TARIFFS: Why YOU Got it All Wrong (Uncut) 03-05-2025

TARIFFS: Why YOU Got it All Wrong | Steve Keen

The government, everybody says the government’s creating too much money and the government’s going to run out of money and the government can’t pay the interest on its own debt which is the limit in its own currency. There’s something loony about that and I want to go into detail as to why that’s the case and that’s the biggest market on the planet, is the bond market. So there’s actually no borrowing going on, there’s changing the nature of the asset banking, the backing, the money that’s being created by the deficit in the first instance and you’d have to be, well there’s one problem but in generally speaking you have to be a bloody idiot to turn that offer down.

Here’s two trillion dollars earning no interest and you can’t trade it. Would you like to swap it for something equal value, earning interest and you can trade? Hello and welcome to Soar Financially, a channel where we discuss the macro to understand the micro. My name is Kai Hoffman, I’m the Etjar mining guy over on X and of course your host of this channel and I’m looking forward to bringing on first-time guest Professor Steve Green.

He’s a visiting scholar at the University of Amsterdam, accomplished book author and a bit of a contrarian to our regular discussions here on the channel. It’ll be fun, I promise you you’re in for a doozy. As I said he’s an accomplished book author, one of the latest books was Debunking Economics.

Now I have to take a peek, he put out another book just recently and you have to go check it out. I’ve listened to a few of his interviews recently and I think the content is a bit, I wouldn’t say controversial but it shines a light on a different area of topics that we’ve had here on the channel over the last 10 days and I’m really looking forward to discussing that with him before I switch over to my guest. Hit that like and subscribe button, it helps us out tremendously and I’m really looking forward to this now.

Steve, it is a pleasure to have you on the program and the book is New Economics Manifesto. I’m sorry we just changed this last second. A bit of abbreviation there, the New Economics Manifesto but I’m sure people can search that on Amazon or whatever else you use, you’ll find it with those three words.

Yeah absolutely, no I appreciate that and I’m really looking forward to this discussion because we’re going to talk tariffs, Mar-a-Lago Accord, I want to talk with you about the strength and weakness of the US dollar, two sides to the same coin here and retaliation is an interesting one. So before we dive into all of this, since you’re a first-time guest, I need to see where your head is at Steve and I’ll ask you a very general question. What’s your general assessment of the economy and the financial markets right now? Well we’ve been in the aftermath of the global financial crisis ever since 2008 and the cause of that crisis was excessive levels of private debt growing too rapidly and then a credit crunch that occurred when that rate of growth of debt turned from positive to negative and that has been completely missed by the mainstream of economics because according to conventional economics, government debt’s the problem, private debt is like an act between consenting adults which the government should not intrude upon and in fact when you look at the actual dynamics of the economy over millennia, centuries but certainly, private debt is what drives the booms and busts of the economy and when private debt is borrowed for speculative reasons rather than for innovative reasons, so you put money into driving up share prices and house prices rather than building better products, that’s when you have a financial crisis.

So we’re still in the aftermath of that. The government in fact tried to keep the level of private debt high, having no idea that that was actually basically like saying let’s make sure the parasite stays alive because that’s really important for the host, completely back the front thinking. So we’re still in the aftermath of that and therefore in some ways, and this is going to sound quite ironic to people, the only way we’ve got an expanding level of economic activity is for the government to spend more than it takes back in taxation.

Now that what happened under Biden, it’s now being reversed under Trump and in very drastic and dramatic ways. So I think that’s where a large part of the chaos we’re seeing is coming from right now. Absolutely, this is completely against what we’ve discussed here on the channel.

I promised our audience that we’ll discuss a very different approach to what we’ve been discussing in general here on this topic and it’s private debt versus public debt. Everybody’s talking about look at the US, 36 trillion dollars in debt, this is not sustainable. You’re saying something different, like you’re not saying, you’re not disagreeing necessarily, but you’re saying we should look at something else and that’s private debt.

Private debt versus GDP for example is ticking up again, it’s, what is it, 215% right now? It’s private debt. One of the hassles about private debt is how badly it’s recorded. So the private debt that I look at comes from the Bank of International Settlements.

They use a standardized approach and they leave out the debt of the financial sector, where banks owe to non-banks and vice versa. And I’ve had a look at the flow of funds data and at the bottom level, when you look at debt of the financial sector, it’s a complete mess. The classifications put, you know, they put apples and, well, they’ve even worse than putting apples and oranges in the same bracket.

They put apples and, I’ll say, they put carrots and rabbits in the same bracket. So you simply can’t use that data. But if you look at the level of the debt of the non-financial private sector, that is currently running at 150% of GDP.

And whereas the government debt, which everybody is panicking about, is running at about 100% of GDP. So we’re being told by conventional wisdom that the smaller number, which is the worry, and the bigger one you can ignore. Interesting.

I do have a couple of follow-ups, like 100% versus the public perception of 123, 124% of US debt. Where’s that difference coming from, Steve? Well, that’s, again, the Bank of International Settlements. So look at the level of government debt as recorded by the Bank of International Settlements.

This is a standard measure that all countries share when they put the data together. They’re currently showing the level of government debt at 50% of GDP. I think, pardon me, looking at Australia there, my mistake.

They’re looking at 110% of GDP is United States debt and the government debt. And again, they said the one they’re telling you to ignore is private debt, and that’s currently at 148%, I think it is, just looking at the graph, eyeballing the graph there. So private debt is much larger than government debt.

And in fact, if you go back further in time to say back to when the global financial crisis hit back in 2008, at that stage, private debt was 170% of GDP and government debt was about 70% of GDP. So we’ve been panicking about the smaller number, which has been coming down over the post-war period, while ignoring the bigger number, which has been going up over the same time period. We’ll have to dissect that a bit more.

You mentioned public wisdom or general economic wisdom is like, okay, public debt is at very high levels, 36 trillion interest rate payments. But I’m trying to understand the difference. Why should we be worried more about private debt than public debt? Well, for a start, private organizations do go bankrupt.

Nobody is going to dispute that a private company that can’t pay its debts will fold. And there’s a simple reason for that, a private company can’t make its own money. If it does make its own money, it’s called counterfeiting and it belongs in jail.

The last person to do that on a grand scale effectively was Bernie Madoff, facetiously speaking. So a private organization has to get more income coming, at least as much income coming in as expenditures are going out. If it doesn’t, it does have to borrow money.

It does borrow that money from banks. It can go bankrupt in that process if it can’t service the debt. So private sector debt is more, it can lead to bankruptcy.

The government, everybody says the government’s creating too much money and the government’s going to run out of money and the government can’t pay the interest on its own debt, which is the limit in its own currency. There’s something learning about that. And I want to go into detail as to why that’s the case.

We’ll do that during the conversation. Yeah, no, absolutely. Really looking forward to that.

And maybe a very simple follow-up question, like SERP and all the other COVID payments just prolonged, just stretched that out a little bit, the suffering there and potential inevitable bankruptcy on the private side. How do we factor that in? And when do we hit that point of no return? When does the first domino really start to fall and set off a series of bankruptcies? Are we seeing that already? You mean with the government sector or private sector? Oh, private, sorry, on the private side. Okay.

Yeah. If you look at whatever the merits of the COVID lockdown, people have been passionate on both sides and it’s orthogonal what we’re talking about here. If you hadn’t, given that lockdowns occurred, if you hadn’t had the government pumping money into the private sector, the private sector would have folded.

The restaurant industries, gone. Transportation, gone. Hotels are gone, et cetera, et cetera.

And let alone the flow on effects from that. So the government stimulus was necessary because equally there was a government shutdown of private sector activity. So without that government spending, that government money created and given to the private sector through all sorts of systems, including payments to workers who were laid off because of it.

And sometimes those payments exceeded the wages they were earning beforehand. That meant people could pay the rent. Landlords could pay the mortgages.

Corporations could pay their commercial rent, et cetera, et cetera. So we had to have that ejection. Otherwise we would have had an enormous financial crisis at the time.

But now we are in the, so we’re still living in the aftermath of the global financial crisis back from 2008. And people tend to have very short, short memories. That’s meant anemic levels of growth for 15 years.

It’s only after the COVID period, when you had that huge government spending, you know, the government deficit hit something of the order of 15 or 15% of GDP, almost warlike, wartime levels of government spending and excessive taxation. That gave an enormous monetary stimulus to the economy. And we’re now dealing with an economy, in America’s case, which is one of the lowest levels of unemployment it’s ever had.

So, and of course, inflation has occurred as well. I’m happy to discuss the causal factors behind that too. But that, without that money, we’d be in a slump.

Now, when you start to withdraw it, you’re taking away the cashflow support that the government sector gave to the private sector through its capacity to create money. And when you start doing that, yes, you can start having the economy slowing down, hitting a slump. And the savagery which these cuts are being implemented by Trump and Musk together at the moment is likely to mean a lot of those organizations that didn’t realize they were relying upon the cashflow from government workers have now been sacked are going to find out the hard way that that sacking of government workers has an impact upon their private sector balance sheets.

That is very interesting, like the ramifications of DOGE and what the ripple effects will be. I think it’s really tough to right now. Is it just coffee shops in the DC area that are affected or is there more to it? Of course, there was that probably that you might have seen that as well.

A graphic that was circulated on X the other day just showed, a Zillow graphic actually, that just showed the amount of houses available for sale in the DC area. It’s like that’s probably a precursor to what you’re envisioning or what you’re seeing here. Is that the right indicator we should be looking at? Yeah, well, certainly.

I mean, if you’ve got a job, you’re servicing your mortgage with the job, suddenly you’re sacked. What the hell do you do? The first thing you’ve got to make sure is you’re going to be accumulating debt on your mortgage. You don’t want to be forced into default on the mortgage.

So the panic response people are going to have, and it’s quite understandable as hell, I’ve got to get out of this mortgage. Let’s liquidate. The prices have risen recently.

Let’s take advantage of that. Well, the prices won’t be rising for much longer if that becomes a widespread thing, not just in the Washington DC area, but across the whole country. Do you think the private sector can absorb the layoffs in the public sector? No.

No, I don’t. And the reason for this is that, I mean, when we talk in economics, people often talk about the real versus nominal. So real is the actual turnover of goods and services.

Nominal is the cash. The way mainstream economics, and I’m a total critic of mainstream economics, everything you’ve learned, quite literally, everything that’s taught in the economics textbook is wrong. So I’m quite a critic of that.

But if you look at the way they say nominal versus real, in fact, the numbers we start from are the nominal numbers. The real numbers are the dollars. That’s what we work out.

We then derive what we call real by working out a price deflator to look at whether the increase in GDP over a year has been due to increasing prices or increasing commodities. So the real number is the nominal. The artificial number is the real.

And what we have with a government, with a financial system is one in which the government creates money by spending more than it takes back in taxation. And the private banks create money by lending out more than they get back in repayments. Now, that can be looking at have a constant level of both private and government debt as a percentage of GDP with both those organisations creating money.

But what we’ve had from the 1950s forward is the private sector going from a private debt of 50 per cent of GDP to 170 per cent now coming down. That’s been a huge boost to the money supply from the private sector side. The government’s been pretty much flatlining.

Most of the money creation has been by the private sector, but the government still creates a substantial proportion of it. Now, if the government suddenly goes from creating money to destroying money, that nominal number, which is the real number, falls quite dramatically. And then that will feed through into good sales of goods and services.

And people, certainly, if you suddenly find that your cash flow has dried up because all the government workers used to be purchasing goods at your supermarket or your coffee shop or your car dealership are suddenly not. And in fact, they’re liquidating what they’ve got. You can have a negative, a deflationary shock come out of that, which undermines your capacity to service your own debts.

So we’ve got a lot of… This is only the first month. It still feels ridiculous. We’re in month two of the Trump administration, and it’s chicken little territory.

The sky is falling, and it may well be. I have a hard time keeping up, quite honestly. And even just structuring or trying to structure our conversation is extremely difficult because there are so many aspects to it.

You just mentioned deflationary shock. And we’ve had guests on this program a couple of months ago that said, well, we’re going to see a massive crash that’s going to affect everything. It doesn’t have to be long lasting, but we’re going to see a massive crash in the markets.

Gold is going to go down, everything else as well, just because it’s a run to liquidity. And that’s exactly what you’re describing. Like, I’ve got to sell my assets.

I’ve got to sell my house because we’re at the top here, and I need cash. I need liquidity. Is that what you’re predicting as well? Is that maybe what we’re seeing in the markets today? It’s feasible.

And certainly, if you look at the scale of the government deficit, you would have to think of so many times $2 trillion, roughly speaking, that’s correct. And they’ve got an economy of about the 30 trillion mark. So you’ve got a substantial portion of GDP.

The money supply created by the government is a substantial proportion of GDP. There are ways in which it’s reduced below that by bond sales, but maybe we’ll talk about that later. But that’s the scale.

If you cut $2 trillion of spending out of the economy, that’s close enough to a 10% fall in GDP. Now, certainly 7%. And if you look at how in macroeconomic textbooks, and one of the few things that the macroeconomic textbooks do not get wrong, is when they work out what GDP is, they define GDP as consumption plus investment, plus exports minus imports, plus government spending minus taxation.

Now, if you’re saying that’s that G minus T, that deficit is really bad, let’s get rid of it. You’re getting rid of not just you’re reducing government spending, you’re reducing GDP by the same sum, even according to conventional textbooks. So $2 trillion taken out of the economy, that’s called a recession.

Are we in it yet? That’s the question mark. Like you said, we’re one month into the whole program, it seems like. No, it’s every time.

I just heard one of the people I follow is Daniel Swain, who’s a meteorologist, led by a private company, but heavily involved in in research terms, people from the National Oceanic and Atmospheric Administration. Now, he’s saying he’s seeing wholesale sacking across NOAA right now. And of course, that’s focused in, I don’t know where NOAA’s head offices are, it’s probably on Mount Sinai, one of the world’s best acronyms, NOAA.

But that’s going to spread across the country, not just the head office will be hit. And then that’s going to hit businesses in those regions. So, but it’s early days.

So they’ve still got lots more to slash. So it’s where the slashing goes. The more they try to cut that amount of money back, the more you’re going to see a fall in aggregate demand.

And therefore, that’s going to impact private businesses as well. It seems like we’re in for a world of hurt for the next 12 to 18, maybe even 24 months. When I look at it, there’s so many things we can sort of take away from what you’ve just mentioned.

Low unemployment right now, that’s not going to stay the case, because if we lay off all the government workers, they do have to show up in some statistic. And as you said, the private sector cannot soak all of them up, it just doesn’t work. Inflation is another driver.

We’ll talk tariffs in a minute here, because that’s a big economic impact factor as well. Deflation, we just touched on. Steve, I don’t know where to take this conversation, because now I circled AI, we need to like investments into infrastructure, trying to make up for maybe some of the lost ground on the other end.

Increasing productivity, and we’ve seen quite a bit of productivity growth here as well. It comes down to GDP, like how do we keep it at a steady level by reducing waste on one side, but also investing and growing it on the other side, meaning productivity growth, right? Do you see that we can actually achieve equilibrium at one point, or maybe even growing GDP again? Equilibrium is a dirty word in my vocabulary. That balance or homeostasis, perhaps, is a better way of putting it.

What we’ve got people doing is confusing how money is created with confusing how money turns over. And the attitude of the government is you’re wasting this money, you’re taxing us, and you’re wasting our tax receipts. That’s the perception.

That itself is wrong, because tax receipts don’t get spent. What they do is actually top up the government’s account at the central bank. If you took away government bond sales, that would not have any impact on government money creation.

What it would mean is that the government’s account at the central bank, the Treasurer’s account at the Fed, would go into overdraft. That’s the impact of the bond sales. But people are confusing the creation of money with the turnover of money.

Now, if you drastically reduce the amount of money being created, the only way the economy can compensate is by a velocity of money increasing, circulation rising. And intend what has to happen, pardon me, when you have a recession or a downturn like what’s being caused right now by the government slashing government spending. People don’t spend more rapidly, they spend more slowly.

You compound the problem. So this obsession with getting rid of government waste, and look, I’ve worked in the government sector on occasions, I have seen, I’ve referred to part of the Department of Trade, which I worked with in Australia way back when I was in my late 20s, early 30s, I call it a sheltered workshop. So I’ve certainly seen waste in bureaucracies.

But a major source of what they actually do is generate some of the demand that enables private sector organisations to work at the speed they do. So cutting out that demand cuts out aggregate demand, and then you have a downturn. So in some ways, just be careful what you wish for.

Yeah, absolutely. I was just looking up the University of Michigan consumer sentiment index, and it’s crashed quite a bit from December, it was around, what was the number here, I want to give you an accurate point, 74 points, and we’re down to 64.7, revised sharply lower. That sort of hints at spending slowdown.

Let’s wait and see what is impacting us directly, I think. Is that what we can take away from this? Yeah, I think the more you have the slashing of government positions, and people who had a reliable cash flow until last week, and then suddenly they’re on the street, you see the NOAA employees apparently given 15 minutes to clear their desks. You walk out of that, you, holy shit, I’ve got a bank account which had money coming in until yesterday.

Now there’s no money coming in, but there’s money still going out. I’ve got to slash my spending, you slash your spending, that’ll have feed-through effects on the private sector. Some parts of which have been cheering this attitude, saying, oh, there’s all this government waste.

Sure, okay, but get rid of government waste carefully, because if you reduce the government, what you see as government waste, you reduce your customers. I certainly saw plenty of bureaucrats that I would rather pay them a basic income to say, get out of the way. That applies, by the way, to virtually every economist in government service.

They’d be doing far less damage if they were given a basic income and said, please don’t work. But at least with a basic income, they’d still be shopping at your coffee shop, your supermarket, your car dealership, et cetera, et cetera. Let me just share something real quick.

I think this is hugely entertaining to a degree. It’s hurtful for some, but I find it entertaining. I’m an outsider looking in, but it’s the Doge Life Tracker, where they show live how much money they’ve saved already.

The goal, as we discussed, is $2 trillion, and they’re at 3.25% there. So they’re not cutting it all, or they cannot cut all at once. It’s not like a $2 trillion cut tomorrow, right? Yeah.

You can’t be walking into Twitter and sacking 80% of the staff, for example. So it has to be slower than that. And there are contracts involved, which have got more rigidity to them than employment contracts.

So it’ll be harder to do, but they’re clearly, they can’t really be hellbent on doing it. Yeah. No, the question is lag effects as well.

Then there’s judges holding up the layoffs. You see a new headline every day. I’m not sure if they can’t even do that.

I’m not aware of that. That’s outside of my knowledge, the US judicial process, how that works. It’s an interesting topic.

I’m seemingly jumping around, because we’ve got so much ground to cover, and I apologize for that. But you touched on government bond sales. And one question that keeps coming back to my mind, and we’ve discussed this here, is just, is it even feasible? Are there enough buyers for the government bonds that the US government has? Yes, there are buyers.

Let’s put it this way. If I gave you $10,000 and said, you’ve got to use that $10,000 to buy a bond off me, and I’m going to pay you 5% interest on that bond. So I give you the $10,000, on condition that you use that $10,000 to buy a bond where I give you 5% interest.

You’re going to take the money? You’re going to buy the bond? It’s quite enticing. Okay. That’s what’s going on.

This is why it’s so important to analyze what’s going on using double entry bookkeeping. I never did accounting as a student. I did a degree in arts and law rather than an economics degree.

Accounting is not taught anymore in economic schools. So economists in general do not understand accounting. And they certainly don’t understand double entry bookkeeping.

I’ve become the global expert on the topic because I invented the software package called Ravel, which has got two main features. One of which lets you analyze the economy as a monetary system using financial flows through what I call godly tables. And the other is a multidimensional tool for analyzing data called the Ravel.

Now, when I put that together, the godly table, I suddenly realized the structure of spending in the economy. And when you take a look at the structure of spending, you’ve got to look for the government. Government spending starts with the treasury or starts with the Congress passing laws, which means government spending exceeds taxation.

And they’ve got outstanding bonds as well. They’re required to issue bonds equivalent to the deficit plus the interest on existing bonds. That’s what looks like a nightmare to anybody who looks about it because they think in terms of, gee, if I did that, if I did that, which is an analogy, and that’s something which which Musk claims he doesn’t think in terms of, you make that analogy, oh, gee, if I did that, I would start running out of money.

Therefore, I have to stop doing it. I have to stop borrowing. But you’re not the government.

The government’s not you. The government is a different entity. And when the government runs a deficit, it then puts money in your bank account.

If the government is spending more than it’s taking back in taxation, then it’s putting more money into private sector bank accounts than it’s taking out. So that is actually creating money. The deficit puts money into your bank account.

Now, the bond, when you look at what happens with the bond sales, to put money in your bank account, it’s putting money in what is a liability for the it puts money into what’s an asset for the banking sector, which are reserves. Now, we go back before the global financial crisis. Reserves did not earn interest.

So you got this, banks were getting an asset. If the government ran, let’s say, a $2 trillion deficit back in 2000, then it put $2 trillion more into deposit accounts than it took out in taxation. It therefore put $2 trillion more into reserves than it took out in taxation.

So banks have got this asset on their books, which earns no interest. Then the government says, we’re going to sell bonds and they sell it to what they call the primary dealer system through bond auctions. You have to be registered to buy that.

And normally you’re either a bank or you’re a high level bank or financial institution. You use those reserves to buy the bonds. So what the money has been, you had this asset created by the government running a deficit.

It’s a non-income earning asset. The government says, would you like to swap those? And the bonds, A, they earn an interest income and B, you can trade them. And that’s the biggest market on the planet is the bond market.

So there’s actually no borrowing going on. There’s changing the nature of the asset banking, the backing, the money that’s been created by the deficit in the first instance. And you’d have to be, well, there’s one problem, but in generally speaking, you have to be a bloody idiot to turn that offer down.

Here’s $2 trillion earning no interest and you can’t trade it. Would you like to swap it for something, equal value, earning interest and you can trade? You’d be brain dead to say no. No, exactly.

That’s why the bond market, A, like Simon Hunt calls it the root of all evil, of course, because it’s behind everything. It can be the root cause of almost everything. Everything leads back to the bond market at some point.

Whatever the crisis is globally, it seems like the US bond market is the main perpetrator. Looking at bond yields, though, four and a quarter now on the 10-year as we speak today, should we have been nervous when it touched on almost five recently and it’s coming down? This is where the mistake comes in, because those high interest rates are the product of the economists who run the Federal Reserve. And they’re neoclassical economists.

That’s the dominant thing you learn in textbooks. They call it economics. They don’t realize it’s a particular school of thought called neoclassical economics.

And they’re all trying to believe in what they call dynamic stochastic general equilibrium models, where the interest rate changes by the central bank actually control the success of the economy. These are the models with which they completely missed the global financial crisis. These models, which they’re still wedded to 15 years after they completely failed, are predicated on the assumption that if the Federal Reserve puts up interest rates roughly twice as fast as the rate of inflation rises, that’ll control the rate of inflation.

Now, it’s nonsense. When you look at the actual monetary dynamics that goes on there, that doesn’t control the rate of economic activity until such time as interest rates become so high that they make people decide it’s just too expensive to invest. Then you have a crash.

It’s not a fine tuning. Instead, it’s a brick wall. It only works when you make it that high.

But those high interest rates, what they do when they come out, they devalue existing bonds. So government bonds are sold at a face value. If you bought a government bond back in 2009 or 10, for example, it would have been earning, say, 1%.

So you pay $1,000 and you get $10 a year from the bond. Then they come out $1,000 gives you $50. Well, that means that one giving you $1 has to be massively devalued.

Now, that’s what bankrupted Silicon Valley Bank because they had mainly long-term bonds and they didn’t have them using the trick of the difference between mark to market and hold to maturity. Of course, when there started to be a run, they would have had some of the bonds classified as holds and maturity. That means you can ignore the fluctuations.

We’re just going to the values being constant. The mark to market, they’ve got to take those fluctuations into account. Well, most banks have a tiny amount shown as mark to market and they trade those and a large amount of holders hold to maturity.

So they try to ignore the ups and downs of interest rates. When the Federal Reserve put rates up that much and Silicon Valley Bank had such long-term bonds, 15, 20-year, 30-year bonds on its books, they were devalued massively. They had to start liquidating the holds to maturity to meet the outflows required to end bankrupt.

Now, lots and lots of the financial institutions are still like this at the moment about their hold to maturity versus mark to market. And if you start having people doing cash withdrawals, they get panicked about the financial system or if they’re transferring it across to Bitcoin and held in foreign countries where they’ve got to exchange American dollars for whatever exchange is being used internationally, then yeah, you can suddenly find your bank’s assets fall in value so much that the bank itself becomes bankrupt. So there’s an extreme level of fragility in the economy right now and it’s been caused by the Federal Reserve putting up rates, which in terms of controlling inflation was completely unnecessary.

Anybody disputes that, have a look at Japan. Japan’s data on the rate of inflation and so on, which is what they’re trying to control by putting up rates, Japan had a lower boost to inflation and a faster recovery. So therefore, we should do what Japan did rather than what the Federal Reserve did.

What did Japan do? Its rates before the crisis were minus one quarter of a percent and it put them up to zero. Now, that was more effective than the Federal Reserve putting up from 1% to 5%. So I think it’s quite foolish and I’m now contemplating what to do with some cash I’m about to have coming into my system.

And I’m saying, well, I might as well buy bonds now because if the rates are forced to fall, and I think they will be forced to fall by the shattering of the economy under Doge, then those bond values are going to rise and I’m still going to keep on getting 5% from them. You indirectly already answered my next question. I’m really trying to simplify, but what should the Fed do? And how much of an impact do they have anyway? The Fed is like a butler who’s taken over running the household.

Tell the butler to bloody well do what the boss tells them to do. The fundamental, the neoclassical economics, the mainstream again, has convinced itself that the only way it can control the economy is by modifying the interest rate. They’ve denigrated the importance of fiscal policy.

Now, I think of anything that we’ve been taught out of COVID, whatever side you are on that argument and whatever you think about the level of government spending, fiscal policy works. Government’s money creation goes directly into spending. That boosts the economy far more effectively than changing the interest rate.

Equally, slashing government spending will slow the economy down far more effectively than increasing interest rates might do the same thing. We need to go back to the stage where fiscal policy is in the control seat and the Federal Reserve does what it’s bloody well told. They keep saying, we’re not political, and we’re not going to get influenced.

They’re not political, but they’re neoclassical. This is one of the problems. It’s a bit like saying a tall, make astronomer is not religious, but a tall, make astronomer believes the Earth’s the center of the universe.

How did it happen that way? God did it. In that sense, neoclassicals have politics built into their assumptions. They’re not only political, they’re also strictly wrong about the structure of the economy.

I just want to have those bastards shut up. Not that I have much more faith for the economists in the treasury, but let’s get the actual structure of the economy correct before we start trying to control it. I’m not sure how to segue.

I’m just going to do it. We want to get back to maybe GDPs might have been the segue, but I want to talk tariff and tariff impacts. Just this morning, again, I’ve been reading articles.

Mexico and Canada are going to get hit with 25% tariffs. China is getting an extra 10% slapped on. We need to talk about that because I’ve been trying to catch up on the Mar-a-Lago Accord.

I think we can throw tariffs and put restructuring. Let me read the title of the Mar-a-Lago Accord because I think I just had it open here. A User’s Guide to Restructuring the Global Trading System by Steve Mirren.

Really interesting read. I made it to page 12 before I fell asleep, but I’ve read the summary. It’s really interesting because it really talks about the effects of global trade on the US dollar and the role of the reserve currency and why the US dollar seemingly is overvalued.

I want to start with tariffs. A, how effective are they? Do they help? What’s the impact on GDP? We could discuss GDP at length before. I’m curious.

I’m trying to throw it all into one big basket here. The etiquette that conventional economists have to tariffs comes from the original party trick of economists, which was David Ricardo’s idea of comparative advantage. What Ricardo did in that example was argue against tariffs on what were called the corn laws that prevented the importation of corn, of grain in general.

Corn just meant grain, wheat, corn, the works, importing of that from the continent to England. That was very helpful to the landlords. Ricardo’s attitude, and people never read Ricardo sufficiently.

People who spout them in the media often don’t read the original. What Ricardo said in that book was, it’s my endeavor to show throughout this work that there cannot be an increase in profits except by a fall in wages. The way that you create a fall in wages is by reducing the cost of necessaries.

Cutting the tariffs was Ricardo’s ways of increasing profits. That was because he saw that the corn laws meant that money went to the landlords rather than to the capitalists. Landlords were involved in frivolous consumption.

They weren’t going to be producing the productive capacity of England. We needed a higher productive capacity. Take the money out hand of the landlords, give it to the capitalists instead.

The workers will come out even because the prices of food will fall, but so will their wages. That was Ricardo’s thinking. His argument for comparative advantage was really about redistributing income from the landlords to the capitalists.

That was a bloody sensible idea. The trouble was he put it up on a very fanciful party trick where he said, everybody’s saying that Portugal, which was the main competitor England faced at the time, is better than England at everything. If we open up trade, Portugal will slaughter the English industry.

He said, I’m going to take your assumption that Portugal’s better than we are at everything and still show that trade is a good idea. That’s where the idea of comparative advantage came from. What he gave was the example of wine versus cloth.

Portugal’s obviously better in England at producing wine, but also better at producing cloth. It’s better if Portugal specialises in wine and England specialises in cloth. There’ll be more of both produced and you can trade the surplus.

That was his argument. Now, one thing which Ricardo did, would you check that example out? He considered how you convert workers from one industry to another. He didn’t consider how you convert machinery from one industry to another.

I’m still waiting for an economist to explain to me how you turn a wine press into a spinning janny. You can’t. What happens with that sort of thing, when you open up trade by deregulating, what you do would be reducing tariffs.

You expose an industry to competition, which means it can’t compete. Rather than the capital from that industry moving when the industry can’t compete to the one where it can, it gets turned into the rust belt. This is where the rust belt came from.

Now, in a large way, Trump is tapping into that anger from working class Americans who had skilled jobs in industrial production. Now, if they’re lucky, they’re working as a checkout chick at Walmart, when they used to have decent jobs with decent conditions in an industrial plant that’s now been shut down. They drive past the rust bucket on the way to and from work each day.

That’s the sentiment that Trump has tapped into. Back to the fallacy in Ricardo’s thinking, it’s not shifting resources from one industry to another that causes economic growth. It’s investing and developing new technologies and expanding production that way.

That’s what’s mattered. It’s not specialisation, it’s investment. Sometimes, in some circumstances, and I’m not saying now, I think actually now is not a good time for this, tariffs actually force local manufacturers to invest.

Especially if you say, okay, we’re giving you the tariff barrier now, but it’s coming down over time, you better make sure you develop your technology to be ahead of your international rivals once the tariffs are down again. That’s what’s actually led to industrial development in most of the world, including America. The 19th century, America, as Trump keeps on talking about, had high tariffs.

Those high tariffs meant American manufacturers had to develop steel plants to rival the British and the European ones they used to import from, and they did that. The industrialisation of America, of Korea, of Germany after the war, of Japan after the war, were all driven by trade barriers, which were reduced initially. There’s actually, if you want to see very good academic work on that, the best work is done by a Harvard University professor, Danny Rodrik, R-I-D-R-I-K.

He’s gone through and assessed this internationally. Whereas the conventional economics says, tariffs are terrible because they damage specialisation, what Rodrik has found is that in fact, they are often an important element of the policies that led to industrialisation in countries you now take for granted as being industrialised, South Korea, Japan, and so on. If they’d followed the advice of neoclassical economists, they would have specialised in rice and silk.

Yeah, I get it. It’s an interesting and fascinating topic because mainstream media is bashing their heads in trying to understand what is actually happening and how it’s helping or not helping anybody. I don’t think they can make sense of it just yet, trying to understand it.

Impact on inflation is the biggest topic, depending on who you talk to. Certainly, yeah. You’re going to cause problems.

This is one thing that Trump clearly doesn’t understand. He thinks the foreign country pays the tariff. It’s the company that imports that has to pay the tariff.

It’s actually American shops, American wholesalers paying that tariff. You’ve got the craziness now of globalisation has meant that not only do you have like in the Apple iPhone, I think there’s over 100 countries who manufacture parts for the Apple iPhone, but some of those parts cross borders four and five times. If you whack a 25% tariff and the company has to pay that at each of the import and export sites, you’re going to have a dramatic increase in the cost of those components.

It’s no longer something which you don’t have the separation of countries and nations in the way that we had when you think about it back in Ricardo’s time. Even then, you had the East India Company, which was a British organisation that owned India. You have companies spread throughout the world, what we used to call transnational corporations, and they are a large part of the global supply chain.

They’re now going to be facing tariffs at each stage of moving goods from a plant they own in Malaysia, to a plant they own in Mexico, to a plant they own in America, back off to Canada again. It’s going to be chaos inside those organisations. I love referring to things that I see personally.

I’ve been watching a lot of YouTube videos about graphic card reviews that came out just recently, the new NVIDIA graphic cards. The YouTube reviewers, they have millions of followers. They’re saying, well, the graphic card costs $50 more now above MSRP because the tariffs are being slapped on them.

That’s where I see it. As you said, the end user is paying for the tariff. It’s not NVIDIA swallowing the $50 pill, it’s the end user who has to pay that.

Absolutely. I’m in favour of using industrial policy to boost an economy because you get these usual governments can’t pick winners. Well, BS, when you take a look at countries like South Korea, for example, one reason South Korea has produced so many telecommunications and computing giants today is that 30-something years ago, or 40 years ago, the Korean government told the telecommunications industries, they didn’t care how they did it, but every home in Korea had to have a T45 junction, an ethernet cable.

I had the funniest experience this personally because, wait for it, a member of the president of the Communist Party of South Korea came to visit me for my research. Long story, weird bugger. Anyway, he was objecting about the rental, so I finally got him a place.

He wasn’t too happy about it, but that’s what he wanted to pay. He got out his laptop and he’s walking around with a T45 junction, ethernet cable, trying to find where to plug it into the wall. I had to say, we don’t have those here.

He said, what? How do you get the internet? I had to tell him it was a dial-up telephone. He was horrified. He’s a communist.

He just accepted what the South Koreans had done. Now, what that meant was every kid in South Korea had a T45 junction in their home. Some of them invented Samsung, etc.

The government didn’t actually do it without the cables, apparently, in the South Korean code. The companies had to be able to continue operating in South Korea. They picked the winners.

South Korea now slaughters America in terms of its phone technology and so on. That’s a large reason to watch. You need industrial policy, and you’re getting a half-baked version of it by these tariffs.

Now, my personal example for that is when I went to high school for a year in the U.S., they had T1 internet back in the day. That was in 2000, 2001. That was a miracle to me.

I came from dial-up modems, and even the house I was staying in had dial-up internet. So you’re always blocking a landline, and then you go to the school and it has T1 internet. Yeah, exactly.

In the school. So it sort of fits that. Yes, somewhere else they missed the boat, apparently, but that sort of facilitates innovation.

Yeah, exactly. And that’s a large part of the government spending, is actually to enable the private sector to do that. I’m a great fan of Musk’s work on rockets.

I really want to see a Mars base. So on that front, I’m a Musk fan. But that only happened because of the Apollo venture to send a man to the moon, which is all about global politics, bidding there before the Russians, yada, yada, yada.

But the huge loss leading the government did then generated the foundation that enabled the private sector to take over and do it better than the government can 40 or 50 years later. So the government plays the role of a loss leader. And that’s one important thing in enabling innovation to occur.

People can innovate if they can afford to lose money. Now, wealthy people can afford to lose money, and the government can afford to lose money because it creates it in the first place. So I’d far rather see them doing things like the moonshot than wars in Afghanistan and wars in Ukraine.

Yeah, you just got to make sure that you spend that money or the government spend it somewhat efficiently. You’ll never get dollar for dollar returns on investment. That’s never going to happen.

I give up on that hope, but at least get closer to that right now. Well, I mean, the government doesn’t do it to make a profit. It does it to achieve an objective.

And that sometimes means you get brilliant engineers like Wernher von Braun. That’s where the rocket industry came from in America. You grabbed a very prominent German who built the V1 and V2, and then ultimately you get the Saturn V out of that, and now you’ve got Musk.

The government doesn’t have to think about making a profit. And there are some things which if you want to have a civilized society, like your example of the T1 Junction or T100 Junction, we call it here, that made enormous difference to productivity when you’re at the school. So what happens when you do that? Kids have got blowout modems back at home, try to hang around the school all day, which they can’t do.

They get chucked out, etc., etc. Over in South Korea, government said it’s every household. South Korea wins the contest.

Yeah. Back in the day, you had to download stuff at school, music, for example. It wouldn’t work any other way.

Now, Steve, we have one big topic left to tackle, and it’s really the impact of tariffs and everything else that we’ve discussed on the U.S. dollar and what role the U.S. dollar plays. I want to play a quick 90-second clip I warned you about, but it’s Besant being interviewed on Bloomberg just talking about the role of the U.S. dollar, and I want to get your thoughts on it because it feels like—and you said that, I’m actually re-quoting what you said before we hit the record button—is the U.S. is trying to have its cake and eat it too. So let’s listen to what he says.

You have experience in currency markets, and now as in your new role, you oversee U.S. currency policy. I’d like to ask you, what does a strong dollar mean to you? Well, first of all, the strong dollar policy is completely intact with President Trump, and I was very happy at his Economic Club of New York speech in August when he re-emphasized the importance of maintaining the dollar reserve currency status. But let’s think about what does strong dollar mean.

It really means four things. One, that when we think about a fiat currency, a piece of paper is credibility. So a strong dollar is credibility and a rule of law that is backing it up.

Two, it means a composite price on the screen, the Bloomberg Currency Index, that is the dollar moving up against that. Three, it is a bilateral price. So what’s important to remember is the dollar is either weak or strong versus something else.

So we want the dollar to be strong. What we don’t want is other countries to weaken their currencies to manipulate their trade. And fourth, that we want to have the best policies that create the environment for a strong dollar.

Really interesting. I’m trying to figure out what they really want to achieve. A, they want a state of reserve currency.

OK, I get it. But they also want to have the dollar stay strong, meaning in exchange to the euro and other currencies, of course. But it feels like both isn’t possible, especially with the policies they’re introducing like tariffs.

That’s nonsense. I’ve heard worse garbage than that, but I’ve got to use the memory banks to find an example. If you look at why the dollar is the reserve currency in the first instance, of course, the previous reserve currency was the British pound.

Now, the British pound, the British economy was the economy where industrialization first occurred. And between 1770 and 1840, you had England going from 1 or 2 percent of global industry to 15 or 20 percent of industry. It’s been on downhill run ever since then.

And one of the reasons for the downhill run is it’s the reserve. It was the reserve currency. And when you have the reserve currency, people need your currency for not for buying your goods and services, but for goods and services from anywhere.

That means the monetary demand for your currency exceeds what’s necessary for goods and services. So you get overvalued. And that means your manufacturers are more expensive than manufacturing of other countries.

So it weakens your manufacturing sector against other trading partners. And when we had the Bretton Woods meeting in 1944, Keynes, who was the most prominent economist on the planet at the time, of course, Keynes argued what he called the Bancorp. And the accounting system at what became the International Monetary Fund, where you’d start with a zero balance.

And if you ran a trade deficit, you’d get a negative balance, you’d be in overdraft. And if you ran a surplus, you’d be positive, you’d have a surplus. But the overdraft countries had to pay interest.

And the countries with a surplus past 1 or 2 percent of a trade surplus compared to their GDP, they had to pay interest as well to developing countries. It was a way of stopping the huge imbalances that we now experience where countries like Japan and China and Germany and Korea at various times have a trade surplus as high as 10 percent of GDP. That means other countries have to wear the other side of it because the sum of all trade surpluses is zero.

So we should have had that system. Now, the reason we didn’t largely comes down to American ego. There’s a particular individual involved, Harry Dexter White.

It’s well worth reading a book called The Battle of Bretton Woods about the fight between himself and Keynes over having an international reserve currency. He won. What that meant was the American dollar took the place of the British pound.

It therefore, rather than the British pound being overvalued, the American dollar was overvalued. It strengthened your financial sector because most operations globally, financial transactions are done in the American dollar. So it gave us the vampire squids and all that sort of jazz, but it actually undervalued and hampered your manufacturing versus other countries.

If you want a strong dollar, the strong dollar is a lower valued dollar and that will enable your country to be strong. You want your manufacturing sector to be strong, not your bloody currency. I think he wants to stay the reserve currency.

That’s why threatening tariffs on countries that have mentioned we might establish our own currency to do trade with. He was threatened at the BRICS, although I haven’t heard much about that in the last few weeks. It’s been awfully quiet in that category, in that department.

But then he wants a weaker dollar to trade, to match with other currencies. It’s exactly what you’re saying. You can’t have really both.

You can’t have a strong dollar and a strong manufacturing sector. That’s what the paper by Mirren is about as well. You can’t be reserve currency because you’ll be automatically overvalued because everybody’s got to use your dollar.

Exactly. Trump’s into big. He’s the biggest this, the biggest that.

He wants the biggest dollar and the biggest manufacturing sector. I’m sorry, they’re like either end of a seesaw. Which one do you want to have up? Exactly.

Steve, what a wonderful conversation. One last question. How worried are you about a general and global depression? I’m more worried about what’s going to happen with the climate, frankly.

I know that’s going to lose me a few subscribers, but let’s say it anyway, because I work with climate scientists and I know how terrified they are. I think we are going to see a stuttering of the global economy, courtesy of all the disturbance to the government sector in America. Also, you’ve got the same thing being done by the British.

You’ve got Starmer and Reeves both trying to cut the government deficit there. The obsession with the Europeans and doing the same thing. All this stuff is actually reducing aggregate demand and reducing the capacity to innovate and move forward.

On the other hand, if you look at China, China’s average government deficit is running at 9% of GDP. Now, in terms of how our economy is performing, I’d rather be China than America. The Chinese have got the idea correctly worked out.

The Americans, by this obsession with reducing the government deficit, are doing the opposite. I do think there’s going to be a shock this year, largely caused by bad government policy, where that bad government policy misunderstands that you need both fiat money and credit money in a viable monetary economy. By slashing the deficit, what you’re doing is slashing a fiat money creation, and that will lead to a slowing of the economy and also to all sorts of financial consequences for anybody who’s got private debt.

We’ll see how that all plays out. It’s really interesting. I’m coming from the gold end, of course, so I’m cheering $2,900 gold.

But again, it looks like there’s a bit of a run for liquidity right now happening in gold as well. We’ll see how that all plays out. Steve, it was amazing to be schooled by you.

I really, really enjoyed our last 54 minutes here together. We’ll have to do this again together. I really enjoyed it.

It’s challenging for me to keep up with you. I loved it. We’ll have to do it again.

Where can we send our viewers? Where can we best reach you and get a hold of you? There are three ways. I have a Patreon and a Substack page. If you go to patreon.com slash profstevekean, that’s one way to get my material.

The other is Substack. That’s profstevekean.substack.com. I think it is. I’m forgetting where the dots and the slashes go on that one.

So, profstevekean.substack.com. I also am running an online course now, which is called book.stevekeanfree.com to get to that one. Please pardon some of the marketing. It’s very heavy.

I’ve got a marketing company I’m working with and I love the reach they’ve got. I cringe at some of the marketing, but you end up with a course with me that has now got about 400 or 500 people participating. It’s a lot of fun.

People are thoroughly enjoying the course, and I give them my contrarian approach to economics in that course. Patreon, Substack, and stevekeanfree.com. Yeah, if it’s only half as fun as what we just did here, then it’s definitely a hoot. So, absolutely.

Steve, really, really appreciate your time. It was really hugely educational to me, and I hope it was educational for everybody else. So, thank you so much for tuning in.

I hope you learned a lot today. I sure have. It was amazing to get schooled by Steve and learn a lot more.

I hope my questions made a lot of sense. I’ve been really trying to keep up here, doing a lot of homework and preparation and just trying to stay on top of things. I’ll never keep up with a professor in economics, so I’ll scratch that idea from my head, but it was interesting.

I really enjoyed it. If you did as well, please leave a like, leave a comment down below. What do you think will be happening? Are we headed towards a depression? Of course, it’s a bit of a dramatic question at the end here, but I’m curious how this will all play out and what it will lead to.

Honestly, I don’t know. We’ll have to figure it out together, and we’re trying to educate you along the way. So, if you did like this, hit that like and subscribe button.

Thank you so much, and we’ll be back with lots more. Thank you.