S1: This ad free podcast is part of your Slate plus membership.
S2: Hello, welcome to The Money is Made Up episode of Slate Money, Your Guide to the Business and Finance News of the Week, a very, very special episode this week. I am Felix Salmon of Axios. I’m here with Emily Peck of Huff Post. Hello. I’m here with Anna Shamansky of Breakingviews. Hello. But most excitingly, I am here with Jacob Goldstein of Planet Money. Jacob. Hi there. Hello, everybody. Your podcast probably needs no introduction to this crowd, but just in case it does, tell me about your podcast.
S3: My podcast is called Planet Money and my book is called Money The True Story of a Made Up Thing.
S2: You are totally on brand here. We are going to have a whole show about money, which is something weirdly after. I’m not sure what we’re up to six years of this show. We have never actually spent an episode talking about money. It’s about time, if you ask me that. We had an episode of Slate Money talking about money. So this is what we are going to do and to talk about money, what it is, what it means, it’s relationship with power. We’re going to talk about Bitcoin and whether that really counts as money. We’re going to talk about mortgages. Why not? We’re going to even have a Slate plus segment about debt service to GDP ratios. We go all manner of places in this issue. It’s a good one because we have a proper professional podcast, basically driving the bus for a change. So you have that to look forward to coming up on slate money. So, Jacob, in between all of your other gigs, you managed to write a book and it is called Money The True Story of a Made Up Thing. Money is a made up thing. Yes. So I don’t need to worry about it. Right.
S1: Correct. False. Just it’s just a fiction. It’s just fiction like the law, which you also don’t need to worry about.
S2: OK, so these are a major parts of society that we all rely on on a fundamental basis. What does it mean if if that’s so important and so foundational, what does it mean to say that they’re made up?
S1: What it means is, you know, I think we often confuse money, especially with something that exists in nature. Right. I still think we kind of go back to gold in our, like, fuzzy mental models.
S3: That’s what I did, you know, before I started learning about it. It’s just, oh, money is just this thing that exists in the world. And we have some set of complicated feelings about it. But it’s just out there and that is emphatically not true. Right. Money is a thing that people made up and have sort of remade up and remade up. And the important point of that, the reason that insight is meaningful is it means that it’s a choice. Right? It’s this collective social choice we are making all the time. And it’s something that can be quite different than it is now. It’s something that has changed a lot over time and will continue to change. And we can choose to do money differently if we want.
S2: All right. So so what’s the biggest change that you have seen in the history of money? Well, what were the two biggest changes?
S1: Wow. I think from the whole thing, like all five thousand year old.
S2: Five thousand. Yes. I think the one change that people intuitively know about is the gold standard. At one point, money was linked to gold and now it’s not. But let’s put that one to one side because it is a big one.
S3: That one is not overrated, that people are correct and that we kind of know about that one, though.
S2: So if it’s there, another one is less well known, but almost as important.
S1: Well, I mean, the to call it historical is to give a little too much credit. We don’t exactly know the origins of money, but like the very beginnings of money are really interesting and I think instructive. Right there is this sort of just so story that people told for a long time about the origin of money, which was people before there was money, people would barter. Right. They would just exchange goods. And this was inconvenient because if you had something I wanted in order to get that, I also had to have something you want. Right. And and that didn’t work so well. And people thought, well, if only there were some little token that I could give you for the thing you have and then you could give that token to somebody else, we would solve our problem. Right. This is now called the myth of Barter, because it turns out, as far as historians, anthropologists have been able to figure out, that kind of pure barter society has never existed.
S3: Right. So this barter story sort of imagines money as this very kind of atomistic, individualistic thing in the world. Barter is this very kind of impersonal exchange, what anthropologists discovered instead when they were, you know, going around the world in the 20th century, looking at the way different kinds of societies exchanged material goods in the absence of what we think of as money. What they found instead was this really complicated set of rules about giving and getting and reciprocity, you know, rules about what you had to give someone’s family if you wanted to marry someone in their family rules about what you had to give someone’s family if you killed somebody. In their family and those all of those rules, those really seem to be the origins of money. And so I do think that points to money as this thing that is not this cold, atomistic Mathie thing, but rather this really intensely social and socially agreed upon thing. So that origin story is one of the big ones for me.
S4: And so it kind of goes back to that idea that all money to a certain extent is credit in the idea that whether it’s because a culture says, you know, when you do something, you must give me something in return or whether it’s I did something for you and now you owe me this, like going back to the tally’s stick till today. To a certain extent, it’s all about that push and pull.
S1: Yeah, absolutely. Absolutely. What’s the Teletech I let Jacob. You wrote the book. Yeah. Telesis are not in the book. I know it is. But if you don’t. Well so you point to it. Yeah. So Tele’s in England. Well Felix you know it. You’re British.
S2: I can tell there was a whole pile of them in the houses of Parliament which got burned for firewood and it was this incredible historical record which disappeared.
S3: Yes. Well that that’s the end of the story. Right. And it almost burnt down something the House of Commons. But basically, I think the idea was somebody would take a stick and break it right, break it in half, like whatever a branch from a willow tree or something and give one person one half.
S2: And it was an IOU because they had lengthways to be clear. So, yeah. And you could tell which which two halves matched to each other.
S1: So in some fashion, matching the top of the dead broken in half.
S2: Exactly. Yeah.
S1: Oh like the best friend. Like the B.F. lockets. Yeah. It was that well that England whatever hundreds of years ago and you actually see this model a fair bit. I once at the New York Public Library saw they had that in early banknotes, sort of paper IOUs where they would tear it in this kind of serpentine way and you can match the sides together to see that they fit. And so, yeah, that is debt as this relationship between two people, as you know, manifested in the stick in debt and money to a..
S2: Point a very closely connected in fact, I think Adam was basically saying that the same thing. Yeah. I mean, I can totally see this idea that money is debt. One of my favorite other theories comes from Narayana Koch, Lakotah, who says that money is memory. It’s a way of remembering things. And this goes all the way back to the one thing which everyone who ever writes about money has to talk about, which is the island of Yap. But it’s basically a way of memorializing like who did what for whom.
S3: Do you prefer one of those massive I think I like memory. Like the death thing gets a little slippery today not to have to prefer one or the other. I mean, the memory one is is clearer to me. I mean, money as memory is really elegant. If you want to be more boring about it, you could say money is a ledger. Right. Which it really is. Right. I mean, most money today, like our mental model of money, is a twenty dollar bill or something that is a small minority of the money in the world. Right. The vast majority of money in the world today is basically bank deposits. And a bank deposit is not a record of some dollar bill in the bank’s vault. Right. That dollar bill does not exist. Your money in the bank is just a ledger, is just a number on the bank’s computer. And that number is essentially memory. It’s the memory of everybody passing money from hand to hand.
S5: I mean, I think and this is maybe even too obvious to say, but what Jacob’s book makes clear and we just read the Keynes biography by Zach Carter, Make Money is power. Well, money is power. Yes. And it’s political. It’s always political. And it always has been. It’s it’s a tool of the state. And depending on how you wielded it can help people or not. Yeah, right. That’s the lesson I took away from FDR in the Great Depression, essentially from your book.
S3: I mean, that story FDR in the Depression is the story of the end of the gold standard. It’s really an extraordinary story to me. I mean, I didn’t know it before I started covering money and the gold standard more than any other period, I think was the era when people confused the rules they were living under for the natural state of things. Right. People like really smart people who spent their lives studying money thought during the gold standard that that was the only thing money could be, that anything else was just chaos out of the question.
S1: And they were wrong. Like they were so wrong that they caused the Great Depression. Right. Like the stock market crash of 29 would have been like a nasty recession. But what turned it into the Great Depression was everybody following the gold standard was central bankers raising interest rates as people were losing their jobs and prices were falling, which is clearly the exact opposite of what they should have done. So, you know, Roosevelt gets elected in 1933, the worst of the worst of the Great Depression. The day he gets inaugurated, banks all around the country are closing because basically there’s like a run on all the banks in the country and. A few months later, he says, in spite of the advice of his closest advisers, we’re going to go off the gold standard. And like the people in the room who he tells say this is the end of Western civilization. Like that’s what they thought. And they were smart, right? Like they were smarter than us and they just couldn’t see out of the world they were in. And they were wrong. And he was right. Right. He knew that. Emily, as you said, money was this set of political choices fundamentally. And he realized we America, whatever, the world could make different choices.
S4: Doesn’t it also, though, have to do with the faith and trust that people had in the government? Because, you know, that is power.
S2: That is exactly what power is. So one of the thing that power does is you can try to to turn it into money. One of my slogans that I roll out every so often is that it’s a lot easier to turn my power into money than it is to turn money into power. That when you’re FDR and this is I think the insight that FDR had is that he’s like, I have power and person in the United States. The United States has this incredible global hedgeman. I can just turn that power into money because what the economy needs right now is lots of money. And that’s what he did.
S1: And what were you going to say?
S4: It’s also, though, the faith of the people who are willing to use that money and accept that money, because I think, like, part of the reason the gold standard existed as it did, was because it for a period of time enabled global trade, partly because countries didn’t trust each other enough. And also, frankly, citizens often didn’t trust their own leaders enough. But then as things developed, as politics developed, and especially as the U.S. became this hegemon, like things started to change and the politicians hadn’t quite realized that they really no longer needed this thing that had anchored all of that trust in the past, because now people did have trust in the state.
S5: Throughout Jacob’s book, there are these sort of delightful examples of where powerful political figures take some kind of stance on money and completely change the game. So obviously there’s the FDR example, but then Jacob has the whole thing about Deng is quite right. Kubelik on his grandson, the other car. Thank you. Kublai Khan, who basically is like, use this money or, you know, I’ll kill you. And everyone was like, OK, that seems fine. You know, among those options, I’ll choose the money, right? Yeah. And you had something in France, too. There was John Le, who is trying to get everyone to use money and like, it wasn’t going well until the guy running France, not the king, because he was too young, but the guy who was in the king’s place was like, yeah, use this money. And everyone was like, OK. So, I mean, I feel like there are examples, pre gold standard, where if the person in power says this money is good, most people are going to be like this. Money is good until they decide.
S3: That’s right. I mean, I think one interesting wrinkle in the context of what you guys are talking about is sort of who has power when. Right. Part of the deal with the gold standard was when there would be a bout of inflation under the gold standard, you would need basically a bout of deflation to fix it, essentially to get back to equilibrium. And when the deflation came, unemployment would go way up. People who were in debt would get screwed because your debt stays the same even as your wages are falling when there’s deflation. And for a long time they just took it, it just happened, and they didn’t have enough power to do anything about it. One of the things that changed the life of the sort of classical gold standard was from the first half of the eighteen hundreds to the Depression. So about one hundred years, not that long. Right. One of the things that changed over that period was the people who were on the bad end of the gold standard, the people who had less money and less power got more political power. Right. They got more political power. Politics changed over that time. And so that was part of the reason that the gold standard was able to, you know, be pushed out of business. And in terms of trust in the government, I mean, if you think of what’s going on in 1933, like that is the hundred days, right? That is the New Deal. That is this great pivot in American history, certainly in terms of money, but also in terms of the federal government taking on a much bigger role in American life. And so it does all fit together.
S5: I did want maybe to ask Jacob about what he thinks the link is between money and democracy, because that did come up a few times in the book. I think the France example, someone was saying, like you just at the end of the day, you can’t do this in a monarchy. You have to have the push and pull of regulators and bankers to kind of have success with your money. So is democracy key to having stable money?
S2: I love that question because if it’s true, the power is money and the money comes from power. How does money differ in democracies from money, in dictatorships, autocracies, monarchies, that kind of thing?
S1: Well, I mean, look, there are different things I can say. Like, these are big questions. Here’s an interesting fact. It’s a tidbit, but I hope it’s a tidbit on the road somewhere more than a tidbit. Let me say a few things. One, the Incas had a big, complicated civilization with no money at all, which is amazing, since the only example I’m aware of of this existing, you know, they had trade and they had roads and they had, you know, lots of people doing different things.
S3: And the reason they were able to do it without money was it was essentially an authoritarian government. Right. The emperor and the people who worked for the emperor told everybody what to do, took whatever they wanted from everybody and redistribute it as they saw fit. And there are earlier examples of sort of more subtle versions of this. Right. They talk about temple economies and the sort of ancient eastern Mediterranean, the Minoans before the Greeks were the Greeks. We know they were the Minoans where you had some powerful ruler, religious or, you know, religious, secular figure who basically dictated the flow of goods in the economy, a tribute economy. So everybody makes their tribute to the ruler and then the ruler redistributes everything. And so if you have a very strong central ruler, you can actually get away without money. Right, because you don’t have the need for individual exchange based on people’s wants and needs. You need money. Well, the first place we see money that we would recognize is money, although probably not the first money money. But the first place you see coins really take off is ancient Greece, which is, you know, famously the cradle of democracy. Also, clearly not what we would call a democracy, very unequal, but the fact that the Greeks are coming up with this new civilization that is too big and complex to do the kind of sort of tribal reciprocity thing where everybody is giving and getting based on these kind of small group norms. But on the other hand, not sufficiently top down to have a, you know, a tribute and redistribution thing where there some king telling everybody what to do means they needed money. They loved coins. Right. Coins took off first in Greece because they needed money, because they were this kind of pro democracy. So I do think in the like origin stories, you see this link. I mean, as you get further into the modern era, that question gets more complicated. But I do think, you know, the basic idea of money letting individuals exchange as they see fit is this fundamentally Democratic idea?
S4: Well, is it also in Britain, people think part of the reason that Britain was able to become the power it was and to develop the economy did was partly because you had kind of the revolution that started to check the power of the king. Yes. So now I’m not saying it became a democracy, but as it became more and that moving in that direction, that enabled those changes.
S1: Absolutely. So that’s like the late 60s hundreds, which is, you know, this era when the sort of modern capitalism is emerging in Western Europe. And so it’s I think sixteen, eighty eight is the glorious revolution, which is this moment when parliament gets more power relative to the king. And just a few years after that, I think sixteen ninety four is when the Bank of England is founded and the Bank of England is this really interesting institution that sort of sits between Parliament and the king and is lending money to the king. But Parliament has more ability to make the king pay the money back than they used to. They have more authority. And there is this notion that that credibility, the king is making a commitment that is more credible than in the past when the king could just say, screw you, I’m the king. I’m not going to pay you back. This notion that there was a legal check on the king made people more willing to lend money. Right. And so the Bank of England becomes this really central institution in the history of money. It’s essentially the first central bank. They didn’t know that yet, but it becomes the first central bank. And, you know, central banks obviously today are at the center of money and relevant to what we’ve been talking about. They are very much the government. Obviously, they’re today government institutions, although the Bank of England was a private bank, but also a little bit apart from the government or they sort of pretend to be apart from the government. Right. There’s this notion of central bank independence, and that is an interesting wrinkle in the like democracy and money story. Right. Like there’s this question of how democratic do we want money or monetary policy to be? That is something of an open question.
S4: I think that concept of central bank independence fits into this conversation very well, because I think. People often say, like, why does that matter? And I actually think why that matters is because that is actually the check on government, like if you have a fiat currency. So in theory, as a government, you can do anything you want. You want to have this idea that there is something connected but slightly apart that can act as this check.
S3: Exactly. I mean, the classic worry with the central bank is when the president is up for reelection, the central bank will print a bunch of money so that interest rates are low and businesses are hiring a lot of people. But that may not always be the right move. That may be actually bad for the economy in the long run. It might cause overheating or runaway inflation. And so you want to have a little bit of remove from short term political interests in the central bank. You know, it’s a very technocratic idea and debatable, but reasonable. There’s a reasonable argument for central bank independence, clearly.
S2: OK, so, Jacob, this is my perfect opportunity to sit on the bed Bitcoin, you won, I won the bet and I have another bet. Tell everyone what we’re talking about and more importantly, tell people whether I’m going to win the second bet.
S1: OK, so many years ago now, maybe six, seven years ago, Felix, something like that. A long time ago, certainly a long time ago. In Bitcoin terms, this is a Bitcoin story. You came on Planet Money and you made a bet with noted venture capitalist Ben Horowitz, giant in the VC world. And the bet was over Bitcoin. The bet specifically was, are people going to use Bitcoin to buy stuff? It was a five year bet from the time you made it. And and we said will survey people five years hence and ask them, ordinary Americans in the last month, have you used Bitcoin to buy anything? And Horowitz said more than some percent of people, what was it, five percent, 10, 10 percent of ten? Yeah, 10 percent.
S5: A crazy bet.
S1: I can’t believe it will say, yes, I have used Bitcoin to buy something. And you said no, no. People will not say I have to use Bitcoin to buy something. And you won the bet and a pair of alpaca socks, which was one of the first things people actually could buy with a Bitcoin. And Ben graciously came on the show five years later. And you I’m not going to say graciously because you won the bet. Of course, you’d want to come on the show five years later and talked it through. And, you know, it was quite interesting because nobody buys anything with Bitcoin. You won the bet. But Bitcoin is still around. People are willing to exchange more dollars than ever for a Bitcoin for reasons that are maybe somewhat mysterious, given that nobody buys anything with Bitcoin. And you guys made another bet, basically the same bet, but maybe open to more countries. Did you choose Mexico? I think, Ben, that a country where Mexico, for reasons known only to Ben Horowitz. Let me let me try.
S3: Let me try. I think his his argument was we have quite a well-developed payment system in the U.S. And so lots of people have credit cards or debit cards. It’s easy to use them online. So I think he wanted to choose a country where the payment system is less well developed and an alternative might be more compelling.
S2: So the reason why this is relevant is precisely what we’ve just been talking about, which is if you talk to the Bitcoin types and people like Ben Harvest’s, they’ll be like, yeah, this is true democracy. We have moved in terms of money from just this. The king issues coins with his face on them to something much more democratic with independent central banks, and which England had a prime mover advantage because it was the first country to have like a vaguely independent parliament and this kind of thing. And then if you just follow that thread and follow that arrow, the place you get is a truly democratic system like Bitcoin, where there was no government in charge and it’s just controlled by the people and what the people do. And this seemed to me to be completely ludicrous back when I took the other side of that bet. It still seems to me to be largely ludicrous. But in the context of the conversation that we’ve just had, there is this kind of logic there. So what is the flaw in that logic?
S1: Governments control money. That’s the short answer, right?
S3: I mean, the short answer is governments control money and they have for a really long time and they really, really have since we went off the gold standard almost 100 years ago. And it basically works, right? It basically works. And I want to distinguish here between money itself and like economics more generally. When I say money basically works, I don’t mean the economy is working for everybody or whatever. I mean our monetary system basically works. Inflation is low and stable, arguably too low. Sometimes you can use a bank. You’re not going to lose your money in the bank like we have a totally functional monetary system and it’s run by the government. So the government is not going to want to give it up. And people are not eager to flee the monetary system. Right. So I think that’s the thing about Bitcoin is it’s solving something that for most people is not a problem. I will say it’s technically super clever. And, you know, the back story of Bitcoin is really interesting. And it is this relatively small group of like techno libertarians with this dream of money that requires no banks and no governments setting out to solve this complicated series of technical problems and then solving them. And like, it’s a really elegant technical solution. And so it’s interesting to me that now it’s twelve years since Bitcoin was invented and these two things that seem incompatible are the case. Right? One is basically nobody uses Bitcoin to buy stuff, too, is people are willing to exchange more dollars for one bitcoin basically than ever, which is something of a puzzle to me.
S4: This question actually, it reminds me a little bit of a conversation Slate Money has had about Chanes, by which I mean this idea of we kind of have this span from the libertarian idea that you don’t need to have almost any government and that economics should just be allowed to do whatever it wants. And then you have much farther over on the idea that you need. Some government involvement, and I think what the gold standard showed us is that you really do need to have the government have the ability to have some control over the monetary system, because if not, horrible things can happen.
S1: Yeah, I mean, think of Bitcoin this year. The price of Bitcoin has what let’s say, doubled approximately. Maybe it’s more than that. But let’s say the price of Bitcoin has doubled this year. Right? If it were really money, that would mean deflation of 50 percent. Right. So that would mean basically your wage would have fallen 50 percent. Now, the good news is the price of everything you buy would also have fallen 50 percent. The bad news is your mortgage would not have fallen by 50 percent. Write your student loans would not have fallen by 50 percent. You would have to work twice as long to pay your debts in a Bitcoin world. That’s the problem.
S5: There does seem to be some kind of link between democracy and like a stable monetary system, but then you can go all the way crazy with it. And and Jacob’s book, he describes what it was like. I think in the eighteen hundreds, when different states had different money, everyone had different money that were Santa Claus on some of the money. And when you traveled across the country, you had to keep changing your currency. It was basically like a total technical term shit sounded like to me. And that was like a pure democracy, kind of not maybe not pure, but that was like the democratic way of doing money. Like, we’re all free to do our own currency.
S3: And it’s like it’s kind of a nightmare free market in money when people refer to it as a free market in money. And it is extraordinary. Basically, banks could print their own paper money. Right. And this was the era when paper money was very much a claim check, an IOU for gold or silver. And so you had literally thousands of different kinds of paper money. It is amazing. Like merchants had to subscribe to special periodicals that told them, like what each bill look like, you know, in tiny, tiny print and also told them whether to take it at full face value. Like if the bank is far away or if the bank is shaky, you should discount the value of the note. Right. You should give somebody, whatever, 90 cents credit for one dollar because maybe you’re not going to get your gold or silver back out of that bank. It does sound like a nightmare. Now, I will say one interesting sort of asterisk on that is I think it wasn’t as bad as it sounds. It is basically the kind of modern revisionist history of it, like when people went back in a more analytical way and actually like looked at the books and looked at the way people lived. It kind of worked. And, you know, it allowed for easy credit on the frontier and places where people needed easy credit. So it’s not what I would choose, but I think it’s worked better than it sounds to us.
S2: But I think it works because people didn’t travel very much. Yeah, people stayed within the catchment area of that one bank mostly. And then it failed when people started carrying IOUs from that bank and trying to exchange them somewhere else. And I, you know, grew up with this myself. In England, we would occasionally come across Scottish banknotes. There’s this weird thing that, like the Clydesdale Bank and the Bank of Scotland and the Royal Bank of Scotland were allowed to print their own banknotes and they were all completely accepted in Scotland. But the further you get from Scotland, the less likely they were to be accepted. And God help you, if you rocked up in Thailand or somewhere and went to a money changing shop and said, can I swap these Scottish banknotes into Thai? But they would say no. So this exists to this day is this idea that the further you go in that kind of private world, the harder things get. And yet when you’re in the 19th century America and people not moving very much or very fast, it kind of works, but it wouldn’t work in today’s globalised economy.
S5: Do I need to worry about Bitcoin, the fact that, like something that’s so worth less like is not used as money is worth so much money?
S3: I mean, I don’t think so. I mean, so what is it used for? I don’t really know. I mean, it’s used for ransom. I suppose it makes, you know, like ransomware a little easier. But whatever it’s used for people to get their money out of countries where there are capital controls. Right. Like I’m kind of pro that I don’t feel threatened by Bitcoin. The people who dreamed it up wanted it to be a threat. It is really interesting how sort of dramatic and world historical, like they were writing manifestos, you know, the the cypherpunk manifesto about how their work was going to change the world. And basically what they thought was people would abandon government money and go to libertarian digital money and that would radically disrupt, you know, tax payments and the sort of observed, you know, government controlled economy. That hasn’t happened so far. And it doesn’t seem likely to happen. I mean, I can imagine much less kind of world historical, but maybe useful things you could do with cryptocurrency, like have lower fees for digital payments. Right. There is this oligopoly of credit card processors and they charge fees that seem like a little bit rent extracting arguably a little higher than they need to be. And you could imagine cryptocurrency being useful to compete there like that is not some crazy libertarian dream. That more seems like a straightforward venture capitalist saying, hey, technology can bring.
S2: New competition and lower costs in a way that actually might be useful, although you don’t need Bitcoin for that, as we saw with the Department of Justice case against Visa when they bought plaid. Or maybe someone like plaid to come along and say that’s a better way of being able to do that without charging fees. You don’t need to change the entire currency to do that.
S1: And you need plaid to not get bought by.
S2: While you’re here, Jacob, we have a question for you about mortgages, we’ve mentioned this whole question of having to pay off your mortgage a couple of times on this show already. But let’s be specific. We have this question from a couple of listeners, which Emily Peck and I got drawn into a Twitter thread about. But we want to throw it to you, which is is it a good idea to pay down your mortgage more aggressively than, like, the minimum amount every month and is already shaking her head?
S3: I’m not in the business of giving financial advice, so this is not financial advice. I’ll just say what I do. Max out your retirement plan first. That seems like an easy call. Write your expected return from your whatever 401k or whatever retirement plan you have is going to be higher, almost certainly than the interest you’re paying on your mortgage. Plus it’s tax advantaged. So I would certainly, if you can put another dollar in your retirement plan as opposed to paying another dollar on the mortgage, I would definitely do that. That’s really the big one. You I think you had mentioned maybe it was in the Twitter thread, like the idea that if you pay off your mortgage, then you can borrow money against your house if you need it. But that seems like a long way around. Like you could just save the money. And I feel like even like it is the case now, like I have money in savings that is getting a lower interest rate than I’m paying on my mortgage rate. So I suppose on a mathematical level, maybe I should take some of that money in savings and put it toward the mortgage. But then I feel like if I were going to borrow against the mortgage, there’s a lot of friction there, right? It takes time. There’s costs associated. Although I guess the one thing on the other side of the ledger, the ledger is the wrong word here is the kind of behavioral things. Right. Some people just hate being in debt. And like I respect that there’s a thousand years of tradition of being wary of debt that is like good, you know, grandmother, wisdom, fear, debt. And so if if it makes you really sad or scared to have debt, paying off debt seems not unreasonable.
S2: And the other behavioral thing is that the mortgage is a very, as you say, friction ish place to be able to get money out. So if you have money in a savings account, it’s slightly harder to access that money than if it’s in your checking account, but not much harder. You can get out of it pretty easily. On the other hand, if you have money in home equity, it’s incredibly hard to get that money out. So it makes it much more difficult for you to go, Oh, I have that money, I can spend it. So the reason to use your savings to pay down your mortgage is precisely because if you do that, you’re less likely to just go spend your savings.
S4: So when rates are very low and you can earn a higher rate of return on that money you are borrowing, it makes essentially no sense to pay off your mortgage. I understand the psychological part of it and I get that. But the reality is debt is not a bad thing as long as you can continue to keep servicing it. And in fact, that is actually quite a good thing. That is what has enabled a lot of people in the country to gain a significant amount of wealth. So I would say a lot of it really comes down to what the rate is that you’re paying, what the interest rate is that you’re paying, and also and then rates of return that you can get. Obviously, money that you just have sitting in like a checking account. To a certain extent, that is very liquid money. That’s in other places. There’s going to be a little bit of a liquidity discount. But still, it doesn’t make a lot of rational sense when rates are low.
S2: But you can’t get let’s say your mortgage is four percent. You can’t lower.
S1: We’re looking at four percent on your money or three percent or whatever that you can you can’t get if you think you can get it. If you take a risk, you can’t get it if you take her.
S2: Yeah, you can put it in the stock market and hope that stocks are going to rise, which they almost certainly will like that.
S4: That’s the whole point. And also, this is one of the few areas where people can use a lot of leverage to earn a higher rate of return on their initial investment easily. That’s not something that most people just kind of everyday investors do. And a mortgage actually enables you to do that. You’re getting to use money very, very cheaply in order to generate a high return. That’s something that can be very useful. And when we have the ability of the United States to spread that over a long period of time, that has been very beneficial.
S2: That’s true. I think I think that’s the big difference between you and your view of, like future equity returns versus someone like my relations in Germany who basically saying, like, there’s nowhere I can put money where I can expect a positive return. I can put it in the bank and get like a zero return. Even if I got a mortgage at one percent. Like, I can’t do better than that because they don’t have that mindset or idea that, oh, yes, I can just put it into the stock market and I will almost certainly get a positive return on that. And I do think that there are a lot of Americans out there right now who are looking at where the stock market is. And they don’t think that it’s almost certain that. They will get more than four percent on their money by investing in stocks and that idea of like it’s fine to put it into stocks because there’s you can be pretty sure that if interest rates are low, you’re going to outperform and do better. I think that is almost uniquely American.
S3: Can I propose an intermediate step that might be happy for many people? If you’re in a 30 year mortgage and you feel like it’s a terrible idea to pay so much interest, refinance into a 15 if and you also have extra money. Right. So if you’re in this position, you’re like, oh, I have extra money, I have this mortgage. Should I use my extra money to pay my mortgage? One thing you can do is refinance from a 30 year loan into a 15 year loan. So what that does is it raises your monthly payment. So presumably you can do that because you’re already considering should I pay down my loan extra fast? It lowers just the interest rate. The headline interest rate on 15 year loans are lower than the headline interest rate on 30 year loans and also even over and above the lower headline interest rate. You pay less interest over the life of the loan because you’re paying it off faster. So that is a sort of middle ground. I mean, you end up with less money to, say, invest in the stock market because you’re paying more to the mortgage every month, but you’re keeping a mortgage and paying it month by month.
S2: And I would I would agree with you, but with the proviso that you should only do that if you get a significant reduction in interest rates by doing so. If you don’t get a significant reduction in interest rates by doing so, then you might as well just take the amount of money that you would have to pay every month on a 15 year mortgage and spend it towards paying down your 30 year and save yourself all of the refinancing costs and also make sure you’re not about to move for the same reason that if you refinance and then you move a year later, that’s not a good move.
S5: The big upside to paying off your mortgage early would just be the same as we were saying the psychological value in owning a home. And as we’ve been talking about through this episode where gold used to be, this viewed as the sort of like natural money from God or whatever. And that’s not as much a thing anymore. The idea that owning a home owning land still carries that weight in the United States, around the world, owning land, owning your own home. It’s a big deal and it feels like a value almost separate from money. Just the idea that, like, I have this piece of property, no one can take it away from me. That’s bigger than than money, I think. And a lot of ways, although, I mean, you could argue during the housing crash, we learn that that’s not really true, blah, blah, blah.
S3: But if you own it outright, that like. Right. The problem in the housing crash was people with like mortgages they couldn’t afford. Yeah. Yeah. So no. And I think that’s valid. Right. I mean, the point of money is to be able to do things you want to do. And so if what you want to do is live in a house that you own and don’t owe anybody any money on, do that with your money. Like it’s not crazy to pay off your mortgage early, especially if it makes you happy. Yes, but just might not be maximizing your long term wealth. But not everybody should do that.
S2: There’s more to life than wealth maximization. Let’s have a numbers round and do you have a number for our numbers?
S4: So my number is 13, so the country that has defaulted or restructured the most times has done so 13 times. So who is this? Which country is it? Argentina. Greece, Emily. Venezuela. Good guess. Spain.
S1: Oh, no kidding.
S4: All of those before. Before 1882, there were before 1800. But yes, Spain is in fact the record defaulter.
S3: So part of the trick is, B, a really old country.
S4: I guess it is, although Venezuela, if I’m not mistaken, has 11 or 12 catching up.
S2: My number is one million, which is the number of followers that the RBI just managed to reach on Twitter. And when I say the RBI, I do mean the Reserve Bank of India. The Indian Central Bank is the first central bank in the world to get a million followers on Twitter. Welldone, Reserve Bank of India. I can assure all state money listeners that it’s not actually that great of a Twitter account, to be honest, but they do have a million followers. So there are definitely a lot of Indian people who want to follow it.
S1: The Jamaican central bank has some great social media content.
S2: I don’t know how many Jamaican central bank has Twitter account in of all central banks, bar none. If you only follow one central bank on it, make it the Jamaican central bank. That’s, I’m sure, family. What’s your number?
S5: My number is 20. That is the number of minutes in the only break that Dr. Anthony Fauci takes in his work day. My colleague Jeff Yang just recently published a story on Huff Post that sort of goes through falsies workday. And it is just absolutely insane. He is scheduled to basically the second and it made me think that money was supposed to help us. I mean, he’s an extreme example, but money is supposed to help us, you know, work less or make us more productive. I don’t know. But people work just as hard as ever.
S4: And in these times, sometimes people also like to work. And granted, she’s also in the middle of a global pandemic. So imagine that makes him slightly busier.
S5: But I think this idea that, like, oh, people will always work less is also because some people actually like working for which she is clearly not in it for the money, just like even he only if you look at the schedule that that just lays out, there’s only one bathroom break even on the list. I mean, it’s it’s just wild, you guys. It’s just it’s very busy. And the man is 80 years old.
S3: Let me say, by the way, that was a great piece of journalism. Everybody everybody is talking about it on Twitter and for good reason. I mean that like, it’s brilliant to just get one day in the life of forty to the minute. Great idea.
S5: Yeah, really good. I’ll pass that on. He doesn’t listen to the show.
S2: Jacob was he was your.
S3: No, I worry based on you guys numbers that I’ve brought to worky a number.
S2: So let me apologize. You can never be too wonky on this show. It’s not possible.
S1: Two percent. Two percent. So Jason Furman and Larry Summers, who are as like establishment big name center left economist as you can get, came out with this number two percent in a recent report. And the reason this number is a big deal is they said this. Basically, we have been thinking we economists have been thinking about government debt all wrong. Right. So the key way everybody who talks about government debt talks about it is the ratio of debt to GDP. How much debt does a country have and how much is its total annual income? And they are like, you know what? We all we economists, we got it wrong. We should not be thinking about debt to GDP. It doesn’t actually matter what this one lump sum debt is relative to our annual economic output. What we should care about is how much do we have to pay on that debt, how much our total interest payments on debt each year. How do those compare to GDP? How do those compare to economic output? And what they said is if it’s under two percent, if your total debt payments are under two percent and are likely to be under two percent of GDP for the next ten years, you’re fine. You don’t need to worry about the deficit or adding to the debt. You are fine. And this is a huge deal, I think, coming from these two big name economists. And it’s part of this broader shift of these other really establishment economists who have spent their careers worried about debt, saying, you know what, maybe we were too worried about government debt. We’ve had these years now of rising deficits, but still low inflation and low interest rates. Maybe we should think about this differently.
S2: So, Jacob, that is definitely no worthy of a little bit of discussion. So we’ll talk more about that two percent number on the slate. Plus, other than that, thank you, Jacob, for being on the show. It’s been fantastic. Thank you, all of you guys, for listening. It’s been. Great hanging out with you all year.
S6: Thank you for sending in your emails, state money and state dot com. Thank you as ever to the amazing Justman Molly for producing. And we will be back next week on Slate Money.
S2: I am now going to Google US debt service to GDP. To find out what we’re at right now, yes, I Google that myself, yeah, yeah, there’s a wonderful chart on Fred where you get all shout out. Fred. Yes. Shout out to Fred, the best website in the world. We are currently at one point seventy five. There was a long period when we were above two, which started in around 1980 and went on to about 2000. So for about 20 years we were above two percent. But we haven’t been above two percent since then was with the years from 1980 to 2000. But those bad years where we had too much debt is that.
S1: And in some of us would say, well, they were a time when real interest rates were much higher. So like the complicated thing in the world that is sort of this big monetary mystery, sorry for the alliteration is debt has been going up, but interest rates have been coming down. Right. So 1980 was like the peak of the, you know, high inflation, high interest rate era coming out of the 70s. And then Paul Volcker came in to the Fed and jacked up interest rates super high and crushed inflation. And so we have had decades of falling interest rates and falling inflation expectations. And that’s what that 80s story is. And that’s kind of their point, right? Like we think about debt, but we should really think about debt payments. Like if you go back to the mortgage when you’re getting a mortgage, the question is not how big is the mortgage relative to your income, it’s how big are your monthly payments relative to your income. And by the way, I know you should never compare a household to a government in terms of debt. So don’t write me that email.
S5: The reason this is so important now is that the worry, I think, is where people are going to start talking about the deficit and the debt as a reason not to do more for the economy and leave like millions of people out in the cold, which is something we’ve tended to do in the past as we’re coming out of recessions or economic crises. So if, like the conventional types at the Larry Summers of the world are like, it’s fine, you can spend more and they come up with this new formula, it gives cover to spend more money on on people and not start freaking out about the debt.
S3: I think that’s absolutely right, Emily. I mean, and in particular, like the in the United States are debt to GDP ratio, I think just crossed one hundred percent, which is like a big deal in the old debt to GDP kind of world. But their point is our debt payments, what we actually have to pay on it is lower than it was when our debt to GDP ratio was like half that. Right. And that’s what matters now. It is possible, I suppose the sort of counterpoint would be, well, yes, but the interest rates could go up. And if interest rates go up and you have this massive pile of debt, you could be screwed. And then the next thing I would want to know is, well, what’s the average maturity of the debt, which I didn’t get to Google. But and I feel like, you know, I feel like you’re about to say, yeah, it’s skewed toward short term.
S4: You’re oh, you’re showing a lot of short term debt. So that is always a concern. I mean, I think that this is the right move for where we are in the world right now because of. Income inequality and a number of global government policies, we just have an enormous amount of capital and a number of other reasons why, also keeping inflation lower so we don’t have the type of interest rate hikes that you would expect. However, it doesn’t mean that that can’t happen. And my fear, of course, is that what is going to eventually happen, although it may not be for 20 or 30 years, is that we will set up a society that cannot function if interest rates increase and then all of a sudden we’ll have inflation spikes and we won’t know what to do. And I’m not saying that’s not a reason to make this change now, but I think that that is always a fear.
S1: Well, I mean, to both. I would say you’re in Emily’s point. Like the short term case seems like a super easy call, right? Like we’re in the middle of a pandemic. Millions of people don’t have jobs. Give them money like that. Seems like a wildly easy, right. Easy, easy. Just do that thing and then then you’re into sutler territory.
S3: You know, like ideally next year, a year from now, everybody’s got a vaccine. The economy is roaring back then. Then it becomes a subtler, more complicated question.
S1: The most interesting macro question to me is like, what is going on outside of the pandemic? If you go back a year ago, you know, we’re at below four percent unemployment in the U.S. Wages are going up not just for rich people, but across the income distribution. Deficits are really high like that is a recipe for high interest rates and high inflation. And we saw super low interest rates and super low inflation. And I know people have various stories of what’s going on, but it seems really weird to me.
S4: Yeah. I mean, I think it seems really weird to everyone. And there are, because I’m sure it’s not one answer. You know, it’s going to be a combination of globalization, which not only in terms of keeping prices low and wages low and profits high, but it’s also just where it’s I would imagine I could be totally wrong about this, obviously. But, you know, you’re also skewing more and more of the output to those parts of society that don’t spend it. And so that means you have people meeting asset rich people, but also corporations. And so consequently, when you have all of this capital trying to find a home, that’s on the one hand because you don’t have those people spending who would probably increase inflation, that’s going to keep that down. And then you have all this capital trying to find a home in a weird way. That’s also why, like, well, you need the US or other countries to issue more debt because people need places to put that capital that’s safe. Right. So it’s weird because traditional ideas, stock prices are not included in the inflation gauge.
S2: Right. If there’s inflation in the price of CocaCola stock, that doesn’t count as inflation. So it all depends on inflation. Does not that’s where rich people spend their money is by buying these pieces of paper called Coca-Cola stock. And those pieces of paper have become much more expensive. But no one worries about that because they shouldn’t.