Episode 32: PJ Pierre [Denali Asset Management]

PJ Pierre

In this episode, I talk with PJ Pierre from Denali Asset Management.  

 

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Have comments about the show, or ideas for things you’d like Taylor and Jason to discuss in future episodes? We’d love to hear from you at info@mutinyfund.com.

 

Transcript for Episode 32:

 Taylor Pearson: 

Hello and welcome. This is the Mutiny Investing podcast. This podcast features long form conversations on topics, relating to investing, markets, risk, volatility, and complex systems. 

Disclaimer: 

This podcast is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. All opinions expressed by podcast participants are solely their own opinions, and do not necessarily reflect the opinions of Mutiny Fund, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed to not make specific trade recommendations, nor reference past or potential profits. Listeners are reminded that managed features, commodity trading, forex trading, and other alternative investments are complex and carry a risk of substantial losses. As such, they’re not suitable for all investors, and you should not rely on any of the information as a substitute for the exercise of your own skill and judgment in making a decision on the appropriateness of such investments. Visit mutinyfund.com/disclaimer, for more information. 

Jason Buck: 

Welcome to the Mutiny Investing podcast. I’m Jason Buck, CIO at Mutiny Fund. My special guest today is PJ Pierre of Denali Asset Management. PJ has a long history of being an autodidact trader, starting in FX, trading across multiple asset classes. Eventually having being mentored, for lack of a better term, by Warren Mosler, and now working with hedge fund market wizard, Scott Ramsey at Denali. And Scott’s going to hate me for mentioning that. Yeah, right from the jump I’m really impressing your crew over there at Denali. 

But, I want to start with why you don’t drink coffee? I’m just joking. Right before we got on, PJ told me you didn’t drink coffee. I’m on like my fourth coffee of the day as you can hear by my voice. Maybe that’s why I talk so fast, everybody complains I talk too fast and it may be due to my coffee consumption and maybe I should slow down. Maybe that’s why I don’t sleep enough either. But I’m going to start with maybe the hardest question first PJ. And that is: Is Warren Mosler the most interesting man in the world? 

PJ Pierre: 

Oh, that’s a tough one. I think he’s definitely in the running. He’s definitely in the one of the nominees, if you ask me, but 

Jason Buck: 

Because people don’t know outside of like 

PJ Pierre: 

I think he would disagree. 

PJ Pierre: 

Well that’s because he’s so humble. He’s amazing. So, outside of MMT, which people are either pro or con these days and he was an amazing trader, made a ton of money off Italian bonds back in the day. But more importantly, he has, what is it called? The quad haul ship that he built. He basically designed 

and had built down in the Caribbean. It’s a quadhull because it can manage the waves better than a monohull ship, so that’s one of the things he built on the side. He also built his own car company, was the P 900 back in the day. He was trying to build race cars. 

PJ Pierre: 

MT900 

Jason Buck: 

MT900. Okay. These are his side hustles. This is what he does in his spare time. And had lived down the Caribbean for most of his life. I think he’s also found the fountain of the youth, because what is he in his seventies now? And, to me, he looks like he’s in his forties. So this is my pitch. What I’m doing is I’m pre-selling the biopic that I’m going to create about Warren Mosler, the most interesting man in the world, to take over the Dos Equis guy. But, you got to spend a lot of time with him. I’m sure I’m missing a lot of little details, but what you also just referenced is humility, right? He takes his time to teach people. He’s never the biggest personality in the room and tries to deflect as much as possible. Is that a fair statement? 

PJ Pierre: 

I think so. One of the things that I always found interesting about Warren is how charitable he is to everyone. It doesn’t matter how often I go “Ah, what’s this guy saying? He’s not making any sense.” And Warren goes, well, he’s right in the context of fix exchange. So it’s like one of those dynamics where he could kind of always find the silver lining or always find a way to be magnanimous and charitable, which I think makes him a pretty interesting person. I mean the whole dynamic of how he came to be one of the driving forces behind the proliferation of MMT has to do with that same charitable dynamic, where he was funding research and putting together conferences sort of out of his own pocket just because he thought this was information that was useful, and needed to get out there. I mean, he’s run for office a couple of times. 

Jason Buck: 

Oh yeah, see? I knew I was forgetting stuff and I forgot he ran for office in the Caribbean and in the U.S. If I remember correctly. 

PJ Pierre: 

Yes. I want to say maybe in like 2012, he ran for president. And I think the idea was he just wanted to kind of run on the platform of a payroll tax holiday, and he wanted to just get that platform out and thought that that would be good for the economy. And then eventually the Obama administration adopted the payroll tax holiday, or Obama administration and Congress. So then he dropped out, mission accomplished. So it’s definitely interesting the way he kind of sees things. And then the way he kind of gets up and tries to do something about it. 

Jason Buck: 

Yeah. Besides even the Obama administration taking on that payroll tax holiday, you’ve told me a bunch of other private stories. And I don’t want to blow up Warren’s spot, but where he’s almost in the best sense possible, like Forrest Gump. He ends up talking to a lot of politicians, administrators and his ideas get adopted by other people and they get all the credit. And like you said, his humility is like, he doesn’t care, as long as his ideas got implemented. He doesn’t even want credit for his ideas. 

PJ Pierre: 

Yeah. I mean, that goes in the world of finance as well. 

Jason Buck: 

Which is shocking in the world of finance. Everybody wants credit for their ideas, even if they only had 5% of the idea, everybody’s going to pretend like it was theirs. 

PJ Pierre: 

Oh yeah. 

Jason Buck: 

So obviously part of your Mosler background, but it’s not fair. I loosely use the term mentorship, because what I think you brought to it is not only what you learned as an autodidact trader, but also what you’ve learned from your new unique path in life, as we all have unique paths, is then you took in what Warren was saying. But if it didn’t work with the way you viewed the world, then it wasn’t like you just took everything Warren said, hook, line and sinker. You were like, “Does this line up with the way I view the world?” You had your own thoughts about it. So that’s why I really wanted to do a podcast with you, cause I love our private conversations. And especially if you have that kind of monetary or money view framework, it’s something that we can all use as a better foundation. And you already referenced fixed exchange rates. So, maybe kind of unpack that a little bit for us. What did you mean when you said that worked in a fixed exchange rate world, or a fixed rate world? 

PJ Pierre: 

Yeah, I guess I could kind of dive right in there if you want, but I don’t know if you wanted to sort of do like a little brief bio or so on first? 

Jason Buck: 

Let’s just dive right in. We’ll figure it out as we go. 

PJ Pierre: 

Cool. So in the reference of fixed exchange, I’m pretty sure most of your listeners are aware of the fact that we currently are on a floating exchange rate system where the dollar isn’t convertible at a fixed rate to any other asset. If you walk into the fed with a hundred dollar bill, the only thing that they’re going to offer to give you is two fifties or five twenties or so forth, but nothing else. So in that framework, there are certain dynamics that just are different than if you were in fixed exchange. And one of the things that I gravitated towards with the stuff that Warren Mosler was teaching, was the fact that a lot of the prescriptions that sort of come from the mainstream macro models were sort of, kind of leading you to, your conclusions were almost 180 out, right? 

PJ Pierre: 

Where it’s like almost the exact opposite things happening. Like Standard and Poor’s or Moody’s downgrades, U.S. debt and interest rates go down, not up, bonds rally. So you have to ask yourself the question, “Why is that different?” Or, anyone who’s familiar with bond markets, and especially Japanese government bonds, is familiar with the widow maker trade where, lots of people, based off of everything you learn in the text, thought it was a good idea to short Japanese government bonds based 

on their debt ratios and those aspects. But the rates kept going lower and lower, and people kept losing money. For me it was kind of easy to sort of gravitate towards what’s now known as MMT. 

PJ Pierre: 

I’m not a huge fan of the name. I don’t think there’s really much theory in modern monetary theory. I think it’s just kind of descriptive and, judging for my background, one of the jobs that I had before I actually stopped working for anyone and just trading my own accounts was, I was an automotive technician right out of high school. And I used to do electrical diagnostics and all sorts of engine control, system diagnostics, and stuff like that in cars. And one of the things I always think of, as it relates to finances, if you brought me a modern internal combustion vehicle and I was diagnosing your car, and diagnosing your running problem, and I said that you needed to replace your fuel injectors. It wouldn’t make sense for you to tell me that “Yeah. Okay. But your knowledge doesn’t apply to a carburetor.” 

PJ Pierre: 

It’s like, “Well, no, the description I gave you for fuel injectors describes that system. If you give a carbureted car, I’d give you a different description.” So as it pertains to fixed exchange, to me, some of the things that we describe when we were describing the modern monetary system were applicable to fixed exchange. So they were applicable to a carbureted engine, but they’re just inapplicable in the world of fuel injected or floating exchange, to overuse the analogy. 

Jason Buck: 

Yeah. And I’ll maybe say it in a different way, cause we had a lot of animated conversations when we were in person down in San Diego. And I think part of it (that’s why I was going to try to bring out on here) is things that make you angry or things that you hear a lot of times in Macrospace or Fintwit that upset you. And one of them, like you’re saying, is a lot of people’s understanding of the world is based on this fixed exchange rate. And basically their thoughts are outdated the way the monetary system works. And so that’s what you’re dealing with all the time is like, people are saying things that like only apply maybe in a textbook from the 1950s. But when we start talking about monetary operations as they are now, and it’s descriptive when you talk about monetary operations, not prescriptive. 

Jason Buck: 

And that could be very frustrating for people like you or Warren. And like you said, Warren, his equanimity is impressive. And so is yours too. But, I know I can get you a little heated sometimes if I poke and prod you in the right way. You brought up being a car mechanic. It made me think about a lot of times, even if you learn about monetary operations, and especially if you have a mechanics mindset and you’re trying to figure out a closed loop system, right? You can kind of figure out a way a closed loop system works. And that’s most of the things that humans invent are closed loop system. But when we start talking about an open loop world of finance or global macro environments no matter how much you may understand monetary operations, there’s something outside of that closed loop system that can affect monetary operations or something else. 

Jason Buck: 

Like we’ve talked about before, you have internally public and private balance sheets internally in America, but then you have to worry about the foreign exchange. There’s always some sort of compounding variable outside that system. So, to me, that’s an interesting transition because usually if somebody’s a car mechanic, or like an engineer that I talk to a lot of times as clients they have a very 

closed loop mindset, but you have a very open loop kind of view of the world to realize maybe what you don’t know or there’s a lot of form of integrative complexity. And I’m wondering how you kind of like made that transition to be a lot more open-minded than thinking about the world in a very mechanistic worldview. 

PJ Pierre: 

I think for me it was probably because I sort of came at auto repair as kind of just as something to do to try to work my way through school at the time, with the idea that I was going to do this job and then find my way back to get a degree or so forth. But I sort of came at it from the perspective of someone who was very much into the science of how things work. That’s the reason why I found the job interesting. It was like, “All right, here’s another thing for me to figure out how it works.” Growing up, my dad would always explain to me how a CRT television works or the difference between a parallel electrical circuit and a series circuit. These sorts of dynamics. 

PJ Pierre: 

So for me, when I came at auto repair, I think I was kind of a bit open-minded because the concepts that I was sort of applying were much broader than just in that narrow system that I might happen to be analyzing. So, it’s like you said, there’s always a hidden variable potentially. Even in a system that you think you understand, there could be some component factor or some exogenous influence that’s sort of driving a result that’s different than anything you’ve experienced. 

PJ Pierre: 

And then in finance, it’s like you said, being an autodidact, I also like to consider myself like an armchair physicist. So I would read a lot of books on theoretical physics and those kinds of concepts. And then you really start to challenge the concept of how much do you really know in a system, right? It’s Schrodinger’s cat, as humans learn by making measurements, but every time you make a measurement, you’re influencing the system, so you become one of the component factors of your measure. So objectivity is lost and it’s all subjective. So, once you start to kind of apply it with those kinds of things, you kind of move with an open mind. And then for me, I think the other thing was, especially moving into finance, was it would’ve been hard for me to kind of have a closed mind when everything that I was told seemed to be not accurate. So it’s like… 

Jason Buck: 

What do you mean by that? Give an example. 

PJ Pierre: 

Well, for example, when you start to learn about finance and you learn things like, one of the main tenants in like macro economics is basically the concept of savings being the precursor to economic activity. So, we spend from our savings, we invest from our savings. And for me it was always kind of backwards because to me it’s like, “Well, I would’ve had to earn something to have saved in the first place.” The dynamic of loanable funds models, when you start to try to learn about banking and economics and fraction and reserve banking, you start to realize that some of that stuff just doesn’t, like there’s dislocations, or it just doesn’t fit the real world. 

PJ Pierre: 

Whenever you actually start to analyze these things, it’s these dynamics or you get these stylized stories where our monetary systems progressed from a system of barter. And then due to the necessity to sort of lubricate said system, we came up with a monetary system which would’ve started with like hard currency, so specie or whatever, some sort of commodity currency, most likely. And then to further lubricate that system, we then would come up with a credit system and overlay that on top of that. And then it would sort of create these dynamics. And I guess maybe it’s the confluence of all the experiences I had to that point. Where for me, it was just kind of simply put that credit most likely would come first because monetary arrangements are based on credit to begin with. Like if I have a tax obligation, I pay it. That was a credit, I owed taxes. That’s a form of credit. 

PJ Pierre: 

I discharge that debt by bringing that which is acceptable in payment of taxes and the relationship collapses. It was real easy for me to understand that, just as in physics, we talk about the theory that the universe expands and then possibly will someday collapse. It was kind of easy for me to understand that credit systems and money aggregates sort of expand and then contract based on economic activity and based on credit systems and so forth. I think it’s a quote, I’m not sure who to attribute it to, but it goes, “Economics is a science of confusing stocks and flows.” And to me that’s something that always resonated with me because you see it kind of play out in all levels of econ where the difference between a stock and a flow sort of gets confused. 

Jason Buck: 

Exactly. There’s so many things you said in there, I want to pull on different strings. So to pull on one, I’m glad you brought up physics. Because when you were talking about your childhood and the way your dad was educating you, remind me of Richard Feynman and his dad, the stories of his dad. And I was like how fortuitous to be raised that way. And then you start talking about physics. So I’m sure you’ve probably read the books about Feynman, and the way he was raised , and how his dad always had a questioning mind and was getting him to look a little deeper to how things work. But the other one you brought up though in physics, what I also can’t stand is a lot of times people will go, “Well like a physicist, I reason down to first principles.” And right then I go, “Well, you just disqualified yourself, because which branch of physics are we talking about? If you think there’s first principles, quantum mechanics and everything, will tell you, there’s not really first principles there.” 

PJ Pierre: 

Yes. 

Jason Buck: 

[crosstalk 00:19:22] 

Jason Buck: 

Go ahead. 

PJ Pierre: 

The statement betrays the ignorance, right? 

Jason Buck: 

Exactly. They haven’t asked enough questions. If you thought you stopped at foundational principles, you need to keep asking questions. You actually didn’t dive deep enough, but it’s always interesting to me, they invoke that like they’re a deep thinker and I’m like, “To me you negated yourself right off the gates on that.” I was kind of thinking I could go in the direction, like I said, of what annoys you and you start referencing do I save first and then I spend money? Or do I earn first? And then I save, I spend money. I’ll even start with something as basic as should we run the government, like a household budget? 

PJ Pierre: 

All right. So I’m going to try to keep my cool in this podcast, even though Jason’s goal is 

Jason Buck: 

No, I’m going to give you 

PJ Pierre: 

to push my buttons apparently. The short answer is no, we shouldn’t run the government like a business. The government’s stated purpose isn’t to somehow extract resources from other agents in the economy to somehow accumulate wealth. That’s not the purpose of collective government. Government’s purpose is to serve public purpose. In many ways, the institutional arrangements that are set up around creating a government and the institutional structures, like a system of laws, property rights, all these sorts of dynamics that lead to the free exchange that we enjoy today that creates a productivity and all the real wealth that we enjoy, is a system where the government is, or at least in my opinion, I think the government should almost be necessarily countercyclical. And I think that private individuals are by definition procyclical. So yeah, the idea, [crosstalk 00:21:25] 

Jason Buck: 

But PJ, we should get rid of the budget deficit. The government deficit’s killing us. What are we supposed to do about that? 

PJ Pierre: 

Well, none of us [crosstalk 00:21:33] 

Jason Buck: 

If you can’t see the video I’m smiling. I’m smiling. 

PJ Pierre: 

Yeah. You hear it. Fortunately, what I will say, we could address that, but what I will say is you don’t hear that as much as you used to. We’ve had some of the largest expansions of fiscal policy that we’ve seen in basically like war footing type of expansion of fiscal in response to the COVID pandemic and no one’s talking about solvency, no one’s talking about going bankrupt or leaving debt to grandchildren. Everyone’s focus is on inflation, which is, I think where it correctly should be whether or not this footing is going to lead to inflation that’s somehow detrimental to economic growth and prosperity and generation of real wealth and productivity and so forth. 

PJ Pierre: 

By definition, you and I know this, and I think more and more people are beginning to know it, but it’s a simple macro accounting identity that the public sector deficit, is a private sector, is the non-government sector savings to the penny. It’s like, where else would it come from? When we talk about household wealth, when we talk about the wealth denominating dollars accumulated by the rest of the world, global reserve stocks and so forth. Where did they think that that currency came from? Those balances that are saved on private balance sheets are negative entries on the public balance sheet. It’s just basic double entry accounting. And it’s not really that controversial for people who understand that, but it still brings up lots of animus if you bring that up at Thanksgiving with your uncles or at cocktail parties and so forth. 

Jason Buck: 

What you always talk to me about, and I think it’s key, is everything has two sides of the coin, right? Every asset needs a corresponding liability and that’s what we need to always think. And the cancellation thereof of the two double entry bookkeeping, those sorts of things is what we always talk about. So one of those is like you just said, I just want to, once again, highlighted again, is that a government deficit can mean household savings. So we’re showing household savings are some of the largest they’ve ever been, but also at the same time, obviously the government deficits is one of the largest it’s ever been, because those are like offsetting each other. And there’s difference between public and private versus households, corporations, et cetera. But another part of that, like you almost referenced about, do I spend out of my savings or not is like, why do we have taxes? Maybe that’s the question, does the government spend out of the taxes they collect and that’s the government budget? 

PJ Pierre: 

Well, I think that’s actually a good thread to pull on because I think that was like the main insight that I could say for me uniquely came from Warren Mosler. I don’t have any like original ideas as it pertains at macroeconomics. I just was able to absorb the information  

PJ Pierre: 

… economics, I just was able to absorb the information that I thought fit the world as I saw it best, and just makes more sense. So to me, everything I understand about economics is just pure force of logic. To me this concept of, in order for the government to spend it first has to collect taxes. And I think that’s a good place to start because going back to my father, when I was a kid and I would ask my dad, “Why is money valuable if it’s just a piece of paper? I don’t understand. How’s that work?” And then my dad said, “Well, money’s valuable because the piece of paper just represents America’s stock of gold, gold reserves.” And at the time that my dad was telling me this was probably, early 1990s. We were long since off the gold standard. He may or may not have known that or not. 

PJ Pierre: 

I don’t know. But as a kid, it was enough to make me kind of go, “Okay, so it’s valuable because of gold?” I was always a curious kid, and my parents encouraged that curiosity. However, I don’t know how much time it took, but then, I came back with the next question, “But why is gold valuable?” Then you get to this regression. Quickly, my dad was like, “Well, gold is valuable, because it’s always been valuable.” And even as a kid, I’m sure he could see it on my face that I wasn’t satisfied with that answer. It’s like, it 

couldn’t have always been valuable, at some point someone had to decide this is valuable and get others to agree. 

Jason Buck: 

Yeah. Just like every kid as you know, we happen to do this in finance all the time, because we’re trying to do our own work. We’re autodidact. We’re trying to figure it out. If you ask somebody like a little kid. If you ask them, why, three to five times they tend to break down. Just like parents said, “Because I said so.” And you find out who actually knows what they’re talking about or not. Sorry I interrupted. So then you went to gold and he said, “Because it’s always been valuable, because it’s a shiny yellow metal.” Yeah. 

PJ Pierre: 

Because it’s always been valuable. And then, at some point or another, I think I was much older. I think I had to be probably elementary age when I was asking those questions. But then, I think I was probably much older. Maybe I was early teens or whatever. I was kind of talking to my father and I said, “But if the currency is issued by the government, if you counterfeit currency, you go to jail. Everyone understands that. The only people who could mint coin or print paper currency and it be legal is the US Government.” I would kind of always ask the question, “If the government has to,” and I didn’t know the answer to this. So it’s not like I had some sort of insight. 

PJ Pierre: 

I just knew that the information I was getting didn’t fit in my head. So I sort of accepted it as fact that the government did spend from taxing. But what I couldn’t understand was if the currency that we used to pay for to pay our taxes is the currency that it can only be issued by the government, I didn’t understand how we ever got the currency to pay them in the first place. So in the first instance, I didn’t understand how the first person made that tax payment. I could understand that if the government collects the dollar and spends it, pays it to you, you could then use it to pay your taxes. But if the government needed the dollar from one of us to pay you in the first place, I didn’t understand. I didn’t know how you start that. 

PJ Pierre: 

It was sort of this circular logic that I didn’t know how to, what angle to sort of come at it from. But it wasn’t a big deal, I just moved on. I just accepted that there are people who understand these things, and I’m just not one of them. I just haven’t done the work or I haven’t run into the right person who could actually give me the answer I was looking for. And as you said, being an autodidact trader, I had already spent sort of years reading, studying and learning about the financial markets and still, never got a satisfactory answer to that question. Most other people didn’t ever even seem to be asking that question. And one of the things that resonated with me was, in talking to Warren, Warren would say, the thing he said was, “The sequences, the government spends first, then it collects the tax.” 

PJ Pierre: 

And for most people they probably hear that and they go, most people who are reasonable and logical could go, “Okay, I understand that. That makes sense.” But for me it was so much more than that. It was just full circle, because it’s like, “The government spends first.” It’s like I always understood that because to me, I sort of imagined this situation where, the Greenback is created during the civil war. And I kind of just thought that there was some distribution center where the government came and said, “Come 

trade in your other money thing for this new money thing.” Because I was like, “How did they get the money out there in the first place?” But then when I understood, when Mosler said, “The government spends first, then it collects taxes.” 

PJ Pierre: 

Then for me it was like, “Okay, that’s simple. You don’t have to have distribution centers. You don’t have to get people to exchange there crowns for the Greenback. You just spend the Greenback on things and then that’s the same currency that you could collect when you collect tax payments.” But that also leads to a regression, where you go, “Okay, well then, if that’s the case, then why would anyone accept the Greenback from the government?” is the next logical question. Okay, if the government spends first, but if the government spending paper currency that it printed on near worthless paper, why would you and I exchange our goods and services to the government for this Greenback? And what resonated with me further was Warren actually had an answer to the next question. 

PJ Pierre: 

And it was because of the tax obligation that the government imposes on you. The government imposes a tax obligation. You now owe this, you now owe 100 Greenbacks. So your question is, well, what’s a Greenback and how do I even get that to pay you? The government says, “Well, we’re looking for soldiers. You’re able bodied show up. And one month’s conscription gets you 300 Greenbacks.” And it’s like, ” “Okay, cool. So I could earn enough Greenbacks to pay my taxes and have something to save. So I don’t necessarily have to show up and get shot at in the next period because I earned enough to save.” And so quickly, I quickly kind of gravitated towards, okay, now I want to learn more about this stuff because now this makes sense. 

PJ Pierre: 

I’m the kind of person that if something doesn’t make sense to me, I can’t move forward. I just kind of get hung up. It’s probably not a good trait. If I’m reading a research report that might have a useful nugget, but there’s a line in the middle of the report, but there’s a line in the beginning that doesn’t make sense to me, I’m just not going to ever make it to the middle to find that useful nugget oftentimes, because I just kind of, I start racking my brain as to how to make sense of this thing that doesn’t make sense. So once that sort of started making sense to me, it was a lot easier for me to look at the world of finance and understand these things. 

PJ Pierre: 

And the most surprising thing to me, it wasn’t just that what I had been taught before was backwards. That wasn’t what surprised me the most. What surprised me the most was that almost everyone was taught the backwards description as opposed to what I believe is the more accurate one. When I first learned this, I kind of thought, “Okay, now I’ve finally been initiated. I’ve finally been let in the room where everyone knows that the government spends first.” Then quickly, Warren’s like, “Well, no, but no one seems to know this.” 

Jason Buck: 

This isn’t a secret knowledge or secret college. It’s just, nobody cares and everybody believes- 

PJ Pierre: 

If you say this out loud, people are going to maybe laugh you out of the room. So I was a bit disillusioned that dynamic. I’m always one of those guys who’s sad when you hear the story about, physicists who comes up with a great theory and then his contemporaries just kind of ruin him because he challenges their work and then he’s only vindicated 30 years after his death. That kind of stuff always bothers me. So to me I was kind of like, “Wow, if no one knows this then, so what are those implications for everything else you hear when you hear the government needs to get its fiscal house in order? So they’re wrong about that?” And then the answer’s, obviously you hear, yeah, they are wrong in that sense. 

Jason Buck: 

One of my favorite stories about that is Ignaz Semmelweis used to deliver babies. And they were wondering why all these, when they’re in delivery, how many babies and mothers were dying? And what he started to notice was, and this is pre germ theory. So down in the basement, all of the medical students would work on cadavers, they wouldn’t wash their hands and they’d come deliver babies. And he was just pragmatically and just running personal experiments. He was like, “Hey, I think we should wash our hands after touching cadavers before we deliver babies.” But to your point, he got laughed out of the room. Everybody treated him like a pariah. And then ironically, he died of sepsis. So once again, it’s just full circle. And then later on, we find germ theory, everything, and he was vindicated, but who cares? 

Jason Buck: 

It didn’t happen in his lifetime. But part of the narrative you told, I think they always use the historical antecedent of a military. And that’s the way they first spend and then collect. But also part of that tax collection with your military then is like, “We get the collective security or violence.” And that’s what justifies also that this is why people will pay the tax and use the Greenback. But what I’m really curious about that transmission mechanism, if it was historically used for a large military, based on the populace is now like in America, less than 1% of the population is military. That’s no longer a transmission mechanism really, right. We can’t really think about, that’s the way you could really value the Greenback that way. 

PJ Pierre: 

Well, I think in the analogy, in the model, the military is just sort of a stand in for the goods and services the government demands. In the modern world, the government demands all sorts of things. Congress needs to get their fiscals once a year. They need to get, whatever, resources they need to pay for the studies that fund the bills that they sponsor. And the military doesn’t just buy, it’s not just soldiers in the military, but it’s equipment it’s R&D, it’s the military college and studying, strategy and so forth. And so, the government sort of demands goods and services that probably touch almost every sector of the economy, these days. You could argue, it may have always been that way. 

PJ Pierre: 

There’s probably just more sectors around today, than there were in the past. But I think it’s useful to sort of use the military because it’s a simple stand in for something that you just know that a government would demand. The government needs, the crown needs, it’s military force. And you could just as easily use food. The crown needs food from the farmers. The king doesn’t grow any food. So I feel like when I was growing up and learning about history, you would hear taxes and you would, and I think 

in most grade school history books, when they’re talking about ancient analogs, they would kind of describe taxes as being paid in kine. 

PJ Pierre: 

I think even the Bible’s that way. In Egypt, the Pharaoh, the guy who grows grain, pays the Pharaoh his taxes and grain, and so on and so forth. The guy who, the silk trader pays the Pharaoh in silks. And I think that’s probably just something that sort of comes from maybe lazy anthropology or lack of actual anthropological study. Because these kind of systems were sort of always monetized to the degree that there was a monetary system and that the king, or whatever form of government you had, whether it be a monarchy or some other, the Roman Republic. To the degree that they issued some form of currency, they almost always bought goods and services in said currency, and then collected said currency and return in taxes. 

PJ Pierre: 

Yeah. There are times where you would, if you might cut out the middleman and you could just, you don’t have money, but you have grain so the tax collector accepts the grain and kine. But it was more as a mediation to your inability to meet the obligation in currency than the normal course of things. But yeah, I think when you look at it today, you see that there’s this economy that’s so much bigger than just the government. So it’s hard for people to think that, “Well, the government spends first in the modern economy.” Because it just seems like we’re in a world where there’s plenty of savings. The distribution of those savings is probably not as equally distributed as we would like, but the nominal amount of savings is large enough that you could imagine that the government could just finance the budget by taxing the private sector. But you can only do that so much. 

PJ Pierre: 

If the federal government ran surpluses, you eventually get to a point where the private sector runs out of savings and can no longer meet it’s tax obligations. It’s a regressive policy that regresses the economy to GDP to zero eventually. So obviously you wouldn’t want to do that if your goal is to promote economic growth. The only reason you would do that is because you for some reason, thought that the government needed to, or that the government would be better off for having a surplus. So the government would better off for saving its own I.O.U so to speak. Its own liability, which also doesn’t make sense and it’s completely nonapplicable. 

Jason Buck: 

Collecting I.O.U’s. 

PJ Pierre: 

Right. In an accounting sense, the federal government could have a budget surplus, but in any real sense, you know that’s not meaningful. If to the degree that we understand that the US dollar, fed liabilities, US treasuries, treasury securities are treasury liabilities. The things that we consider money good are liabilities of the federal government. What sense does it make to conceive of a situation of the federal government being wealthy in its own liabilities? American airlines can’t be wealthy in its own air miles. Just doesn’t make sense. I could collect credits from Walmart, and if I have five, $10,000 worth of Walmart credits, that’s an asset to me. I could go on Walmart and I could demand, I could purchase goods that are paid for in those credits. But Walmart issues those credits out of thin air. There its liability, not its asset. So it’s like what you said before. It’s the other side of the balance sheet for them. 

Jason Buck: 

One of the ones that used to drive me nuts during the pandemic, and nuts is, I’ll talk about it in different ways. The idea that a lot of restaurants were issuing gift cards during the pandemic, and everybody thought it was nothing but a good thing, 100% a good thing. And I do. I applaud every nature of wanting to help their local restaurateurs, but that was a liability on the balance sheet of the restaurants, and everybody missed that. Ans so, they’re issuing that and they’re getting cash, but then they have, whenever they open back up, they’ve got this liability on their books and people are going to come wanting to spend those gift cards. And people didn’t realize that. I understood the sentiment was beautiful. They’re trying to help the restaurants, but it was that liability on their balance sheet. 

Jason Buck: 

But I also felt like I was screaming into the wind when I was saying that, because you just sound like a horrible person. I just was trying to be honest about, that gift card is not just free money, that’s a liability on their balance sheet. So that was one of things that it drove me crazy. But also, other things you’ll typically hear, we were saying, at let’s call it Thanksgiving dinner. That might drive you nuts. And I try to ignore them that way I can maintain my Zen posture in the corner with a cocktail, is the idea that banking is fractional reserve banking. Tell me about how banks actually, create money or what banks actually do, and this myth about fractional reserve banking, whether it’s partially a myth, but maybe not fully a myth. 

PJ Pierre: 

Yeah. It might go too far. Currently right now, I would say it’s not the way the system works. To a degree, I guess it’s fair to call it the myth. I think it was fair to say that’s the way the system did work when you have a fixed exchange system. When you have a fixed exchange system, you have something backing the currency. Whether it be a gold system or you have a dollar peg, if you’re Hong Kong, or some nation with a currency board. You have a situation where, you could argue that’s fractional reserves because to the degree that there’s leverage in the system, then you have a fraction of reserves with respect to the balance sheet. That’s where the term comes from. That’s what they’re describing. But in a system that’s floating exchange and there’s no fixed convertibility, fractional reserve to what? 

PJ Pierre: 

If dollars are held, so the banking system in and of itself, it becomes a different system. So when we look at modern day banking, simply put. We talked about Walmart issuing credits when you buy a Walmart gift card or an airline issuing miles and so on and so forth. I think it’s probably useful to think about the money story, the kind of money stories we tell each other. How do we come to use monetary systems? And then to me, to the degree that a government issues a currency, obviously the money story is in that regard, we don’t have to be talking about all money, but the US dollar, that’s issued by the US government. 

PJ Pierre: 

The government issued that currency to further some sort of objective to meet, for public purpose. So the government issues that currency in order to be able to extract goods and services from the economy and from the non-government sector. So once you understand that, and you understand, as we talked about the sequence that the government spends first, then it could collect taxes and so forth. The start of the sequence is first, the government imposes the tax obligation and that’s what sets the terms of 

relative value. It sets the tax obligation, and it decides it basically sets how much it’s willing to pay for goods and services and that sort of thing. 

Jason Buck: 

Back to physics and relative value versus relative position. 

PJ Pierre: 

Right. And then everything else in the economy finds its indifferent levels. If it takes two days to harvest a bushel of corn, but it takes one day to harvest a bushel of wheat, then you could argue that in terms of labor, wheat is going to be half as valuable as corn, and all these relative value relationships sort of fall out, but you have that first input price from the government and that, which the amount that it pays and it really only needs to set one price. So going back to your example, it might set the price on what it pays for one day’s wage for a laborer. And it might be a tiered system. It might be a system where if you’re a unskilled laborer, you make a certain amount. 

PJ Pierre: 

If you’re a soldier, you make a certain amount. If you’re a skilled laborer or some sort of master, you’re blacksmith, if you’re a carpenter, so on and so forth, you get a certain amount. But once it sets those prices, the economy, the market is good at setting relative value once it has that input. And then the relative value sort of falls from there. When you bring it back to the banking system and you realize it’s like, so why do banks issue deposits? Where do commercial bank deposits come from? The bank’s issuing deposits to further its business. It issues loans, because those loans earn interest. And that’s the business model, simply put. Banks do a lot more than that these days, but, in the first instance, banking is issuing a loan and collecting a vig. 

Jason Buck: 

My deposit, their liability, so they need an asset to offset that, and that’s what the loan creates. It also creates an Asset liability on that side as well. 

PJ Pierre: 

So for me, when you look at the banking system and the concept of fractional reserve, you realize it doesn’t make sense in a fixed exchange world where loans create deposits. And by definition, any requisite reserves, because in the first instance, to be short reserves is to have a negative entry in your reserve account. Is to be in debt so to speak to the federal system. So the way we say it is it’s about price, not quantity. Banks aren’t reserved constrain, or bank lending isn’t reserved constrained, bank lending is constrained by the cost of money, or the cost of reserves can be prohibitive. 

PJ Pierre: 

If the banks know that they’re going to pay a penalty rate on a reserve loan from the fed or on overdraft, so in the first instance that reserve requirement, if the system is net short reserves is an overdraft at the fed, if the penalty rate is so high that it offsets the interest income from the loan, then the banks don’t make the loan. So it’s always about price, not quantity. And once you sort of understand that, you realize, it sort of informs certain things. You understand that quantitative easing is probably not going to promote more bank lending, because you realize that the banks- 

PJ Pierre: 

… because you realize that the banks, if the financial sector sells its stock of treasuries in exchange for reserves, that does not change its ability to make loans to any degree. First of all, treasuries are good enough collateral. You could post treasuries as collateral in the repo markets to pay. So once you understand the plumbing of the system, you realize that it’s just an asset swap. They’re just trading time deposits for demand deposits, so to speak, when you do QE. So it doesn’t really change anything and then you start to realize that if QE is not going to necessarily promote lending, and then you understand that if the Feds buying bonds from the private sector. So if the government issues bonds to finance its deficit, the difference between its expenditure and what it was able to collect in taxes. And if there’s a deficit, if that number is negative, then it offsets that by borrowing the difference. 

PJ Pierre: 

And going back to, “should the government be run like a household?” That’s where these analogies come from. So it’s like, “Okay, so the government needs to borrow the difference.” But once you understand that, if the treasury sells us bonds, and that’s borrowing, but then the Fed buys those bonds back from us, could the Fed not have just bought the bonds from the treasury in the first place? And then you could take it a step further to the degree that the Fed is an agent of government. 

PJ Pierre: 

The Federal Reserve is a department of the US Treasury system and answers to Congress and so forth. And so to the degree that the Fed is, when you aggregate the entire government as a component of the government, what does it mean for one government agency to borrow by selling bonds to another agent of the government. Then so once you sort of understand these things, you start to realize that these relationships are sort of different. You realize that the issuing of bonds is more about managing the interest rate, and it’s more about monetary policy than it is about financing fiscal. And then that goes even back to a fixed exchange system. The government’s had the ability to deficit spend even on a fixed exchange. The problem is, the more currency that’s available in the private sector is the more demand you potentially have on your gold reserves, which threatens your peg, your ability to maintain the peg. 

PJ Pierre: 

If to the degree that your deficit spend, a way to keep people from sort of demanding that gold, converting those dollars to gold, you offer them a time deposit that pays them interest, gold doesn’t pay any interest so that gives them a more attractive alternative. But that was always more about the monetary policy. The borrowing already occurred. Or the spending, I should say, already occurred. The deficit spending already occurred. This was just a way to maintain this policy of the gold backing, which was always just a monetary policy mechanism to begin with. Never really had anything to do with fiscal. 

Jason Buck: 

You said in there that issuance of bonds affects interest rates. So one of the dumb questions I always like to ask people is “why do we have bonds?” So for example, I know it allegedly goes back to the Rothschild family, that they got tired of basically financing or subsidizing monarchs in war. And alleged, they would finance both sides. Whoever won the war, got to then enforce the contracts to make sure they got paid by the previous deposed dictator. And then actually, if then the winner didn’t pay them back either, then they would finance a military to overthrow that leader. This is the way the Rothschilds actually made their money, was by financing monarchs and dictators and reaping the rewards of that. 

Jason Buck: 

So they got tired of doing that. So they’re like, “How do we unlock all of this wealth of this landed gentry?” Because if they’re basically sitting on land wealth, that they’re land rich, cash poor. So they allegedly, one of the Rothschilds, I think it was Nathan Rothschild, in England or the UK, came up with the idea of government bonds. And that way they could trade in government bonds instead of having to trade with monarchs. And also, they could get the landed gentry to start putting some of their wealth into bonds. And then they had this tradable market where the Rothschilds could make money and they didn’t have to worry about dealing with deposed monarchs. But then that’s roughly 200 years ago, and we always move forward. I always think, “Why do we have bonds in general? Why do we even issue bonds?” Like you’re saying, it affects the interest rate. So explain to me why bonds, why do we even have them? Why do we need fixed income? 

PJ Pierre: 

Well, going back to the story you just told about the Rothschilds. I mean, in that story, are they saying that the Rothschilds in essence convinced the monarchs to issue bonds that they purchased? 

Jason Buck: 

Yeah. 

PJ Pierre: 

So to me, that just goes back to what me and you have talked about before, where if you think about it further, you realize that it’s no different. If the Rothschilds were loaning, were financing governments, meaning, what? They gave the governments what? Gold, I assume. Would be what how that story is told. Maybe they provided the governments gold and silver, which the governments used to finance wars and excursions. That was already a bond. They gave the governments gold. The governments gave them back conceivably a note, some receipt that the government owes them that debt. So there was always a bond. There was always this financial asset that was this time deposit, this debt instrument. And so to the degree that they then formalized it and had the governments actually issue bonds that prints the crowns, seal on it and so forth, all they did was formalize an arrangement that always existed. 

Jason Buck: 

But what that’s doing like you said, and I want to get into this, like the time value of money or the time value of credit, or what’s moneyness or money good. But I think allegedly, part of the reason in the story that I’m recounting that was told, was to actually also have a tradable instrument that would unlock the wealth of the landed gentry. Because otherwise they’re sitting on that wealth, they weren’t participating. So now they could create an entire asset class where they weren’t just trading, contra trading with monarchs, they’re now good to trade with actual individuals or a landed gentry in England. 

PJ Pierre: 

So they were creating liquidity for unliquid asset? 

Jason Buck: 

Yes exactly. 

PJ Pierre: 

And to that degree, that part of the story is more interesting than the story of the creation of bonds. It’s to the degree that you create a stock exchange to provide liquidity to your pieces of joint stock corporations that you otherwise would have to find a private seller to buy. On an exchange, you generate a lot more liquidity. So yeah to me, if you ask me why do we have bonds today? I don’t presume to know the answer why we have bonds today. What I can answer is why or what bonds do currently. I mean, currently the issuance of bonds provides an instrument that the Fed uses to implement monetary policy. Or at least that’s how it was when I first came into this industry and started learning about these things. 

PJ Pierre: 

So before the global financial crisis, the Federal Reserve System was not a system that was replete with excess reserves as it is now. Post QE and all these untraditional policies that the Fed implemented in response to the global financial crisis. So in the system before, it kind of reminds me of the way we manage supply chains with on demand inventory. One of the reasons why we have so many pricing pressures as we have now is because of the concept of on-demand inventory, where you efficiently only carry about as much as you think you’re going to sell in a short period of time. And because the supply chain is efficient, you could always replenish your inventories in short order. 

PJ Pierre: 

So you don’t need the stockpile, because stockpiling is an inefficient use of capital. So the way the Federal Reserve System was working before the global financial crisis as far as settlement balances were concerned, is we had a system where the system, at the end of the day always, had just about as much reserves or settlement balances as were necessary for all payments to clear and all regulatory obligations to be met, like reserve requirements. So to the degree that we go into the next day and Jason’s mutiny bank makes a new loan, a new million dollar loan. 

PJ Pierre: 

At that point, if the reserve requirement is 10%, the system’s now a $100,000 short reserves. And so in that environment, the Fed would maintain monetary policy by providing liquidity or providing reserves, but there’s also another instance where I think that example is kind of easier for people to understand. You grow the balance sheet, you need more reserves. They have to come from somewhere. So the Fed lender of last resort provides those reserves at a cost. And so it goes back to what I was saying before about it being about price and not quantity. 

PJ Pierre: 

But there’s another example, which is actually just as common, where I pay off my million dollar loan to the mutiny bank. Well, so now the system is to the degree that it’s the inverse. Now, the system has a $100,000 of excess reserves, in the system that we had before those excess reserves put downward pressure on the overnight interest rate, because all money’s trying to find a home, that’s how we understand competition and difference levels to the degree that you have a 100,000 excess reserves and you’re earning zero on them at the margin, the overnight interest rate has fallen to zero. 

PJ Pierre: 

Well, if the Fed’s maintaining a positive interest rate so let’s just say it’s 2004 or 2005 and the interest rate is 4% at the margin, the interest rates fall into zero, that’s putting downward pressure on those reserves. So to the degree that somebody is borrowing reserves overnight at 4% here, you’d be willing 

to lend them the hundred K at anything above zero. So it becomes this race to the bottom where you loan that to somebody for 3.9%. Well now, whoever they were borrowing for and paying 4% before that you gave it to them for 3.9. Now they have a hundred K reserves that are earning zero. So, so that competition drives, we understand market dynamics, drives that puts downward pressure on reserves, puts pressure on it towards zero. 

PJ Pierre: 

And so what the Fed would do in that instance is its simple. The Fed would come in and do open market operations and mop up those excess reserves. The Fed would mop up those excess reserves by selling you a treasury, a bond from office balance sheet and so instead you would sit in a time deposit, earn an interest rate, a positive rate and not be putting downward pressure on the reserve. So those open market operations is how the Fed sort of hit its target rate. It was part of maintenance, interest rate maintenance policy. Well, once we moved into the world of having excess reserves, post QE one, two and three operation twists, so on and so forth the Fed also changed policy and started paying interest on reserves. Well, it’s something they always could have done. 

PJ Pierre: 

I mean, it’s funny, for the three years before the global financial crisis, I would always hear Warren say, maybe it wasn’t even three years. Maybe it was only like a year before, but I would hear Warren say that instead of doing all these open market operations, the Fed could just pay interest on excess reserves at its overnight rate and job done. You always hit your target rate and it’s what they started doing after that. So right now interest on excess reserves is something that we all have come to understand, but they weren’t around then so that’s what bonds do today. Earlier I gave you the example of, in fixed exchange bonds sort of sequestered money, so that money wouldn’t deplete the gold reserves. And so that was a way of maintaining that form of monetary policy. So it seems to have always as far as I can tell, just been a method for achieving monetary policy objectives, not really financing fiscal policy. 

Jason Buck: 

One of the biggest or consistent policies I see across Twitter or just in life in general, is this idea of fed money printer go brr especially here in crypto, but as we both know the Fed, doesn’t actually print money, the Fed, if anything, prints reserves, then that’s where you keep talking about the reserve requirements. And then what those reserve requirements, how those affect the banks. But we’re talking about banks, the reserve requirements don’t matter as much as just their capital equity and the amount of leverage they can use on that capital equity to create new loans. And therefore the banks are the ones that actually can create money out of whole cloth when they create a new loan for any sort of useful purpose. So if I was going to, I think we both know our Richard Werner and the princes of Yen, that in the 1980s, the Japanese decided to use window operations to incentivize or force their banks to lend more than they normally should, would to the general public. 

Jason Buck: 

And that’s what created the big boom during the eighties in Japan. So I’m wondering just let me ask this in a different way, if you were in charge and you are a dictator of America, PJ Pierre, dictator of America, how would you, this is the monetary velocity issue that we’re not seeing because of their QE is just reserves is, how would you force the monetary velocity to increase? What kind of window operations, or what kind of monetary operations would you force the banks to do to create an interesting capital and 

really get to move money through the system, which we’ve just seen monetary velocity collapse throughout QE. 

PJ Pierre: 

Right. So, and going to what you said about banks being able to issue money out of whole cloth, or issue currency out of thin air. I’m actually not offended by the idea of money printer go brr I think all government spending is money printing its issuance of debt, and all taxation is extinguishing that debt or canceling that debt. So to me, it’s, I don’t find that term particularly controversial. I think to the degree that’s controversial is that, I think people on main street and who don’t really pay attention to monetary operations and money markets isn’t their thing, they’re not bond traders, so on and so forth. You know, most people think of cash as being a much larger part of the monetary system than it actually is. So they’re imagining the printing of new cash. 

PJ Pierre: 

And whereas like, if the Fed adds reserves to the system, the person on main street, isn’t thinking that, “oh, the Fed just printed money,” it’s when the government sends a check, a stimulus check to somebody that’s when they think the money printer go brr. So to them, money printing is just a euphemism for fiscal policy, non-tax, financed, fiscal policy. Right. So to me, its inapplicable, in that regard, but, transitioning back to this dynamic of speaking about the banking system. 

Jason Buck: 

If I forced you to run the banking system and start issuing loans, creating money out of whole cloth, try and increase monetary velocity, how would you do it? 

PJ Pierre: 

How would I do it? 

Jason Buck: 

What’s a proven way. Yeah. What do you, think is the right way of doing that? 

PJ Pierre: 

Yeah so if you restricted me to try to do it via the banking system, then I would say that you don’t do it by reserve. You don’t do it by monetary policy that creates a condition of excess reserves because bank lending isn’t reserve constrained in the first place. I say, you might do it by targeting that, which actually does constrain bank lending, which is capital requirements, collateral demanded for liquidity, so on and so forth. So it’s these regulatory requirements that actually set the terms, create the rules and then the banks go out there and play the game and try to win the game and try to compete with each other. So to the degree that I had to do it through the banking system, I would say that you would probably want to loosen regulations on capital requirements that, if we use the global financial crisis as the example, the global financial crisis was, was a crisis of liquidity in many ways maybe in the first instance. 

PJ Pierre: 

And I think that’s where it became crisis and that lack of liquidity, or it was basically the situation where financial institutions stopped wanting to lend each other. I think you talked about it when we were in San Diego, it’s things that were money good were no longer money good, you went to bed money good, 

you woke up the next day and you need to post different collateral because that which was posted is no longer acceptable. 

PJ Pierre: 

So in that kind of situation, you had, where financial stability was threatened by lack of liquidity, we decided the answer was to make it so that banks are more constrained, have to keep more available liquidity, have to have more capital to backstop their, any potential losses that they may need to absorb, and in that environment, we tighten regulations on banks at the same time that we claim to have been pushing on a string by doing QE and buying bonds off their balance sheets, which basically robs them of the interest income they were getting from the bonds. Which interest income would’ve replenished their capital and made it so that they had more of that capital, which we wanted them to have, and we purported to be stoking, lending by engaging in these unconventional monetary policies. But at the same time, the regulatory regime was contracting credit issuance. 

PJ Pierre: 

And not to say, that’s the only reason credit issuance contracted. You had a recession and the economy as a whole became less creditworthy than it was before. So it might have just been prudent for the banks to not make as many loans to the degree that they’re not in business to lose money. So in that environment, you would’ve wanted to basically encourage risk taking, not discourage risk taking. So I think that’s done on the regulatory side more so than it is on the reserve requirement is a form of regulation, but that regulation has to do with the liquidity management side more than it does the capital side. 

Jason Buck: 

I think hopefully we’ll touch on this more later too, is like, ideally the government will be countercyclical to the procyclicality of a general economy, as the American economy, as in general. But part of it, I was thinking about is even if I was running the banking system and not just because I’m an entrepreneur is I would want banks to lend to entrepreneurs, business owners for CAPEX spending and not necessarily to mortgages or financial financialized products. 

Jason Buck: 

And in creating that way, you create bubbles for asset classes, for people that are already rich, but by increasing the money velocity in CAPEX and maybe entrepreneurial loans, that would be an interesting way of increasing that money velocity, but also increasing the general economy in America. But, as with everything, comes with commensurate trade offs, right. If we reduce capital requirements, we’re making banks a little bit shakier, and in the Minsky sense, it’s stability brings instability might look good for a while. And quite frankly, if you’re giving loans to entrepreneurs, you might have a lot of defaults. So I’m not sure if there is a perfect answer to what would you do if you controlled the banking system? 

PJ Pierre: 

Yeah. So I agree. In the example you gave earlier, you sort of confined me to using the banking system and credit issuance to try to promote economic growth and promote money velocity. So in that regard, you sort of have to do it by expanding bank balance sheets, which inherently potentially puts you at higher risk of a future crisis or some sort of tightening of credits. But there is a way you could do that if that’s the objective. Now, if you ask me if I think the banking system would’ve been the best way to try to promote economic growth, I would say that I don’t think so. Going back to what you said about the government being counter cyclical and wanting banks to do loans that are more productive, loans that sort of create increase the real wealth in the economy, as opposed to basically like lending against financial assets, which doesn’t necessarily create any real wealth per se. 

PJ Pierre: 

I absolutely would tend to agree with you because to me, when I think about the banking system and the way we sort of do things. When the economy slows down, banks being run as private enterprise can track…  

PJ Pierre: 

Run as private enterprise contract their balance sheets, and act pro-cyclically, and stop providing liquidity per se, and when the economy’s running red hot, when we have lots of economic growth. So whether it’s the nineties.com bubble, or it’s the subprime mortgage bubble, or you go further back in savings and loans, and so on, and so forth. One of the things that’s interesting, and you might have heard Warren say it before, whenever you look at a lot of the good times, where we’ve had the kind of economic growth that we champion, it’s always corresponded with some sort of behavior that, in hindsight, we would try to not engage in, moving forward. A lot of the growth in the ’80s was driven by junk bonds and the SNL crisis and bubble, and then, that ends badly, and then, we go, “Oh we don’t want to do that again,” but we wanted all the growth that, that promoted and stimulated. 

PJ Pierre: 

So we haven’t really come to terms with what’s really been the drivers of economic growth in most of our lifetimes. But yeah, so to me, it would actually make more sense if banks, when the economy was running red hot, if they actually started tightening credit and started saying, “There’s a bit of irrational exuberance,” to use Greenspan’s term here, and maybe I’m not going to buy into the hype. And maybe I’m going to say, “Maybe the future is not going to be as rosy as we all believe it to be because of recency bias and so forth,” and to the degree that you would want the banking system to do that, you could do that with regulations. 

PJ Pierre: 

If the Fed was a actual effective regulator, we always talk about, it’s the concept that the Fed’s job is to take away the punch bowl, but the idea has been reduced down to taking away the punch bowl is to raise interest from 4.5% to five. If you really want to take away the punch bowl, you just tighten restrictions on… You tighten the regulations around lending, and you tighten the punch bowl. You could leave interest rates where it’s at, and then, you don’t have to drive up the rate that the government has to pay on deficits. And then, the people at the CBOE don’t have to tell you that, “Well, at this rate, the government’s going to be bankrupt and social security… We’re not going to make social security payments in 2093 or whatever,” and you don’t have to hear all this nonsensical stuff and people projecting these present circumstances into their future indefinitely. 

PJ Pierre: 

You could actually do some more direct things. Now, most people don’t like hearing that because they see it as being a controlled economy. Right? And, I can’t necessarily disagree with that, but it’s always a controlled economy, right? Free markets exist within the framework of the rules that the government 

sets about, in a system where the currency, the thing of final settlement, is a public monopoly that’s only issued by the government. So in what world is that free when the thing at the center of it is a monopoly? Currency is monopoly issuance. So by definition, monopoly is the exact opposite of a free competitive market and that’s the foundation of our entire market system. 

PJ Pierre: 

So once you understand these things and you realize it’s not about black and white free market controlled economy, it’s all about degree and we’re always somewhere on the spectrum, then you start to understand that, okay, you may shift more on the spectrum if that meets your objectives, but you have to understand what those objectives are and how you actually achieve those objectives, instead of doing the things that we keep doing. 

PJ Pierre: 

You look at Japan, we brought up the JGB situation before, you have Japan, where interest rates have been zero for decades, all my financial life, for sure and all my adult life, most of my life, it’s been in that… That’s been the situation and the idea is that these low rates are supposed to be stimulative, but Japan, it never stimulates. 

PJ Pierre: 

And then, anytime they do get an uptick in economic growth, on the fiscal side, they raise taxes, which by definition is contractionary fiscal policy, but they could get away with doing that because the bank of Japan has all this expansionary monetary policy, so they could afford to raise taxes. It’s nonsensical. It’s no wonder they haven’t been able to generate the type of economic growth they’re looking for. They have the accelerator and their brake pedal backwards. They’re stepping on their brake and wondering why their car is not accelerating. And… 

Jason Buck: 

I’m glad you brought back up the JGB trade because I was, actually, thinking about it in a different sense, in that, you reference, that was always the widow maker trade that everybody was shorting JGBs. They got carried out on a stretcher because they never made any money, but what I think is interesting now, is there’s a lot of people that say with their yield curve control and wanting just 25, just stick it at 25 BPs. 

Jason Buck: 

The pressure almost like an ERM might break through there. Almost like a Soros style trade, but I’ve watched everybody making fun of people that want to short JGBs, do you not remember the widow maker trade? Are you an idiot? And I really wonder if this boils down to the old adage, in a bull market, you want a 20 year old, in the bear market, you want a 60 year old. Do people have too much scar tissue where now may be the actual opportune time to be seeing if you can put pressure on JGBs and shorting that JGB market. And we could see it, even though they want to peg it to 25 BPs, it could break through there. 

PJ Pierre: 

Yeah. Look… It’s hard… No, it’s fair. 

Jason Buck: 

I don’t know if there’s an answer to this, but, it’s interesting to me the scar tissue. 

PJ Pierre: 

Yeah. It’s fair and I think the point you’re making is a fair point. I think you should always question what becomes conventional wisdom. The concept of, it’s always been this way, we talked about that before, it had to start at some point and it might have been different before that point in time and whenever you had that paradigm shift, but, to me, I guess, I look at it differently. So to me, when I look at the U.S. Treasuries in our Federal Reserve System and I look at JGB and the Bank of Japan and their monetary system. In those systems, the interest rates are policy variable. 

PJ Pierre: 

So, it’s not really market determined per se. I guess you could argue that the market sets an indifference level. So if the Fed targets overnight rates and then, the market sets rates on three month, two year, 10 year, 30 year, whatever, but it’s an indifference level. The rates on a two year bond are higher than the rates on a three month bond because they include the rates on the three month bond. Right? But they include two years worth of three month bond and it’s the compounding. So it’s all just in different levels. So when the Fed… There’s no market. You and I had this discussion in San Diego, where you have monetary economists, people who work in central banking who say things like, “If we get this amount of inflation or if we see unemployment fall to this level, then, rates will go up.” 

PJ Pierre: 

And to me, it’s that dynamic where, okay, so the FOMC meets and the members all vote on monetary policy. They vote on to stay, to hold, to cut, or to raise, and by how much, if they’re making some sort of rate change. How does that work? This dynamic that, if inflation goes to this amount, or if unemployment falls to this amount, is there somehow some transmission mechanism that forces everyone’s hands up and makes everyone vote on the rate hike? No, there isn’t. It’s conceivable that you could have unemployment fall into zero and inflation rising towards 10 and those 12 people could go in a room and sit on their hands and not raise rates. 

PJ Pierre: 

And as a trader, you have to always… You have to discount that possibility too, that it’s just a policy variable. Right? That’s the reason that we’re all Fed watchers, is we want to know what are they going to do? It’s the reaction function that we’re trying to target. There’s not this implicit… There’s not this natural force that moves these rates, these ways. It’s a policy variable. It’s political. We try to say it’s apolitical, but it’s political to the degree that these 12 people decide, based on their worldview, and their politics, and how they see things, and their understanding of economics, and what they think is important. Some people might think lower unemployment’s more important. Some people might think fighting inflation is more important. You’re going to get a different outcome depending on those two views and it’s not mechanical. 

Jason Buck: 

Yeah. Part of that, I was thinking, it’s the form of [Canesy 01:25:22] in beauty contest, right? Of their second and third order of facts and you’re trying to figure out what those are. And part of it is, like you just said, we even call it inflation expectations and do we undershoot or overshoot expectations? Right? It’s not. So it’s the relative value of expectations then, what is the reaction function to the market expected? And did we overshoot or undershoot? And that’s what move markets. And that’s what I think 

you’re missing those countervailing forces, and depending on who you’re talking to. The other thing that I wanted to touch on, but we don’t have time during this conversation. So I look forward to our future conversations, but part of it was, we were talking about money-ness, time, value, money, credit, all of those things. 

Jason Buck: 

So I wanted to get into, maybe, Perry Mehrling’s four prices of money, and just talk about that a little bit, but we can save that for another time. But I know when we were talking about that the other day. And then, earlier you referenced, even with your dad, into the ’80s and ’90s, talking about the gold standard and how these historical antecedents tend to persist, even when they’re no longer part of the colloquial way we deal with money or whatever finance topic we were talking about. But one of the ones you brought up to me was the Haitian dollar. So I’d like to end on that story of, tell me what is the Haitian dollar? 

PJ Pierre: 

The Haitian dollar. So, yeah. So, obviously, we all always hear the… When you talk about the theory of money, we hear about the three main functions of money, or to me, I’d say the three main functions of the currency thing and those are, obviously, unit of account, medium of exchange, and store value. And for me, these things have always been… I don’t want to say that they’ve been abstract, but you understand these concepts and you see them and how they work in the economy. 

PJ Pierre: 

But yeah, like I was saying to you, as I was traveling to Haiti back in 2016, I think it was, and both of my parents immigrated from Haiti. So, I’m an American of Haitian descent and it was my first time being back in Haiti since I was a child and I’m traveling Haiti and I’m interacting with people and interacting in their economy and everything’s quoted in the Haitian dollar. And when I went to Haiti, I exchanged some of my dollars for Haitian gourde, which is the Haitian currency, the currency issued by the Haitian government. 

PJ Pierre: 

And, I think, at the time, the exchange rate was maybe like 58 to one. It was a pretty big difference, but everything was quoted in either… Every price was quoted in either USD because USD trades in Haiti. You could buy anything in USD. Even the government accepts USD in the payment of taxes, which is nonsensical. That probably explains why their currency is at 58 to one. It just goes to show you that taking advice from the IMF doesn’t really get you. 

Jason Buck: 

So, it also, how pervasive the dollar is. Yeah. And the… 

PJ Pierre: 

Well, right, because they’re taking advice from the IMF and the IMF is saying, “Peg your money to the dollar or take this dollar, borrow this money, take this dollar denominated debt.” So now the Haitian government’s trying to figure out how to get dollars. So they’re like, “Yeah well, we’ll take, we’ll accept dollar in tax payments because we need it to pay this external debt,” and so forth, but that’s an entirely different story. We could touch on another point, but yeah. So prices are either quoted in dollars, U.S. 

dollars, or they’re quoted in the Haitian dollar. And the whole time I’m there, I was like, “So where do I get a Haitian dollar from?” So everyone said, they’d say, “Well, no, the Haitian dollar is five gourdes.” 

PJ Pierre: 

So the Haitian gourde trades at a five to one ratio with the Haitian dollar. But I was like, “Okay, but what is the Haitian dollar? Is there a Haitian dollar printed, so there’s two currencies or is the Haitian dollar just a denomination? Is that like a $100 bill? Or a $5 bill or a five gourde bill, I guess, or something?” They’re like, “Well, no, no. Haitian dollars is it’s just an amount and it equals five gourde.” And I’m like, man, that doesn’t make… So I’m scratching my head. So, you go to get gas and the gas is trading for however many Haitian dollars it is at that point. So it’s probably trade… [inaudible 01:30:26]. 

Jason Buck: 

I’m thinking about the difficulty of that. Yeah. If I’m traveling, I go to Brazil for the Real or whatever, I’m always going, okay. That’s how many Real and I translate it back to dollars, but now you’re going, okay, this is in Haitian dollar, that equals this amount of gourde, and then, gourde equals this amount of USD and so you’re having to do a double calculation. 

PJ Pierre: 

Yeah. You’re having to do a double conversion and so the whole time I’m going, why are we doing this double conversion? So okay. Yeah. The Haitian dollar is five to one to the gourde. And the gourde is 58 to one to the U.S. dollar. So I’m like, okay, great. So then, eventually, I get somewhere, I get to one of my uncle’s houses and he’s relatively educated. He’s a pretty successful businessman in Haiti. And I asked him, I said… I asked him, “Uncle explain to me this Haitian dollar concept.” And he goes, “Oh, well, the Haitian dollar is not really a thing.” And so now I’m even more confused, right? 

PJ Pierre: 

What do you mean the Haitian dollar is not a thing? He’s like, “Well, yeah, the Haitian dollar doesn’t really exist, but the Haitian gourde is so devalued with respect to the dollar and our economy is so dollarized. So it’s a matter of national pride that we quote our prices in Haitian dollars. So it only seems like it’s one fifth as devalued as it would be.” So instead of it being… Instead of just thinking that the gourde is 58 to one to the dollar, he’s, in essence, telling me that they’re looking at it as the Haitian dollar is what? 11.6. Instead of 58 to one it’s 11.6 to one. And I’m like, okay. So that looks better, I guess, but everyone’s doing all of these calculations and all of that as a matter of national pride. The answer just didn’t sit with me but I enjoyed the rest of my vacation and kept doing the double conversions. 

PJ Pierre: 

And then, eventually, when I got back stateside… I got back stateside and I don’t know how… Maybe a few weeks back and I’m like, man, I got to figure out what this Haitian dollar thing is. This is a world with Google. I have good internet. I can find this information. So I start researching the Haitian dollar and it turns out that, at around the time of World War I, the U.S. had invaded and occupied Haiti for 20 years, from 1914 to 1934. And they had done it at the behest of American business interests that were growing in Haiti at the same time that the political influence of the Germans was growing in Haiti. So, and, obviously, we had our conflict with Germany, so that posed a understandable problem for American business people. 

PJ Pierre: 

And the solution to that was to invade and expel the German influence out of Haiti, but one of the byproducts of that was, at the time, they pegged the Haitian gourde to the dollar five to one, and the Haitian dollar is literally just Haitian dollar pair. It’s five to one. Well, that peg no longer exists, but not everyone still quotes in this pairing of five gourde is one Haitian dollar, even though there’s really… The peg doesn’t exist anymore and so that was the legacy. So now, I understood where the legacy came from. They were doing it since then. They continued doing it and that’s where the term Haitian dollar comes from. That’s why it’s called Haitian dollar. So it’s like me saying Euro dollar, when I’m talking about the Euro dollar pair. So now it all made sense, me being an FX trader. I started an FX. 

PJ Pierre: 

Okay, now I get that and that makes sense, but what occurred to me and the thing that… The reason why you’re telling me to tell this story was… As it relates back to the three functions of money, as soon as I understood where it came from, it occurred to me. Haiti, for me, at least, it was the first place that I went, where I actually saw three different constructs posing those three different roles all at the same time and in real time where the Haitian gourde was the medium of exchange and the Haitian dollar was a unit of account. It’s what they were pricing everything in, even though it didn’t actually exist. So it’s just a unit of account, like a unit of measure. And then, you had the desire to save in dollars because it was a better store of value than the Haitian gourde, meant that the dollar was acting as the dominant store of value. 

PJ Pierre: 

So you had these three different constructs in one economy acting as these three functions and these largely illiterate Haitian citizens, all handling all these conversions in real time seamlessly with… And if you ask any of them what are the three functions of money? Most of them don’t even… probably don’t even store a val… They haven’t ever thought through the concepts, but they’re actually… It’s a real world case study for those three functions of money and three different things doing it in real time. Where, to me, it was a better case study than anything I find here stateside. 

Jason Buck: 

The other thing I love about that is, no shade to humans, but we’re irrational. Right? And that’s always my argument for, like you were saying, control the economy or whatever is, if we actually had a counter cyclical or countervailing force with the government, we would be able to constrain boom and bust cycles, hopefully, a little bit more, but it’s governments aren’t a monolith. And it’s humans evolve in government and humans being humans. We love pro-cyclicality and nobody likes to remove the punch bowl. So that’s always one of the arguments against, and so I brought you on to talk about money, because I love always our conversations, but they’re usually a lot lengthier. I’m going to, unfortunately, cut this one off here, but maybe… We try to cover some deep subjects. So hopefully we can have you back on to dive into different segments, but also want to give a place for people to find you. Do you even remember what your Twitter handle is now? I have it, if you don’t remember it. 

PJ Pierre: 

Yeah. I think it’s @TatianaPierre or something like… 

Jason Buck: 

Right. It is, so now I got to know what that means. So once again, on Twitter, it’s @Tatiana, T-A-T-I-A-N-A Pierre P-I-E-R-R-E. But what’s up with Tatiana? 

PJ Pierre: 

I think whenever I was trying to set up my Twitter handle, PJ Pierre wasn’t available and Tatiana Pierre was the name of my daughter’s favorite teddy bear. 

Jason Buck: 

Oh, okay. I didn’t know if that was your childhood nickname or… 

PJ Pierre: 

So her bear, Tatiana, is a member of the Pierre family. So I use her bear’s name as my Twitter handle. 

Jason Buck: 

So you’re already setting yourself up for failure. You’re just assume nobody was ever going to follow you on Twitter. Yeah. That’s why you’re… [inaudible 01:37:19]. 

PJ Pierre: 

Yeah. At that time I had no desire to have a social media presence. I still don’t really have much of a desire for one. 

Jason Buck: 

Exactly. Well. That’s… I appreciate it. We’ll put the link for Tatiana Pierre, on Twitter, in the show notes. And then, I was going to say, it’s understandable given the firm you work for because I was going to say we’ll put links to Denali Asset Management in the show notes, but we are not going to do that because Scott will kill me and shout out to Scott and Brad, but you have one of the most secretive family offices in the country. You guys hate publicity, but you’re all brilliant and great characters. So I’d love to get you more publicly facing, but you guys try to shun it as much as possible. So once again, I appreciate you coming on and I look forward to our future conversations. 

PJ Pierre: 

I had fun. Thanks again for having me. Thanks for talking me into this. As a lot of people probably don’t know this is my first time ever doing a podcast or anything public facing like this. So you had to console me a little bit, maybe hold my hand and tell me it wasn’t going to be so scary, but yeah, I enjoyed it and I’m happy to come on again, in the future, if so desired. 

Jason Buck: 

Yeah. Like a drug dealer, I gave you the first taste and now I’m going to get you back on for more. I’m going to abuse the privilege. Thanks, PJ. 

PJ Pierre: 

Thank you. 

Taylor Pearson: 

Thanks for listening. If you enjoyed today’s show, we’d appreciate it if you would share this show with friends and leave us a review on iTunes, as it helps more listeners find the show and join our amazing 

community. To those of you who already shared or left a review, thank you very sincerely. It does mean a lot to us. 

Taylor Pearson: 

If you’d like more information about Mutiny Fund, you can go to mutinyfund.com. For any thoughts on how we can improve this show or questions about anything we’ve talked about here on the podcast today, drop us a message via email I’m taylor@mutinyfund.com. And Jason is jason@mutinyfund.com or you can reach us on Twitter. I’m @taylorpearsonme and Jason is @jasonmutiny. To hear about new episodes or get our monthly newsletter with reading recommendations, sign up at mutinyfund.com/newsletter.