a lot of currency and pay for things with all the cash you just printed, speculators and your trading partners will eventually start losing faith in your currency. Speculators will short it, a depreciation effect will kick in, your imports will get more expensive, and then you’ll end up with inflation. This is the same issue that’s plagued countries with so-called “soft currencies” since time immemorial. You can try to get around it with capital controls and import substitution, but there are huge costs associated with that. 

So, in a sense it’s two cheers for MMT. I’m not on board, but I don’t deny the fact that they’ve done a great service by pointing out that a lot of what passes as sound economic commentary is completely wrong. Does that mean it’s an actionable program for all currencies and all countries? No, that’s where I get off the bus. 

NP: Before I let you go, there’s one more question that I’d like to ask, more for selfish reasons than anything else. What advice would you give to the 20-year-old version of yourself?

MB: Nothing you can print in this magazine. 

*This interview has been edited for length and clarity.