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Understanding Inflation with Fadhel Kaboub
Episode 15225th December 2021 • Macro N Cheese • Steve D Grumbine MS, MBA, PMP, PSM1, ITIL
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This week’s episode is the audio portion of a presentation by our friend Professor Fadhel Kaboub when he spoke with the Hanon Project's Yousra Magouri in September about the causes and effects of inflation during the pandemic. It’s a beautiful illustration that you don’t need an education in MMT to make sense of the economy. With Fadhel’s characteristic cogency, complex subjects are made accessible without sacrificing depth.

He opens with basic definitions of inflation and how it is measured. He describes the two main types – demand pull and supply push -- then contrasts the mainstream and MMT explanations of inflation and the connection of our current circumstances to the pandemic.

For the last several decades since the 70s, the mainstream economist will tell you too much government spending will cause inflation, right? Whether it's government subsidies or government contracts, you're just flooding the system with cash, giving people dollars to go out and shop and increase demand way beyond the capacity of the economy to keep up with it.

Needless to say, different explanations of the causes lead to very different prescriptions for the solutions, as evidenced by political opposition to further pandemic relief measures and spending on social programs and infrastructure.

Fadhel maintains the risk of inflation is triggered by the lack of productive capacity, including the supply chain disruptions during the pandemic. These problems exist on a global scale.

The second source of inflation, which is the most important, I think, and most neglected by the economics profession is what I call the abusive market power and price setting behavior of key players in the economy. Think of big pharma, think of the energy companies, think of companies that have high degrees of market concentration that allows them actually to set prices simply because they can, because there isn't enough competition, because consumers don't have a choice...
…Now, that type of inflation is not going to go away by spending less on the unemployed, on the pandemic, on education or infrastructure. It's got nothing to do with it.

The episode goes into creative solutions for the global South, the danger of deflation, the limits of quantitative easing, the effect of climate change on the economy, and much more.

Full transcripts of this and every episode of Macro N Cheese can be found at

Dr. Fadhel Kaboub is an Associate Professor of Economics at Denison University and President of the Global Institute for Sustainable Prosperity. He holds a Ph.D. in Economics & Social Science Consortium, 2006, University of Missouri - Kansas City; M.A. in Economics, May 2001, University of Missouri - Kansas City; B.S. in Economics, June 1999, with Distinction. Emphasis: Money & Banking.

@FadhelKaboub on Twitter


Macro N Cheese – Episode 152

Understanding Inflation with Fadhel Kaboub


Depending on your diagnosis of the particular economy, you target your strategy to tame the sources of inflation rather than just manipulate interest rates and blindly implement austerity across the board and kind of collective punishment for the whole economy in order to tame inflation.


Have we seen major sources of demand pull inflation in the US? You tell me when was the time when labor unions were so powerful, so dominant in their bargaining power that they were able to control and demand higher wages and higher prices at a massive scale, even at their peak in the nineteen sixties and so on. It wasn't even close.


Now, let's see if we can avoid the apocalypse altogether. Here's another episode of Macro N Cheese with your host, Steve Grumbine.


Hey, it's Andy Kennedy of Macro N Cheese. This week's episode is the audio portion of a presentation by our good friend Professor Fadhel Kaboub when he spoke with the Hanon Project's Yousra Magouri in September of this year about understanding the effects of inflation due to the pandemic. We here at Macro N Cheese and Real Progressives would like to wish everyone a safe and happy holiday season. Enjoy.


Hello, everyone. I'm excited today to have Dr. Fadhel with us to discuss economy and specifically inflation. I think it's a subject that we cannot ignore. I am personally quite interested in all that's happening right now in the US economy, especially since the pandemic started and all the wild things we started seeing.

So in this webinar, we're going to try to cover what's happening right now, what does inflation mean for regular people, and is this here to say, like, what to expect or is this just transitory? And how can we see that change happening? So aslema and welcome Dr. Fadhel. If you can start by introducing yourself for those who don't know you.


Aslema. Hi, everybody. Thanks for joining us today. My name is Fadhel Kaboub. I teach economics at Denison University in Ohio, and I also run the Global Institute for Sustainable Prosperity, which is a public policy think tank.

So I think everybody's heard plenty about inflation over the last few months, especially here in the US, but really all over the world in terms of the economic consequences of the pandemic is not just the economic shutdown, but as the economy started to reopen after the vaccines were made available on and off in different places.

We've seen the reopening kind of coincide with major bursts of inflation. They differ from country to country, and I'll reference this in a little bit. But it certainly sparked a lot of interest, not just in financial markets and public policy circles, but for every person because we live and breathe the consequences of economic activity in terms of grocery purchases, travel costs, energy costs, you name it.

All of these things matter for anybody in any country. So without any further Ado, I'd like to start with some basics. I'm not assuming anybody knows or has any expertise with this. I'm going to start with the basic definition and take it from there. What is inflation? When we talk about inflation, we're talking about a persistent increase in the general price level over time.

Typically, in the US, we measure inflation month to month. So every month the Bureau of Labor Statistics will release the new inflation numbers. But when economists talk about inflation, we usually compare year to year. So we're talking about the annual change from last year to this year.And when we talk about the general price level, we're talking about, typically, the Consumer Price Index, or CPI, in the US.

Different countries have similar indices but let's call it consumer price Index. And it's, essentially, a method that we use to look at the average family, say, in the United States. What do we consume? A basket of items that the average family consumes, not the wealthiest family, not the poorest family, the average family.

We buy groceries, we buy transportation, entertainment, clothing, you name it, all of these items. And the BLS will, literally, look at item by item, hundreds of items in this basket. And they'll look at actual prices associated with a gallon of milk, associated with a pound of rice or pasta or whatever it is. And we'll get the average prices of the typical items that people buy from grocery stores.

So we put a price tag on all of those items, and we create an index, sort of a weighted average. And that index is consumer Price Index. And then we compare it month to month, year to year. If the index is increasing, we call that inflation. If the index is decreasing month to month or year to year, we call that deflation, which is the opposite of inflation.

And I'll come back to deflation in a moment because a lot of people kind of intuitively, from an individual perspective, you would think, well, we don't want inflation. Why would we want prices to go up? Maybe we do want deflation. And deflation, I can tell you right now is the most dangerous thing for the economy. And I'll come back and explain why.

So our kind of individualistic intuition is actually very misleading when it comes to prices going down. It's not a good idea, actually, for the entire economy. Deflations actually coincide with major recessions and great depressions. So we definitely don't want deflation because they spark that kind of vicious cycle. There's two types of inflation that economists talk about that we should be aware of and kind of distinguish the sources of inflation.

There's the so called demand pull inflation, which is the idea that the economy is generating too much demand for consumer goods. In other words, consumers have a lot of money. Maybe labor unions are too strong and they have strong wages. So they have a lot of money and they go out on a shopping spree and they buy a lot of stuff. They add to the demand.

And the supply side of the economy is just not able to keep up. So it causes inflation, causes prices to go up. So that's demand pull inflation. Cost push inflation, as the name indicates, is the type of inflation where prices go up because the cost of doing business is actually increasing. That could be, for example, an increase in oil prices because oil is a basic input and pretty much everything we do at least have been doing for a long time.

Cost of energy, shipping, transportation, heating and cooling, petrochemicals, all the things that you see around you on your desk, in your house probably have paint on them and petrochemicals. So when the price of oil increases, the price of all of those inputs that go into production and shipping and heating and cooling, all of those prices go up. So the cost goes up. It causes inflation.

So that's a classic case of cost push inflation. So these are two things that we need to distinguish. So when we talk about today's inflation, we need to be very careful. Do we blame workers for having too much money and causing inflation as in demand pull inflation, which is typically what some analysts would blame consumers for having too much money or maybe blame the government for subsidizing the unemployed during the pandemic with too much money, right?

Giving them unemployment benefits and sending them on a shopping spree to cause inflation. Sounds familiar? You've probably heard a lot of this in the last few months in the US with calls on the government to reduce and eliminate the unemployment benefits because they're perceived as, number one, causing this massive increase in consumer demand because the government is subsidizing the unemployed, basically.

Number two, it's giving an incentive for the unemployed, those who are displaced by the COVID crisis, not to go back to low paying jobs because the government is paying them $15 an hour, essentially. I'm sure you've heard this narrative. Versus the cost push inflation narrative, which is there's been a major disruption in the supply chains for basic inputs, right?

So it's not just the cost of shipping and the cost of oil, it's the microchips that go into all the consumer electronics that we buy, including industrial equipment, including the cars, the refrigerators, the laptops that we buy, the cell phones that we buy. So when you have a major supply chain disruption because of the pandemic, obviously, over the last year, you create shortages of actual physical inputs.

And as a result, prices go up and that trickles through the entire system and creates delays, creates price increases and shortages and actual consumer goods as well, which helps to continue pushing those prices. Now, over the last few months in the US, as the inflation rate started to spike as the economy reopened in the last few months, a lot of people turned their attention, immediately, to the government subsidies, saying, this is what's causing the inflation.

Too much government spending, too much government deficit, too much forms of subsidies to people who have been displaced by COVID. But many of us and myself included, are paying close attention to the disruptions in the supply chain. And when people say, is this a permanent cycle of inflation or is it transitory? This is the distinction that will help us identify which is it.

And when it comes to the disruptions in the supply chains, the question becomes, the source of the disruption is the pandemic. So if the pandemic is here to stay with many multiple waves and variants hitting multiple countries, different parts of the world. Given the very low vaccination rates that we have in the global south that we have in many parts of the world at this point, then yes, if those cycles of COVID waves are going to keep coming back, then we're going to have multiple waves of disruption.

And we're going to have multiple waves of additional pressure on prices across the system. But if we manage to, once and for all, break the cycle of the spread of the virus, hopefully the development of different variants that will render the pandemic even more dangerous. Then if we don't succeed on the pandemic front, we're not going to succeed on the inflation front.

So the good news is that this is in our hands in a sense, that we marshall all the resources to make the vaccines available, wear masks to social distance to limit the spread of the virus and the development of the variants. There is a direct link there between the pandemic situation, supply chain disruptions and inflation. What about deflation? As I said earlier, deflation is the most dangerous thing that we could experience.

Just to give you a brief sense of what it is. So if we go back to the idea of inflation, when the average price level goes up, the purchasing power of the dollar bill that you have in your pocket gets weaker and weaker over time. In other words, with the same dollar bill, when there is inflation, you buy fewer things. Right?

But with deflation, when everything gets cheaper on average, with the very same dollar bill, you can actually buy more units because everything is cheaper. So that sounds good, right? From an individual perspective, I have $10 in my pocket. I can buy twice as much. That sounds great, except it's actually a problematic thing because the value, the real value of money goes down.

The real purchasing power of the dollar bill increases. But everything in the economy other than cash becomes cheaper. Right? Everything is cheaper, including your house, including your land, including your factory, your business. Everything goes down. So that makes you as a consumer, as a person who's accumulating wealth in the form of your house or land or business, you're actually losing wealth when there's deflation.

That actually creates a consumer panic, right? Because you're literally losing wealth. It doesn't make you feel happier. It doesn't make you feel wealthier at all. Which means if you have debt, if you borrowed, say, $10 million from a bank to build a factory, so you borrowed $10 million, you have a factory. But then deflation happens.

The real value of money increases, which means the real value of the $10 million that you're paying back to the bank is actually increasing. So deflation works against you if you have student debt, if you have consumer debt, if you have corporate debt. So it's a very dangerous thing, meaning the $10 million that I used to buy one factory with the effect of deflation, I could have bought three factories with the exact same $10 million.

So that's a very dangerous thing for the business sector, for any consumer, any borrower. If you're a borrower, you want inflation, some inflation, obviously not too much. Consumers with the effect of deflation start to postpone unnecessary consumption. Because if I experience deflation for a few months and we have examples of this during the Great Depression of the nineteen thirties, the deflation cycle lasted for a decade.

So consumers got used to prices actually falling. So imagine I drive by this house that I want to buy, and I see the price tag and it says $200,000. And then a week later, it says $180,000. And then a week later it says $160,000, $170,000, whatever it is. So if I decide, well, I'm going to buy it and it's costing $150,000, I'm going to say, well, if I wait three more weeks, it's probably going to be $120,000. Right?

Or one more month, it's going to be even cheaper. So consumers will start postponing consumption of all unnecessary items until they believe prices hit rock bottom. And when we have consumers essentially abstaining from consumption, we have a serious problem, meaning no economic activity is taking place. So that's another reason why we don't want deflation.

Another important point, industrial production, especially complicated industrial production that actually takes time, it completely shuts down during cycles of deflation. And here's why. Imagine this. Let's say your production cycle takes about six months from the moment you buy your inputs to the moment you bring your final output to the marketplace.

So, notice. Deflation is prices going down, right? So you buy your inputs on day one, when prices are up here, and by the time you finish all the hard work of producing and shipping and packaging everything and you bring it to the marketplace, prices have dropped by 10%. So you're essentially buying inputs at a higher cost and you're selling your final output at a lower price.

That is not a good business model for anybody, which is why lengthy, complicated industrial production typically shuts down in lengthy cycles of deflation because it's just not worth it to produce and sell at a loss. So we definitely don't want deflation. So as I said earlier, this coincides with mass unemployment, cycles of depression and so on. So we definitely don't want deflation.

We don't even want zero inflation because zero inflation, we're really too close to the danger zone. So notice, in the last twelve years since two thousand eight, the financial crisis, most central banks looking at their inflation levels in the US and Europe and many parts of the world hovering between zero and 2%, which is the danger zone because it's too close to deflation.

It's too close to a cycle of a great depression. So you notice the public statements of all major central banks is to push inflation to at least 2%, above 2%, ideally. And for a long time, a lot of people who are not in the economics profession, say, why is the central bank trying to increase inflation? Because the danger of deflation is even worse than that.

So in that attempt to push inflation to 2%, ideally, beyond 2%, all major central banks failed miserably. That's not even close, right? Which led us to question the very principles that most economists, most central bankers use in their approach to targeting inflation, managing inflation, understanding what actually causes inflation, the root causes of inflation.

And this is really where the big policy and theoretical debates have developed in the last couple of years, in a way that I'll explain here. So the mainstream approach to inflation that is, traditionally, for the last several decades since the 70s, the mainstream economist will tell you too much government spending will cause inflation, right?

Whether it's government subsidies or government contracts, you're just flooding the system with cash, giving people dollars to go out and shop and increase demand way beyond the capacity of the economy to keep up with it. So that causes inflation. Large government deficits, they have a lot of deficit hawks to oppose the idea of government deficits, and we hear quite a bit from them today, including, especially Senator Manchin in the US, who, I guess, the one person right now standing in the way of the Biden agenda for the big infrastructure spending.

High levels of national debt, people say we're going broke, we can't continue to borrow and so on. So they argue the best way to avoid this too much money chasing too few goods in the system and to avoid having central banks pursue this quantitative easing policies, which most central banks have used since two thousand eight.

That is expanding the quantity of money, especially for the banking system and bailing out the financial system, keeping interest rates very low for banks and for consumers. That just encourages more spending, which means ultimately it's going to lead to an inflation cycle. But all of this has been happening since two thousand eight and not a single hint of inflation was appearing. Right?

All major central banks were trying, actually, to achieve an inflation of 2%. And yet none of it was happening. Now the best example in the history of the world of a country that has the highest debt to GDP ratio in the world, that is Japan, for the last several decades. And Japan has been struggling with the cycle of deflation, not inflation.

They have low interest rates, if not negative interest rates and not a single hint of inflation. They have massive government deficits, not even close to meeting their inflation targets. And since two thousand eight, all major economies joined Japan and the dangerous getting close to the cycle of deflation. So austerity was always perceived as a solution to avoid potential inflation.

So a member of the Fed, this is from a couple of years ago, this is pre-pandemic, essentially admitting that for ten years after two thousand eight, we've tried everything to target inflation at 2%, and we just realized that we have no reliable theory of inflation. Translation in plain English, we have no idea what causes inflation. This is the mainstream essentially accepting this.

The European Central Bank, despite all the panic that the ECB repeatedly has about. Inflation is coming. Inflation is coming, inflation is coming, and not a single hint of inflation. Way below the 2% inflation target of the ECB. And they've tried every trick in the textbook to reach that 2% inflation. And my argument here coming from a non mainstream perspective, is that they completely miss the actual sources of inflation.

As a matter of fact, most of the time, for most countries, the actual sources of inflation are way outside the jurisdiction of the central bank, which means they don't actually have the appropriate policy tools to target inflation. So here's a little bit of reality check, actually, about what's been happening when it comes to food, which is a very important component of economic activity, but daily life, but also social and political stability.

It's been out of control in the last year, partly because of disruptions to the supply chain, partly because of climate change and other factors. The most vulnerable countries are Yemen, Sudan and Lebanon, and many other countries are not very far from that category. So we're talking about very serious components to social political stability, geopolitical stability, to some extent.

So to have the economics profession not understand what drives inflation is a very scary idea here, because if the mainstream economists don't get it, then who's going to manage all of these political and social risks all over the world? If we're flying blind, essentially, and don't have the right tools to address inflation.

So I'd like to introduce you very briefly to the MMT approach, Modern Monetary Theory, which is the framework that I belong to and I'm, during the Q & A, happy to tell you more about it. I'm just giving you the inflation angle to this. So the mainstream believes that too much government spending causes inflation.

So they believe government spending should be limited to how much the government can tax and how much the government can borrow from the private sector. Beyond that, they say, if we increase borrowing, if we increase deficit beyond reasonable limits, we're going to end up in cycles of inflation. And what MMT is saying, sovereign governments, like the United States government actually have a much, much larger spending capacity.

That additional spending capacity is not infinite. It's constrained by the risk of inflation. And then the focus becomes what actually determines that risk of inflation. And to me, it's two particular items. The risk of inflation is constrained or triggered by the lack of productive capacity.

In other words, if you have supply chain disruptions, if you run out of skilled workers, if you run out of raw materials, machinery, equipment, then yeah, if there's more demand for cars and computers and we have shortages, prices are going to go up. The good news about that type of inflation is that with a more resilient supply chain system, with more strategic investments and strategic planning for building productive capacity in the form of skills and technologies and machinery and equipment, we can actually create millions of jobs and at the same time expand the productive capacity.

Which means we actually tamed the risk of inflation. And we push that red bar further and further out. And as a result, increase that additional spending capacity of the federal government. And we've seen this in the beginning of the pandemic, when everybody thought, where is the money coming from to pay for the pandemic relief money? Did we tax anybody? Did we borrow from anybody?

Absolutely not. This was the sovereign government of the United States spending money into existence, and it didn't cause inflation per se. The inflation came from the disruptions in the supply chain, which, I believe, should be and can be transitory if we handle the pandemic the correct way, not just in the US, but globally.

This is a global situation, the second source of inflation, which is the most important, I think, and most neglected by the economics profession is what I call the abusive market power and price setting behavior of key players in the economy.

Think of big pharma, think of the energy companies, think of companies that have high degrees of market concentration that allows them actually to set prices simply because they can, because there isn't enough competition, because consumers don't have a choice. And because federal regulators are not regulating them enough. In the US, we have things called antitrust laws, anti monopoly laws.

And if those laws are ineffective, then we have companies that actually can abuse their market power and control prices. Now, that type of inflation is not going to go away by spending less on the unemployed, on the pandemic, on education or infrastructure. It's got nothing to do with it. The only way to tame that risk of inflation from too much market power is to tax and regulate their market power out of existence.

In other words, make those markets more competitive. Strengthen and apply antitrust laws the way they're supposed to be implemented, to have a more competitive, more democratic economic system. So that becomes a question of political action. This is way outside the jurisdiction of the Federal Reserve Bank.

The central bank is not in the business of regulating pharmaceutical companies or energy companies, and so on. This is in the hands of the 535 people we elect in Washington, DC. We call them lawmakers. Their job is to regulate the market and to create a framework for a more competitive, more democratic system.

So that becomes a question of democracy fundamentally, right? Democratizing the economy, democratizing the system. Now I'm not naïve here. We all understand the superpower that super PACs have in the political system, the influence that oil companies, tech companies, pharmaceuticals, telecom companies have in terms of their contributions to campaigns and elections and so on.

So how do you have political regulators funded by super PACs? And they're supposed to regulate and break the power of these major corporations? That becomes a question of a democratic process. I'll leave it at that. But that is the part where, for me, the inflation components that matter the most are outside the jurisdiction of central banks, which is why central banks can't really control inflation.

I'll give you an example in Tunisia or in many developing countries where a major source of inflation is actually imported inflation via prices of energy imports and food imports. We import a lot of wheat. We import a lot of fuel to run the economy. And yet we believe that the central bank can target inflation. Those prices are determined by OPEC.

Food prices are determined by Russia and the Ukraine and Australia, the major producers of wheat. What can the Tunisian central bank do to convince OPEC to lower its prices or to convince the Ukraine to lower wheat prices? There is nothing you can do, right? It's completely outside your jurisdiction. Yet we have central bankers all over the world believe that they're actually in charge of controlling inflation when it's got nothing to do with the policy tools that they have.

So I can come back to what can be done to actually tame those sources of inflation. So we're talking about a paradigm shift in the economics profession and, to some extent, it's unfolding before our own eyes in the last few weeks. We see it all over the media. We see policy makers rethinking the old frameworks and thinking about new strategies to deal with the pandemic, to fund all the new infrastructure that we need and to handle the risks of inflation in a more effective way.

So, for me, the focus should be on the actual sources of inflation pressure points. Is it food? Is it energy? Is it the type of industrialization meaning the output that you produce? Is it high value added content? Is it low value added content? Maybe the source of inflation is in housing, which is the case in the US, maybe it's healthcare, maybe it's banking and finance, depending on your diagnosis of the particular economy.

Then you target your strategy to tame the sources of inflation rather than just manipulate interest rates and blindly implement austerity across the board in kind of collective punishment for the whole economy in order to tame inflation. So since we're talking mostly about the US today, I'll tell you, pre-pandemic, what the actual sources of inflation in the US are.

So when you decompose that price index that I mentioned earlier, you find four major sources of inflation. And I guarantee you most of you already know this because it's in your budget, you live it, you experience it. The four items are the following; energy and transportation, housing, healthcare and higher education. These are the four items that inflate prices in the US economy.

All the other major components of the consumer price index are actually deflating over time, especially consumer durables, cheap stuff that we import from China from the rest of the world. All of those, on average, give you the CPI inflation rate that we've experienced over the last decade, which is one, one and a half percent. But those components that I mentioned are inflating a double digits. Right?

So we're not going to target inflation if the source of inflation, primarily, is dependent on shortages, say, in the healthcare sector, which we discovered with COVID, abusive market power of pharmaceuticals and health insurance companies and price setters who have no competitors and very little regulation to tame their pricing power.

What can the central bank do to manage those items? These items are in the hands mostly of public officials that we elect in Washington, DC, or in parliaments around the world.


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So I'm going to lay out a very counterintuitive statement that most mainstream economists, when they see this, their brains will short circuit. I'm arguing here that we can increase government spending, not decrease it, increase government spending to fight inflation. And from a mainstream perspective, what? This doesn't make any sense because they argue the more government spending, the more inflation we have.

So hear me out. I'll show you the mainstream narrative about too much government spending. In the case of Tunisia, I wanted to use the Tunisia example here and then I'll show you the MMT strategies to actually tame the risk of inflation in Tunisia, and you can change this with any other country. Let's say in Tunisia, we wanted to spend 2 billion dinars today on health and education, very important sector.

Here's what the mainstream will tell you. We're going to have more food imports, more energy imports, more medical equipment imports, more laptop imports, and so on. So we're going to have a large trade deficit and a large trade deficit simply means the value of the dinar, the exchange rate will weaken. And we've seen this over the last few years, obviously.

And we, in Tunisia, have a structural trade deficit that's very problematic. So we get what we call the inflation pass through effect. With the weaker dinar, everything we import the next morning, whether it's food, whether it's medicine or laptops or whatever we import, we are going to import it at a higher price, right, because our dinar is weaker. So we're, essentially, importing inflation.

And if we do this excessively, we'll cause hyperinflation even. So, that's kind of the mainstream narrative, which leads us to a situation where the government has to borrow even more in order to import the basic necessities at a subsidized price for consumers to protect consumers from high food prices, high energy prices, high medical costs, and so on.

So that leads to more government debt, external debt denominated in dollars. So now the IMF and foreign lenders will step in and will mandate spending cuts. They say, you can't do this. You're going to break the economy. You have to follow austerity rules. You have to live within your means. You have to balance your budget. You can't spend this much money.

So austerity means less investment in health and education. We're back to square one, and we have more unemployment, more brain drain, more social and economic and political tensions. And this is the dominant narrative that we've seen all over the world, in Tunisia and beyond, that Margaret Thatcher told us that back in the day. She said, there is no alternative.

You have to follow fiscal discipline, right? This is the famous line from Margaret Thatcher. So that's the mainstream approach. Here's my approach. Here's the MMT approach. Remember those 2 billion dinars we wanted to spend on health and education? Here's how we're going to do it.

We're going to spend only 1 billion dinars on health and education, and then the other 1 billion that we're going to spend, we're going to spend it on increasing domestic productive capacity of food, renewable energy, energy efficiency and crackdown on corruption, abusive price setters, importers of luxury goods via taxation and regulation. So we're still spending 2 billion dinars but the impact is different.

We're spending 2 billion dinars in a transformative way and, if we do this, here's going to be the sequence of events. We're going to have fewer food imports and energy imports, which is a major problem for us in Tunisia. Which means we're going to have a lower trade deficit, which means we're going to have a stable or even stronger exchange rate.

The value of the dinar will strengthen if we import fewer things, especially food and energy. We're not going to have an inflation pass through effect. We're spending more and we have no inflation because we're targeting the actual sources of inflation. We're going to have a lower external debt over time. We're going to have even a higher credit rating over time, which means we can have an increase in foreign currency reserves at the central bank over time.

And that's going to build more resilience to external shocks, especially when it comes to food and energy security. The more food and energy security, the less external shocks. No matter what happens to OPEC prices, no matter what happens to wheat prices, you have more resilience domestically because you have food security, energy security.

You can't run a country without food and energy security. Otherwise, you're always open to these external shocks to your system. We can obviously have a lower carbon footprint. We can have more employment, less brain drain and improve quality of life for all. So now the same additional 2 billion dinars worth of spending but completely different consequences.

And if we discover the actual mechanics of doing this effectively with 2 billion dinars, then the sky is the limit. In other words, maybe we can do three, four, five, maybe 7 billion dinars on all kinds of strategic areas with this approach that targets the roots of inflation. And what constrains that spending is not the amount of money that we're spending because the government is sovereign and creates its own currency but do we have the logistical capabilities to actually identify the sources of inflation?

Do we have the administrative capabilities to actually implement these at a larger scale? And once we discover that mechanics, now we're talking. We can talk about larger numbers, larger volumes, but over time targeting those sources of inflation. So with that, I just wanted to give you a little hint of the MMT approach to targeting the sources of inflation and I'm happy to answer any questions. Thank you again for your time.


Thanks a lot. This was very insightful. I have a question. So I know you talked about the example of Tunisia and how we're changing how to spend. How does that apply in the US? I'm thinking instead of all those paychecks and extra money that was pumped into the economy, would it be more wise to actually address the problem of daycares and other problems that affect every single family, basically, and it's not actually allowing a lot of people to go back to work?


Absolutely. So in the context of this debate we're having in this country about the infrastructure spending that's needed and a lot of people think of infrastructure as roads and highways and ports, but there's also broadband. But to me, also, people are infrastructure. Trees are infrastructure. Clean air is infrastructure, right?

And I mean it not in just the romanticized sense of the phrase, but in a purely economic sense. Because when you look at the cost of living for average families across the country and look at the composition of what people spend their money on, you notice that a big chunk of the spending for families with kids is child care, extremely expensive healthcare, extremely expensive housing, transportation, all of those sources of inflation.

So let's say, hypothetically, we're going to spend $10 billion on building green infrastructure, let's say solar panels for a certain part of the country. We're going to hire 100,000 people full time to do this job of solarizing a particular region in the country and building the grid and so on, which is a great idea. That's infrastructure, right?

So now those 100,000 people, we're going to pay them decent wages, and it's a free country. They're going to take their money and go out and spend. They're going to spend on food, on transportation, on housing, on child care across the system. And if they start spending in certain areas of the economy where we have those two sources of inflation, which is shortage of productive capacity, then we're going to see inflation.

And if we have spending that's directed in areas that experience abusive price setting behavior by key players, then we're also going to have inflation. So my approach to spending the $10 billion on solarizing the economy, for example, would be instead of spending ten on solarizing the economy and doing nothing else and causing inflation in those hot spots.

What we should do is spend maybe $8 billion on solarizing part of the economy and then the other billion dollars on building additional productive capacity and these other areas of the economy that experience those hot spots, let's say shortage of affordable housing, let's say shortage of public transportation, shortage of daycare facilities at affordable rates or subsidized rates.

That's money well spent. This way, you're still spending the same $10 billion, but you're spending it in a way that kills the sources of inflation. And you also tax and regulate abusive market power, whether it's coming from real estate or finance or transportation, whatever that sector is. This way, the spending is actually improving quality of life and not leading to additional abuse of market power.

So that's really the example. You can do this in any country and see that you can spend the same amount of money in a way that leads to inflation versus in a way that actually kills the sources of inflation. So it's not the dollar amount that triggers inflation. It's where and how you spend it.


Great. Thank you. I have a question. Has there ever been demand pull inflation in the US?


Very good question. So the story of the demand pull inflation in the US, the narrative has been building since the post war era, since the 1950s, essentially, the late 40s and 50s, where the US government went into this mode of welfare spending and the Cold War spending. This was the golden age for labor unions, essentially, gaining more membership and influence in the economy.

And economists like Milton Friedman, the Chicago School of Economics, have been yelling and screaming during those years saying, this is too much money. This is too much power for consumers and workers. This is going to cause inflation. And then when the inflation crisis of the nineteen seventies happened in the US, which was actually a stagflation, I should have mentioned stagflation earlier.

Stagflation is a combination of two problems, inflation and economic stagnation. It's a made up word where you combine inflation and stagnation becomes stagflation. So what happened during the Stagflation period? The blame was immediately laid on workers and unions and too much government involvement in the economy.

And that eventually led to the rise of Margaret Thatcher and Ronald Reagan in the nineteen eighties that came out of that 70s crisis. But the actual source of inflation of the nineteen seventies had nothing to do with labor unions or too much consumer power, consumer spending. It was actually a political crisis in the Middle East, right? OPEC decided we're going to slow down the production of oil.

The demand is still the same, but we're going to shut down some of our production and, as a result, the price will quadruple. And it was used as a geopolitical tool during the conflicts in the Middle East because OPEC wanted to punish the Western world for siding too much with the Israeli side. So the problem was a geopolitical problem that led to an increase in oil prices.

And as I mentioned earlier, oil prices in the 70s are a basic input in everything we produce, shipping and transportation, petrochemicals, energy, electricity, you name it. So prices quadrupled, meaning prices across the entire world started to increase. So that sparked the inflation cycle. It had nothing to do with consumers or workers. So it definitely was a cost push inflation.

Beyond that major cycle of inflation, have we seen major sources of demand pull inflation in the US? You tell me when was the time when labor unions were so powerful, so dominant in their bargaining power that they were able to control and demand higher wages and higher prices at a massive scale, right? Even at their peak in the nineteen sixties and so on, it wasn't even close.

So in general, yeah, most of the inflation we experience is cost push inflation, it's dominant market power, and so on. So that's the short answer. And just to finish the story of the nineteen seventies, because I think a lot of people will wonder, well, how did we get rid of inflation? Well, a lot of people think that inflation cycle, which was caused by oil prices, was actually dealt with with the Reagan and Thatcher policies of austerity.

And it was not. Jimmy Carter actually killed inflation. It wasn't any central bank. What did Jimmy Carter do? Well, we found, number one, a diplomatic solution to the crisis. And eventually OPEC started to produce again and lowered oil prices. But beyond that, during the crisis itself, the Carter administration started to deregulate the natural gas industry.

All the fracking that we have today dates back to those days. Why natural gas? Because natural gas was the substitute for imported oil. So we found a substitute source of energy to lower energy costs, at least for manufacturing and heating and cooling and so on. And that was the big natural gas boom in the US. And that's what started to tame the source of inflation.

But ultimately, it was a solution, a political solution, a diplomatic solution to the crisis in the Middle East. It had nothing to do with the Reagan policies or the FED's policies in the US. So very little credit was given to Jimmy Carter during those days. He, actually, put a solar panel on the White House at the time because his administration was really thinking about how can we find substitute sources of energy.

And solar was one of those early tools. That solar panel, Ronald Reagan took it down immediately, by the way.


That's interesting. It just makes me think of the chip shortage and how the US is starting to rethink the supply chain and manufacturing of certain things.


And notice there's a lot of discussion in the business world and including government now, the dominant approach to supply chain for a long time was just in time supply chain, right? You just bring it as you need it. You don't build stock, you don't produce it locally, you deliver it right when you need it. And you have pretty good logistical infrastructure to do it.

Now we're shifting to just in case supply chain, right? Just in case it needs to be local, just in case you need to build up stock and reserves and backup supplies because we've learned our lesson during the pandemic that we just can't afford all of these disruptions.


Totally makes sense. Okay. In your opinion, what prevents governments like the US in particular, from acting on the MMT principle, which sound plausible action to undertake?


Very good question. This deserves quite a bit of time but I'll give you the short answer, and I'm happy to share resources later. So MMT is not saying that we have these brand new insights that governments need to discover. Governments know that they have spending capacity. They just don't know what the actual limit of that spending capacity is.

Notice every time it comes to a major war, nobody in Congress debates whether we should spend or not. It's a war you spend, right? When the pandemic hit and we decided to spend trillions of dollars on the pandemic relief, nobody, not a single person in Congress voted against the relief money because we know we can create money into existence.

But as the numbers started to get bigger and the pandemic last longer, they started to question is the risk of inflation around the corner. And that's where the old idea started to reemerge again. So what's been happening in the public discourse now is you have increasingly more people in Congress, in the mainstream media and even in the economics profession accepting the MMT framework.

I'm not saying that it's dominant yet, but you have people like Congressman John Yarmuth from Kentucky who is full 100% on the MMT framework. I just have to mention here a major publication came out last year, the Deficit Myth, which is on the New York Times bestselling list. It's a book by Stephanie Kelton, who's one of the leading MMT economists in the US, has a major influence.

Her TED talk just came out last week on The Deficit Myth, very influential and kind of shifting the paradigm the way we think about the possibilities. And MMT is saying, we have a world of possibilities available to us and we're just not tapping into those possibilities. The real constraints is not where do we find the money, who do we tax or who do we borrow from.

The real constraint has to do with the abusive market power that we need to deal with, right? If we want a democracy, we have to have a democratic economic system, too, right? The strength of the economy, the resilience of the economy can't depend on a handful of powerful corporations dominating different sectors of the economy.

It's just not healthy for anybody, right, for a democracy, for a system. So the political constraints, will members of Congress who have these powers and these tools in their hands, will they be willing to tackle this abusive market power? We've seen a little bit of signals from the Biden administration but it's really more signals and threats than real action yet. And we see this in different parts of the world. Right?

The big tech companies are facing quite a bit of trouble in Europe. Pharmaceutical companies are on the radar screen for a lot of countries, especially with the effects of the pandemic. In Tunisia, we've seen quite a bit of crackdown on corruption and abusive market power. These are real policy actions that need to take place if we're going to democratize economic systems and tackle issues related to unemployment and inequality. All of that is just things are out of control in the last few years.


Great. And speaking of abusive power, there's a question about pharmaceutical. So is the current effort to get big Pharma to negotiate with Medicare, an example of regulating aggressive price setting.


Yeah. Absolutely.


Really excited to see if there's anything would come out of all the negotiations, especially with the Medicare. I had one medicine last week for my mother in law, and my out of pocket was $660 per month, and for 30 days, it's just mind blowing.


You can kind of justify it for, like, extremely rare illnesses or like a brand new drug that they spend hundreds of millions on research and development. But you can't justify it for basics like insulin. We've had the formula for decades, and it should cost nothing, right? That's the abusive market power that we're talking about. And it's very obvious, obviously, when it's for life saving drugs, right? And yet where are the regulators, right, who are supposed to regulate this market power?


Yeah, totally. Are we in housing bubble? If, yes, when will it burst?


Big question. Yes, we are in a housing bubble. You've probably seen this since the beginning of the pandemic. When will it burst? If I tell you this and then I have the wrong date and then I'm in trouble and nobody can predict this, right? It's complicated. And it varies, actually, because, as you know, the US, there's different markets.

So if you're in San Francisco and New York, it's very different than other parts of the country. Even within the same state, there are certain pockets of neighborhoods that just don't follow the rules of the rest of the country. The burst of these bubbles has to do with what the financial system does. It's not the real estate market per se.

In other words, access to financing and refinancing, access to loans at reasonable rates. Also going back to everything that happened in two thousand eight. Well, is there fraud? Is there abuse? Are the appraisals actually correct or is there inflation of appraisals, meaning abuse of power by appraisers and mortgage companies and so on? These are all questions.

Is this related purely to the pandemic kind of change in lifestyle that we've seen for many of us, especially in crowded cities where people wanted to go out into the country or out into larger areas? These are all questions that are still unfolding.

And I'm not the one who spent most of my time digging into those questions. But this is what I would look for to do my homework to answer that question about is it a bubble, when will it burst and what will cause the bubble to burst?


Totally, yeah. I second what you just said. Every market is very specific. Every state is different. And even here in Texas, certain cities are still very hot and a lot of them are going back to pre-pandemic prices. So gold and the gold standard have been the most successful monetary system for 4000 years. Gold is money, especially in the last 100 years in Switzerland. My question is, does gold standard play any role in the MMT?


The short answer is absolutely not and I must push back against the statement that the gold standard has been the most successful monetary system. It's actually every single gold standard system has failed. The monetary system that we have today is called Fiat monetary system. In other words, the dollar is not backed by gold or silver or anything.

A dollar bill is a dollar bill. It has the full faith in credit of the United States government. It's not backed by anything. And this blows people's minds. What gives that dollar value? Intrinsically, it's a piece of paper that has some cotton in it and some security threads and nothing else, right? So when you actually look at the history of monetary systems and this is part of the academic literature behind MMT.

The history of monetary systems, they're not always backed by some intrinsic value, like gold and silver. Gold and silver was relatively recent in human history. Earlier societies used objects that have no intrinsic value, like wooden tallies and seashells and you name it and had functioning economic systems with monetary systems with credit and debit transactions without gold.

Gold kind of evolved later in human history, and we've left it behind us. And I don't think it's going to come back anytime soon. It's just not a functional monetary system because, if you tie your currency, the actual quantity of money that you have, to a physical quantity of gold, and you've decided by definition that you're going to constrain how much spending you're going to create in the economy, because it requires you to accumulate more gold, which is globally in relatively fixed quantity.

It can't be a functioning global system. All major countries gave up the gold standard every time they needed to go to war, every time they needed major spending. And then they go back to it because people believe that money needs to be backed by something. Eventually, in the nineteen seventies, we decided to go off the gold standard and, even though central banks today have gold reserves, they really have no economic function other than for making jewelry and making some electronics because it's a good conductor.

Other than that, it's just the old mythology of gold is wealth. It's an asset that people trade in commodity markets. I'm not going to tell you not to buy gold or silver or metals or wheat or whatever if you speculate in commodity markets, but it's not a monetary system that we should ever go back to.


All right. The commodity back that dollar and the silver backs the Euro. Do you think those commodities will change over the next few decades, crypto or other precious metals maybe?


The Euro is not backed by gold or silver or anything, right? It's controlled by the European Central Bank based on specific institutional rules that they've created for the eurozone, but it's definitely not backed by gold and silver. The pound is not backed by gold or silver today, either. The gold standard ended a long time ago, right?

Which, by the way, these are common ideas that many, many people today still believe that money is somehow backed by gold or silver. That was ended a long time ago. All money is fiat money, which means all sovereign governments have the capacity to create their own currency to deal with the pandemic, to deal with prices.

And what we're saying is that it doesn't mean that they should spend unlimited quantities of money, but they should spend on national priorities, strategically, and then deal with the risks of inflation in the ways that I described earlier. By taxing and regulating by increasing productive capacity in key areas and so on.

So we're saying there is a much, much bigger potential for having a good economic policy framework to deal with major problems that we have. So finding the money is not the constraint. Finding the sources of inflation and having the political will to tackle the source of inflation, those are the real constraints.


With this, we come to the end of our webinar. Thank you a lot for spending your evening with us.


My pleasure.


Thanks, everyone who joined and Bye


Bye Bye.


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