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Speaker 1: Hello, and welcome to another episode of the Odd Lots podcast.

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Speaker 2: I'm Joe Wisenthal and I'm Tracy Alloway.

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Speaker 1: Tracy, you know obviously recording this September twenty twenty three.

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Speaker 1: Inflation has come way down over the last year, but

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Speaker 1: there is definitely anxiety about, well, could we see another wave,

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Speaker 1: particularly if we don't have a recession, Like, no one

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Speaker 1: is really convinced that it's over.

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Speaker 2: Right, So gas prices are starting to creep up again.

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Speaker 2: House prices have been incredibly stable and also starting to

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Speaker 2: rise slightly, so that could also figure into shelter costs.

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Speaker 2: But I think generally there is this concern that are

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Speaker 2: we going to see another leg up in inflation? And

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Speaker 2: part of the reason there seems to be this concern

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Speaker 2: is because, as we've discussed on this podcast before, everyone

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Speaker 2: tends to reach for the nineteen seventies as the big

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Speaker 2: parallel or analogy for periods of higher inflation.

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Speaker 1: Right, you know, when we were out in Jackson Hole,

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Speaker 1: I guess in August that was when Larry Summers tweeted

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Speaker 1: that famous chart saying, you know it was a good reminder,

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Speaker 1: right that this was when you.

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Speaker 2: Were looking at the mountains and thinking of USCPI charge.

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Speaker 1: Yeah, the Grand Teetons looked like the USCPI from nineteen

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Speaker 1: seventy four to nineteen eighty five. But it's true that

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Speaker 1: throughout the seventies there were multiple times where people sort

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Speaker 1: of breathed a sigh of relief, they said, inflation has

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Speaker 1: been licked, and then it came back. And it's really

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Speaker 1: you know, there's this story that there's all this respon

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Speaker 1: irresponsible policy and then finally Vulgar came and smashed inflation,

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Speaker 1: and it really did not exactly happen like.

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Speaker 3: That, right.

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Speaker 2: I always find that kind of weird because Arthur Burns

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Speaker 2: hiked RAITs a lot before Vulker did the same thing.

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Speaker 2: But you're absolutely right, and the inflation of the nineteen

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Speaker 2: seventies it's important in many ways, possibly not the right ones,

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Speaker 2: but one of the ways that's important is it tends

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Speaker 2: to be the period that a lot of our policy

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Speaker 2: makers and economists and academics kind of came of age in,

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Speaker 2: and it tends to be the one that they go

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Speaker 2: back to to explain what's happening now. And so, you know,

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Speaker 2: there are some shades of the nineteen seventies to our

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Speaker 2: current situation. You did have supply shocks in the form

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Speaker 2: of oil. There was I think some fiscal stimulus from

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Speaker 2: the Vietnam War going into the nineteen seventies, things like that.

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Speaker 2: But overall, the sort of standard interpretation of the nineteen

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Speaker 2: seventies is that monetarist view the old like Milton Friedman,

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Speaker 2: inflation is always in everywhere a monetary phenomenon and basically

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Speaker 2: blaming the FED for not reacting fast enough.

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Speaker 1: You're absolutely right, and you mentioned that the nineteen seventies

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Speaker 1: looms so large. You know, policy makers the FED, in

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Speaker 1: particular central bankers, they take a lot of pride in

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Speaker 1: the fact that they defeated inflation, that inflation has been stable,

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Speaker 1: that they sort of embedded this idea of stable and

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Speaker 1: inflation expectations. They prize that stability quite a bit. You

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Speaker 1: and I we joke a lot about how we both

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Speaker 1: started our careers in two thousand and eight right on

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Speaker 1: the eve of the crisis.

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Speaker 2: And we're always worried about defuse.

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Speaker 1: We're always worried about, you know, crisis and downturn and

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Speaker 1: surging unemployment. So it had, you know, and you look

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Speaker 1: at the people who now make policy today, many of them,

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Speaker 1: as you said, came of age then. But again, it

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Speaker 1: feels as though if we're going to have a conversation

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Speaker 1: about possible second waves, if we're going to compare and

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Speaker 1: contrast now with the nineteen seventies, then actually we better

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Speaker 1: get a better handle on what really happened in the

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Speaker 1: nineteen seventies, because I don't think that outside of these

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Speaker 1: vague things like oh, they let policy run too loose

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Speaker 1: and some oil and gas lines, that actually we've really

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Speaker 1: you know, that there is a crisp, coherent story like yeah,

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Speaker 1: but why was inflation so persistent and so reoccurring throughout,

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Speaker 1: you know, roughly a decade.

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Speaker 2: The ghost of Paul Volker is going to be so

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Speaker 2: mad at us, But I think we should do that.

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Speaker 3: Well.

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Speaker 1: I am very excited. We have the perfect guest, someone

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Speaker 1: who has done original research on nineteen seventies inflation and

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Speaker 1: really sort of broke down what happened. We're going to

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Speaker 1: be speaking with Itamar Drexler. He is a professor of

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Speaker 1: finance at the University of Pennsylvania, someone who's done a

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Speaker 1: lot of research on this period and what it means.

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Speaker 1: Professor Drexler, thank you so much for coming on odd Laws.

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Speaker 3: Thank you very much for having me. This is really

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Speaker 3: fun and nice to talk about a topic I care

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Speaker 3: a lot about and think is very interesting.

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Speaker 1: Excellent. Well, you know what, why don't we start with

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Speaker 1: if you were just in a room full of random

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Speaker 1: economists and you said, well, what caused the nineteen seventies inflation?

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Speaker 1: Why did it keep coming back? What sort of just

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Speaker 1: like you know, we mentioned in the beginning, you know,

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Speaker 1: the the gas lines and the end of the Vietnam War,

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Speaker 1: and maybe policymakers were not strong enough in fighting it.

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Speaker 1: But what is the sort of macro consensus about what

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Speaker 1: happened in that decade?

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Speaker 3: So I think the most common story narrati is that

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Speaker 3: the Fed there were at the outset, say, some kind

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Speaker 3: of shocks that led to the beginning of inflation, but

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Speaker 3: that once inflation got going, the FED did not respond

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Speaker 3: aggressively enough to increases in inflation by raising the FED

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Speaker 3: funds rate as later policy would dictate, which is that,

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Speaker 3: according to the tailor rule, the FED has to raise

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Speaker 3: the nominal rate more than one for one with expected inflation.

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Speaker 3: What that does is raise the real interest rate. They're

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Speaker 3: by lowering demand or what they call demand management, and

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Speaker 3: preventing inflation. From accommodating inflation by letting it go up,

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Speaker 3: and so not doing that, they overtime lost credibility, and

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Speaker 3: that meant that if people expected inflation to go up,

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Speaker 3: inflation would actually go up because the FED wasn't actually

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Speaker 3: leaning into it. It wasn't making it wasn't slowing demand

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Speaker 3: in the face of say, increasing inflation expectations. That, to

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Speaker 3: the best that I understand, is kind of the most

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Speaker 3: common narrative.

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Speaker 2: Right, So the ideas the prices started to rise, the

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Speaker 2: FED basically lost control of inflation expectations, and then you

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Speaker 2: got this self reinforcing cycle of the wage price spiral

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Speaker 2: where people start demanding more money. And then it wasn't

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Speaker 2: until Paul Volker came in told everyone whose boss re

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Speaker 2: established the Fed's credibility and kind of deflated those inflation

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Speaker 2: expectations that things got better. Right, Yeah, So your paper

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Speaker 2: takes a very different view to that whole narrative. You

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Speaker 2: kind of placed the blames squarely on an element of

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Speaker 2: financial regulation that actually Joe I realized this has popped

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Speaker 2: up a couple times on all thoughts, most notably in

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Speaker 2: our episodes with Josh Younger and Lev Menon where we

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Speaker 2: were talking about the origins of your dollars in shadow banks,

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Speaker 2: but you place it on REGQ. Can you talk a

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Speaker 2: little bit more about that thesis.

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Speaker 3: Yeah, sure, So reg Q does come up a lot.

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Speaker 3: It's a very famous banking regulation. Historically, people, many banking

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Speaker 3: people and monetary people are well aware of it. So

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Speaker 3: red Q was a regulation that came out of the

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Speaker 3: nineteen thirty three Banking Act that allowed the Fed to

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Speaker 3: place a ceiling on what banks could pay, what kind

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Speaker 3: of interest rates banks could pay on different kinds of deposits,

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Speaker 3: and for example, checking deposits had to pay a zero

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Speaker 3: interest rate. Savings deposits had their own ceiling, and then

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Speaker 3: CDs could have their own ceiling. For almost all of

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Speaker 3: the time from nineteen thirty three until nineteen sixty five,

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Speaker 3: the FED put the ceiling above the Fed Funds rate,

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Speaker 3: so when it would raise the Fed Funds rate, it

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Speaker 3: would raise the ceiling, and so basically it didn't bind.

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Speaker 3: Maybe it would prevent you from setting some crazy rate,

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Speaker 3: but it didn't bind. But starting in sixty five, they

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Speaker 3: didn't raise it, so that when they would raise the

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Speaker 3: Fed Funds rate, deposits couldn't keep up with the Fed

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Speaker 3: Funds rate.

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Speaker 2: So the reason they put in that restriction was because

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Speaker 2: my understanding is that in the nineteen thirties there was

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Speaker 2: there were a lot of bank failures, and so there

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Speaker 2: was concern that if banks were competing with each other

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Speaker 2: to attract depositors, so just raising deposit rates to uneconomic levels,

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Speaker 2: that it would lead to more bank failure. So they thought, well,

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Speaker 2: we'll put a cap on this and then we'll have

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Speaker 2: healthier competition.

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Speaker 3: Is that right, that's the story that's told. I know

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Speaker 3: it's impossible to say that's exactly what was in their mind,

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Speaker 3: but yes, also that act established they have d IC

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Speaker 3: and deposit insurance, So in some sense it makes it

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Speaker 3: makes sense if you're going to give people insurance, you

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Speaker 3: don't want them to attract deposits by doing crazy things.

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Speaker 1: Right because if you're if you know that you're insured.

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Speaker 1: I could just go out and say, oh, here, here's

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Speaker 1: ten percent.

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Speaker 2: The Bank of Joe and Tracy will offer fifty percent.

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Speaker 1: Interest cent I collect all of the deposits from everyone else,

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Speaker 1: and maybe I fail because whatever I'm doing with that,

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Speaker 1: but I got all the deposit I mean, let's do it.

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Speaker 2: Yeah, okay, So I stopped you right up. In the

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Speaker 2: late nineteen sixties. So in the late nineteen sixties they

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Speaker 2: make this change.

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Speaker 3: Yeah, they decide, they debate it, but they just to

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Speaker 3: use this rule as a tool of monetary policy very consciously.

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Speaker 3: So this is part of a general wave of what

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Speaker 3: was called credit controls that many developed countries used and

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Speaker 3: had been exploring for a while. It was a popular

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Speaker 3: idea that you could influence directly the price and quantity

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Speaker 3: of credit in order to do monetary policy and not

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Speaker 3: just leave it to the short term rate. And so

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Speaker 3: this was used in the UK famously, in France and

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Speaker 3: Italy and Belgium. In the Netherlands, there was an awareness

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Speaker 3: that credit controls of various types were used, usually consisting

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Speaker 3: of often together controls on the level of interest rates

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Speaker 3: you could pay on deposit, ceilings on what you could

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Speaker 3: charge for loans, or ceilings on the quantity of loans

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Speaker 3: you could make, or loan growth.

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Speaker 1: You know, it's interesting because and I will get to

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Speaker 1: the whole debunking of the popular story, or at least

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Speaker 1: the reinterpretation of the popular story. Actually have two questions

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Speaker 1: from a professional standpoint, how did this become an area

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Speaker 1: of interest and research.

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Speaker 3: For Yeah, so it's a little bit out of left

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Speaker 3: field for me and my co authors. I have two

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Speaker 3: very common co authors that we've worked a ton together

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Speaker 3: at NYU, Alexisavov and Philip Novel, and we work on

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Speaker 3: monetary policy and banking. We're coming at it from a

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Speaker 3: finance point of view and the way we got to

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Speaker 3: this so we think a lot about these things. We

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Speaker 3: did not think so much about inflation. We're working on

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Speaker 3: how the business of banking works and how bank's ability

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Speaker 3: to raise deposits is influenced by monetary policy, how much

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Speaker 3: money they make on deposits, spreads, And we're presenting some

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Speaker 3: of our work and we noticed that if you just

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Speaker 3: g the FED Funds rate against deposit rates, the average

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Speaker 3: deposit rate that banks pay, you can see very clearly

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Speaker 3: that in the nineteen sixties and seventies the average deposit

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Speaker 3: rate barely reacted at all to the Fed Funds rate. Now,

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Speaker 3: that's not a discovery, because I knew about regulation Q

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Speaker 3: and just had never never been in my face that way.

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Speaker 3: And there's a very famous graph coming out of the

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Speaker 3: literature of the standard now narrative Clarida Galley Gertler is

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Speaker 3: the most famous paper with thousands of citations. That is

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Speaker 3: a similar graph, but instead of deposit rates, which they

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Speaker 3: don't consider, they have the Fed funds are in inflation. And

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Speaker 3: that's the famous graph that shows that before nineteen eighty two,

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Speaker 3: the Fed funds rate just mostly kind of sticks to inflation,

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Speaker 3: whereas afterwards, with Vulcar and green Span, it reacts more

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Speaker 3: than one for one. And the idea was that sensitivity

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Speaker 3: heightens the sensitivity and of policy in people's reaction to inflation.

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Speaker 3: But here we saw that deposit rates are also kind

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Speaker 3: of look like that. I thought the timing was sort

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Speaker 3: of better. And if you think that the people's deposits

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Speaker 3: is an important part of their savings, which it is

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Speaker 3: an important aspect of transmission of monetary policy across our mind,

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Speaker 3: that maybe another thing that could have gone in there

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Speaker 3: is that deposit rates did not react at all, and

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Speaker 3: we knew that reg Q was there, so we start

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Speaker 3: to thinking maybe that has something to do with the

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Speaker 3: macro of the time and inflation. You start to look,

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Speaker 3: there's a lot of there's a lot of smoke and

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Speaker 3: fire there.

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Speaker 1: Before we get into the specific sort of discovery of

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Speaker 1: your research. One thing that strikes me is interesting and

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Speaker 1: Tracy mentioned this at the beginning, which is the sort

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Speaker 1: of we think of vulgar as the start of this

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Speaker 1: sort of monitorius turn in policy in which the entire

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Speaker 1: goal or the thinking at the time was, well, we

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Speaker 1: can solve the inflation problem, if we can solve the

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Speaker 1: supply of money problem, if we can sort of get

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Speaker 1: a handle on the supply of money problem, then inflation

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Speaker 1: will take care of itself. Judging by what you're saying

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Speaker 1: about credit controls and this, like, Okay, this is how

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Speaker 1: much we want to have in checking, This is how

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Speaker 1: much we want to have in people's savings accounts, this

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Speaker 1: is the cap on CDs. It felt it sounds like

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Speaker 1: this was brewing for a while, that it was very

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Speaker 1: popular already for some time for policymakers to really think

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Speaker 1: about like bucketing different types of money and keeping sort

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Speaker 1: of lid or handle on each of.

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Speaker 3: Them the way we hear things now. I also had

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Speaker 3: the impression that there was a lot of monetarism at

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Speaker 3: the time looking for it. It's after the fact not

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Speaker 3: as much of my impression. Certainly, these ideas are out there,

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Speaker 3: but I feel like the monitorism specifically comes somewhat later. Actually,

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Speaker 3: if you read the way they talked about it, demand

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Speaker 3: management often sounds not that different than we talk about

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Speaker 3: it today. What I will say is, I usually say

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Speaker 3: this at the end of the talk, is I think

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Speaker 3: so there was a lot of there was it by

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Speaker 3: the end, a lot of looking at growth and the

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Speaker 3: money supply and in trying to keep tamping down growth

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Speaker 3: in this and a big part of the money supply

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Speaker 3: and the most responsive are deposits. So jumping sort of

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Speaker 3: to something I usually say at the end, I think

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Speaker 3: that I'm not a big fan of moneitorism, and I

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Speaker 3: think most of the mainstream macro and monetari is not.

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Speaker 3: Now doesn't mean it's wrong, but I think monitoris a

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Speaker 3: little bit don't understand their own theory. So what I

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Speaker 3: mean by this is if you want to reinterpret what

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Speaker 3: happened in terms of moneitorism, so you start out with

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Speaker 3: why do people hold money? This is like standard monitorism.

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Speaker 3: Money is you know, pays no interest and so it's

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Speaker 3: a dominated asset and must have some other use. And

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Speaker 3: as you raise, as you lower the interest rate, you

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Speaker 3: make it more you know, easy for people to have

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Speaker 3: money and they can spend more. So the thing is

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Speaker 3: it treats each each money as just number of dollars.

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Speaker 3: But in the what you see in the right Q

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Speaker 3: time is when you don't let deposits pay the interest

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Speaker 3: that they want, each dollar is now missing a lot

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Speaker 3: of interest. So in that sense, its opportunity cost is

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Speaker 3: going way up. So people take out deposits. There's less dollars,

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Speaker 3: but each dollar is much more money, much more dominated

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Speaker 3: than it was before. So though you have less dollars,

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Speaker 3: the cost to people holding those dollars is way bigger

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Speaker 3: when the number of dollars is smaller, when this ceiling

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Speaker 3: binds tightly. And so that actually suggests that if you

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Speaker 3: sort of don't make this jump of thinking about the

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Speaker 3: number of dollars, but the opportunity cost of holding dollars,

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Speaker 3: the amount of money that's that's that's sort of burning

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Speaker 3: a hole in people's pocket, is actually much higher when

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Speaker 3: were high and the ceiling was binding, then when there

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Speaker 3: was more dollars but the ceiling was not binding.

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Speaker 2: The ghost of Milton Friedman is going to haunt us

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Speaker 2: too on this podcast. Okay, well, take that line of thinking,

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Speaker 2: or that pushback on the monetarist view and apply it

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Speaker 2: to the binding REGQ ceiling and inflation in the nineteen seventies.

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Speaker 2: So you know prices are going up, but banks are

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Speaker 2: restricted from paying out more deposits to savers. How does

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Speaker 2: that impact prices?

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Speaker 3: The idea was that by not letting them pay the

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Speaker 3: interest that they want, some deposits would leave the banks.

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Speaker 3: That was the in fact intention, That is what happened.

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Speaker 3: It was called disintermediation, and so deposits would flow out.

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Speaker 3: The idea I believe was that this would tampen down

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Speaker 3: demand because credit growth was the source of excess demand,

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Speaker 3: and that would help, just like raising the interest rate

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Speaker 3: should help. However, what we argue was it led to

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Speaker 3: the disintermediation, but instead of having a stronger effect on

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Speaker 3: demand or only an effect on demand, what it had

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Speaker 3: a strong effect was on the supply by firms, by producers,

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Speaker 3: because it's been well documented that each of the times

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Speaker 3: that the Fed funds rate went above the ceiling rate,

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Speaker 3: which happened a lot during this time periods, whenever they

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Speaker 3: raised rates, then as deposits flowed out, there were credit crunches,

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Speaker 3: meaning firms wanted credit. Banks wanted to raise more deposits,

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Speaker 3: they couldn't pay the rate they couldn't get enough deposits,

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Speaker 3: so they started to ration firms. And so if the

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Speaker 3: credit became scarce and expensive, now firms need credit to

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Speaker 3: do business. I think that's kind of clear. So it's

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Speaker 3: an input. Think of it like oil, but a much

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Speaker 3: more important input. If you can't get it, what do

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Speaker 3: you do? You fall behind in producing things. You cut supply,

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Speaker 3: and you raise prices because it's more expensive to produce.

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Speaker 3: And so we show that each of these cycles where

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Speaker 3: they raised rates where the ceiling was binding, you see both. Well,

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Speaker 3: you see this is known. You see both inflation and

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Speaker 3: a decrease in output. And then we look across firms

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Speaker 3: and we show that more credit constraint, firms raised prices

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Speaker 3: more and cut output, more, cut employment, more cut investment,

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Speaker 3: more inventories more.

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Speaker 1: All right, let's talk about the data that you collected,

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Speaker 1: because it's a good story, right that. Okay, the money

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Speaker 1: leaves the banking system, supply of credit therefore becomes ration,

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Speaker 1: and then you have all these supply side constraints and

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Speaker 1: that contributes to inflation. It's a good story. What is

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Speaker 1: the actual data that you looked at to establish your claim?

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Speaker 3: So there's there's the aggregate part of the data, which

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Speaker 3: I think is important to see, but for economists usually

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Speaker 3: can't by itself be convincing because you're just looking at

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Speaker 3: the time series for the whole country.

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Speaker 1: Wait, you can't do economics just by like looking at

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Speaker 1: two big charts.

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Speaker 3: I think you could do.

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Speaker 1: I've made my whole career on that.

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Speaker 3: I think. Actually that's a lot of times very important

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Speaker 3: and the most convincing thing to people. But if you

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Speaker 3: are in the business of being the you know, a skeptic,

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Speaker 3: then that is not going to be enough. So we

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Speaker 3: look at a lot of aggregate things, So looking at

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Speaker 3: how deposits flowed out whenever the ceiling was binding, they

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Speaker 3: flowed out more when it was when the gap between

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Speaker 3: the fems right and the ceiling was more. We looked

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Speaker 3: at unfilled orders or backlogs of orders that rose during

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Speaker 3: that time. So I don't know which of these you

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Speaker 3: find the most compelling. But then, like I said the

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Speaker 3: second part of the paper, we looked at the cross

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Speaker 3: section of firms to say, okay, let's look at something

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Speaker 3: that just compares firms that were more exposed to this

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Speaker 3: problem versus less exposed holding constant things you know that

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Speaker 3: are aggregate, like the fed's credibility, like oil shocks, any

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Speaker 3: of these things that you want to try to difference

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Speaker 3: out in order to just focus on exposure to the

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Speaker 3: particular channel that you think is at work.

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Speaker 2: So just to be clear, we're talking about disintermediation and

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Speaker 2: the idea that money can flow out of banks because

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Speaker 2: they can't compete on deposits, and then that could lead

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Speaker 2: to less investment. But what about just savings itself, Like

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Speaker 2: how does REGQ and the deposit rate cap impact people's

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Speaker 2: behavior when it comes to spending versus savings?

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Speaker 3: Right, that apps actually the first line of reasoning that

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Speaker 3: we went through. So we actually had two papers on this,

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Speaker 3: but I'm talking to you about the supply one, but

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Speaker 3: I'll tell you about the demand one. So that also

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Speaker 3: makes inflation worse because so both effects go in the

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Speaker 3: same direction, which I can tell you in a second

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Speaker 3: how that happens. So if you want to if you're

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Speaker 3: thinking about saving, and let's say that for you, the

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Speaker 3: marginal saving is deposit, which for people at that time

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Speaker 3: and even today a lot of people, it is. And

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Speaker 3: you see the rate and you see that you're getting

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Speaker 3: a terrible real rate, right, it's way below the inflation rate.

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Speaker 3: At times it was seven eight nine percent below inflation

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Speaker 3: because the cap was like five to five and a

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Speaker 3: half percent. Inflation was fourteen percent at one point. That's

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Speaker 3: just a complete disaster. So that on the margin would

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Speaker 3: push you to try to consume, not to save. So

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Speaker 3: if anything, it makes people want to consume more. At

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Speaker 3: the same time, and for the same reason, there's less

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Speaker 3: credit to firms, so they can't produce as much. Both

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Speaker 3: effects go in the direction of higher prices. The production

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Speaker 3: effect lower supply. The demand effect increases you know, would

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Speaker 3: increase by itself total output. But both of them are

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Speaker 3: making inflation go higher. So it's kind of a bad

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Speaker 3: situation in that respect.

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Speaker 2: Right, And it kind of gets to the heart part

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Speaker 2: of how transmission of monetary policy is supposed to work.

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Speaker 2: Because you're supposed to propagate these interest rate changes out

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Speaker 2: into the system. Rates go up, people are supposed to

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Speaker 2: hold on to more of their money. But if you

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Speaker 2: have a deposit rate cap, then that isn't happening.

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Speaker 3: Yeah, so usually so a sign of what microeconomists think

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Speaker 3: of a sign of dysfunction is when you have wedges

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Speaker 3: and here there's a giant wedge, there's a wedge between

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Speaker 3: the rate that depositors get the savings rate, and the

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Speaker 3: rate that borrowers pay the borrowing rate. The economy always

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Speaker 3: tries to push you to make those things equal. So

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Speaker 3: if people are willing to pay you a lot for loans,

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Speaker 3: then you pay people higher deposit rates, and then there's

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Speaker 3: more savings and the equilibrium is where they meet. But

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Speaker 3: here you couldn't. It's like a big friction sand in

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Speaker 3: the gears. So what you get is two rates. You

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Speaker 3: get a low rate for saver and a high rate

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Speaker 3: for borrowers. And so it's like asking, was the rate

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Speaker 3: to hire too low? Well, it was too high and

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Speaker 3: too low, and that's because of this wedge in between.

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Speaker 3: That is like a classical sign of a part problem

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Speaker 3: when you have different prices for the same thing on

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Speaker 3: both sides and it's not coming together.

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Speaker 2: Wait, can I ask a devil's advocate monetarist question? If

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Speaker 2: Milton Friedman was in the room with us right now,

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Speaker 2: maybe he would ask this. But like, there must be

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Speaker 2: a monetarist interpretation of the impact of REDQ as well,

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Speaker 2: which I imagine would be like, well, if you make

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Speaker 2: deposits unattractive, then maybe you're inhibiting monetary growth the growth

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Speaker 2: that was there.

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Speaker 3: That was the way that monitors saw that, and when

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Speaker 3: you saw no evidence of that, No, I think it's

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Speaker 3: the opposite when they raised interest rates because this gap grew.

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Speaker 3: It's always deposits were flowing out. It's the clearest thing

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Speaker 3: in the data. So in that sense, it looks like

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Speaker 3: you're reducing the rate of money growth. But I'm arguing

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Speaker 3: that it made each dollar if you want to have

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Speaker 3: that monitors right, like them each dollar much more money,

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Speaker 3: Like do you mind having dollars if if they pay

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Speaker 3: if you know your deposits pay the Fed funds right,

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Speaker 3: and you earn a real rate, it's not a big deal.

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Speaker 3: If they're earning minus eight percent real rate, that's all

437
00:22:00,960 --> 00:22:03,320
Speaker 3: that's really money. Like, it's really bad. You have to

438
00:22:03,320 --> 00:22:05,160
Speaker 3: sort of think what was the point of monetaring.

439
00:22:05,240 --> 00:22:08,120
Speaker 2: It's like the nature of the money kind of changes almost.

440
00:22:07,720 --> 00:22:08,919
Speaker 3: I think it becomes more money.

441
00:22:08,880 --> 00:22:11,719
Speaker 1: I mean, this is like they use the term hot potato, right.

442
00:22:11,760 --> 00:22:14,800
Speaker 1: People didn't want to hold quick question and then a

443
00:22:14,840 --> 00:22:18,600
Speaker 1: longer question. Was this an an extremely profitable period for banks?

444
00:22:18,880 --> 00:22:22,000
Speaker 3: Surprisingly, I don't think it was that profitable, And it's

445
00:22:22,040 --> 00:22:25,280
Speaker 3: a good question why. But I think also the rates

446
00:22:25,320 --> 00:22:28,520
Speaker 3: at which they the real rates at which they lent out,

447
00:22:28,600 --> 00:22:31,639
Speaker 3: for example, for long term mortgages and stuff, which is

448
00:22:31,680 --> 00:22:36,600
Speaker 3: what a lot of snls did, were also lowered by

449
00:22:36,960 --> 00:22:39,720
Speaker 3: this kind of thing. So actually, at the time people

450
00:22:39,760 --> 00:22:41,960
Speaker 3: thought that when you get rid of REGQ, it would

451
00:22:42,000 --> 00:22:43,800
Speaker 3: make the banks very unprofitable. I tell you what it

452
00:22:43,800 --> 00:22:45,600
Speaker 3: did do It led to the SNL crisis. I guess

453
00:22:45,600 --> 00:22:48,919
Speaker 3: they shouldn't be kid. It's well known that lifting the

454
00:22:49,040 --> 00:22:53,680
Speaker 3: ceilings on deposit rates left snls having to pay fair

455
00:22:53,760 --> 00:22:56,840
Speaker 3: market rates, which made a big hole in their balance.

456
00:22:57,200 --> 00:23:01,000
Speaker 1: Getting back to your supply side analysis, and you mentioned

457
00:23:01,000 --> 00:23:03,520
Speaker 1: you sort of tried to go sector bisector. Who would

458
00:23:03,520 --> 00:23:06,760
Speaker 1: be particularly in like, okay, who, all things being equal,

459
00:23:07,080 --> 00:23:10,560
Speaker 1: who is exposed to this sort of severe rationing of

460
00:23:10,600 --> 00:23:13,200
Speaker 1: credit from the banking system having less money? What did

461
00:23:13,240 --> 00:23:16,959
Speaker 1: you find when you look at the sort of sectoral breakdowns,

462
00:23:17,119 --> 00:23:18,320
Speaker 1: what kind of things pop up?

463
00:23:18,560 --> 00:23:21,200
Speaker 3: So should should be specific and say that the database

464
00:23:21,240 --> 00:23:23,880
Speaker 3: we have, because we needed a database of lots of information,

465
00:23:24,000 --> 00:23:28,919
Speaker 3: is the nbr CS Database on Manufacturing Industries. So already

466
00:23:28,960 --> 00:23:31,720
Speaker 3: it's all manufacturers, okay, So we need the prices they charge,

467
00:23:31,720 --> 00:23:34,040
Speaker 3: and we need stuff on their inputs, and so it's

468
00:23:34,040 --> 00:23:38,199
Speaker 3: all different kinds of manufacturing. And so that by the

469
00:23:38,200 --> 00:23:41,399
Speaker 3: construction of our measure, are companies that need to pay

470
00:23:41,600 --> 00:23:44,639
Speaker 3: a lot upfront in terms of production costs and labor

471
00:23:44,680 --> 00:23:47,280
Speaker 3: costs relative to the money they would have from the

472
00:23:47,359 --> 00:23:50,879
Speaker 3: last cycle of selling, relative to the operating margins that

473
00:23:50,920 --> 00:23:54,120
Speaker 3: they have. So I don't remember exactly which ones were

474
00:23:54,160 --> 00:23:56,560
Speaker 3: like high, if it was like textiles versus I think

475
00:23:56,600 --> 00:23:59,439
Speaker 3: the tobacco was low. But so I can't say that

476
00:23:59,640 --> 00:24:03,360
Speaker 3: that manufacturers that could tell you exactly which ones were

477
00:24:03,359 --> 00:24:05,000
Speaker 3: more and which ones or less. But you'd think that

478
00:24:05,200 --> 00:24:07,960
Speaker 3: somebody carrying a lot of inventory a lot of upfront

479
00:24:08,000 --> 00:24:11,080
Speaker 3: costs would need a lot of credit, and somebody who

480
00:24:11,160 --> 00:24:14,719
Speaker 3: doesn't you know at all, and maybe the tobacco manufacturers,

481
00:24:14,760 --> 00:24:15,800
Speaker 3: it's not as big of a deal.

482
00:24:16,280 --> 00:24:20,680
Speaker 2: So you had less investment because of the disintermediation dynamics

483
00:24:20,680 --> 00:24:23,560
Speaker 2: that you described. Meanwhile, you also had people spending more

484
00:24:23,680 --> 00:24:26,520
Speaker 2: because they're not incentivized to save their money and put

485
00:24:26,560 --> 00:24:29,760
Speaker 2: it in deposits that are less than inflation. That seems

486
00:24:29,760 --> 00:24:30,600
Speaker 2: like a bad dynamic.

487
00:24:30,760 --> 00:24:33,639
Speaker 3: Yeah, I think it's I think it's quite a bad dinneric.

488
00:24:33,600 --> 00:24:37,960
Speaker 1: So Okay, well, which is great. Are I really appreciate it? No,

489
00:24:38,960 --> 00:24:40,040
Speaker 1: I understand the seventies.

490
00:24:40,240 --> 00:24:42,439
Speaker 2: So when you did the research, I mean, did you

491
00:24:42,520 --> 00:24:45,040
Speaker 2: find one of those factors, like the supply side versus

492
00:24:45,080 --> 00:24:46,600
Speaker 2: the demand side, which one was bigger.

493
00:24:46,800 --> 00:24:49,320
Speaker 3: You can see in the aggregate data that the net effect,

494
00:24:49,600 --> 00:24:52,560
Speaker 3: meaning the one that overwhelms is the supply one. Because

495
00:24:52,840 --> 00:24:56,480
Speaker 3: in this part, I think is not new because despite

496
00:24:56,520 --> 00:24:59,439
Speaker 3: all the narrative focusing on the feds inability to control demand,

497
00:24:59,680 --> 00:25:04,040
Speaker 3: the four cycles in the seventies, sixties, and seventies, which

498
00:25:04,040 --> 00:25:07,160
Speaker 3: are the stagflationary cycles, were called that because each time

499
00:25:07,280 --> 00:25:10,879
Speaker 3: that inflation went up, output was dropping at the same time.

500
00:25:11,119 --> 00:25:13,160
Speaker 3: By the way, it's quite different than what we've seen recently.

501
00:25:13,520 --> 00:25:16,560
Speaker 3: So that's well known. And so you when we first started,

502
00:25:16,560 --> 00:25:18,920
Speaker 3: we're like, why are they keep talking about demand when

503
00:25:19,000 --> 00:25:21,920
Speaker 3: clearly output is going down. But the reason people say

504
00:25:21,920 --> 00:25:25,080
Speaker 3: that is because they took the decrease in output as

505
00:25:25,240 --> 00:25:29,520
Speaker 3: like basically exogenous like stuff happened like oil happened before

506
00:25:29,640 --> 00:25:33,640
Speaker 3: there was some other crisis that happened, and so they're like, okay,

507
00:25:33,640 --> 00:25:35,960
Speaker 3: well we can't do anything about that. That's just our job,

508
00:25:36,080 --> 00:25:38,000
Speaker 3: the fed's job. To deal with that. And so in

509
00:25:38,119 --> 00:25:41,280
Speaker 3: light of these various supply shocks that apparently kept happening,

510
00:25:41,480 --> 00:25:44,000
Speaker 3: the FED didn't do a good job controlling demand. Whereas

511
00:25:44,000 --> 00:25:47,800
Speaker 3: we're saying these supply shocks, it's happened all the time,

512
00:25:48,200 --> 00:25:51,159
Speaker 3: and it happened in this fashion, it's not a coincidence. Actually,

513
00:25:51,240 --> 00:25:53,840
Speaker 3: it was a huge financial friction that made this happen.

514
00:25:54,680 --> 00:25:58,119
Speaker 1: Why you know, you mentioned, look, if credit is going

515
00:25:58,160 --> 00:26:01,200
Speaker 1: to be rational, investment is going to go down. Investment

516
00:26:01,320 --> 00:26:04,480
Speaker 1: is also a demand impulse, right, So building factories is

517
00:26:04,640 --> 00:26:07,960
Speaker 1: you know, that's someone else's income, that's activity. Company is

518
00:26:08,040 --> 00:26:10,600
Speaker 1: going out of business and laying off workers, we would

519
00:26:10,640 --> 00:26:14,280
Speaker 1: think would be disinflationary, right, So why is it that,

520
00:26:14,480 --> 00:26:17,520
Speaker 1: as you describe, you have this sort of rationing of credit,

521
00:26:17,560 --> 00:26:21,760
Speaker 1: this credit constraint that hurt a lot of manufacturers. Why,

522
00:26:21,920 --> 00:26:24,800
Speaker 1: I mean, just intuitively that could you know, and it

523
00:26:24,800 --> 00:26:26,800
Speaker 1: sounds like it could be a disinflationary Oh.

524
00:26:26,840 --> 00:26:29,639
Speaker 3: Absolutely, But the thing we actually are not emphasizing the

525
00:26:29,680 --> 00:26:34,280
Speaker 3: investment that's that is there, but we're emphasizing the ongoing operations.

526
00:26:34,400 --> 00:26:38,159
Speaker 3: So I think classically, oftentimes people think of credit as

527
00:26:38,200 --> 00:26:40,960
Speaker 3: going to investment, but most of the credit the stock

528
00:26:41,000 --> 00:26:43,679
Speaker 3: of credit to firms is like working cap, not just

529
00:26:43,720 --> 00:26:46,359
Speaker 3: working capital, but you pay upfront for a lot of things,

530
00:26:46,400 --> 00:26:48,080
Speaker 3: like just to take an extreme case, if you deal

531
00:26:48,080 --> 00:26:51,720
Speaker 3: with the contractor, you pay them usually half upfront. It's

532
00:26:51,760 --> 00:26:53,920
Speaker 3: not like you tell them, yeah, go build my house

533
00:26:53,960 --> 00:26:56,360
Speaker 3: and when you're done, I'll pay you. So people pay

534
00:26:56,359 --> 00:26:58,800
Speaker 3: for materials in labor in large part, this is where

535
00:26:58,840 --> 00:27:01,159
Speaker 3: trade credit comes in and all these things. Companies need

536
00:27:01,200 --> 00:27:02,920
Speaker 3: a lot of credit up front. So we're talking about

537
00:27:02,960 --> 00:27:05,920
Speaker 3: the direct operations of the firm. It is also true

538
00:27:06,280 --> 00:27:08,320
Speaker 3: that you saw a decrease in investment, and like you're

539
00:27:08,320 --> 00:27:10,679
Speaker 3: saying that by itself could be interpreted as lower demand.

540
00:27:10,720 --> 00:27:13,600
Speaker 3: So it's not our emphasis in this part.

541
00:27:13,840 --> 00:27:17,800
Speaker 1: So you know, again going to when Vulker came and

542
00:27:17,840 --> 00:27:20,280
Speaker 1: I've been plugging this a lot lately, but I was,

543
00:27:20,359 --> 00:27:22,959
Speaker 1: you know, I finally read the book Secret to the Temple,

544
00:27:23,080 --> 00:27:26,640
Speaker 1: and it totally changed my perspective on like, at least

545
00:27:26,640 --> 00:27:30,240
Speaker 1: the first few years of the Vulker regime, because it

546
00:27:30,280 --> 00:27:32,320
Speaker 1: was not actually a simple story of like finally we're

547
00:27:32,320 --> 00:27:34,400
Speaker 1: gonna get tough. It was just like all of these

548
00:27:34,480 --> 00:27:37,840
Speaker 1: levers being pulled and the huge swings in the fed

549
00:27:37,920 --> 00:27:40,520
Speaker 1: funds rate and it was kind of a the first

550
00:27:40,520 --> 00:27:45,040
Speaker 1: few years seemed like a total mess. What did actually then,

551
00:27:45,280 --> 00:27:49,760
Speaker 1: in your view, create the real durable turn in inflation.

552
00:27:50,240 --> 00:27:53,119
Speaker 3: So yeah, we look at this in both papers. I

553
00:27:53,160 --> 00:27:55,920
Speaker 3: think the timing lines up very well. I would say,

554
00:27:56,240 --> 00:27:59,440
Speaker 3: bet this is heresy. Now it's better than the vulcar

555
00:27:59,520 --> 00:28:03,080
Speaker 3: rate hike. With the two stages of the deregulation of

556
00:28:03,480 --> 00:28:06,920
Speaker 3: reg Q, the first one being the first major deregulation

557
00:28:07,000 --> 00:28:11,520
Speaker 3: at the end of nineteen seventy eight and nineteen seventy nine,

558
00:28:11,840 --> 00:28:15,160
Speaker 3: and then for this one, the total essentially getting rid

559
00:28:15,200 --> 00:28:16,760
Speaker 3: of almost the rest of it at the end of

560
00:28:16,840 --> 00:28:21,080
Speaker 3: nineteen eighty two, and both were associated with huge inflows

561
00:28:21,119 --> 00:28:25,520
Speaker 3: of the respective deposits that were, you know, deregulated, And

562
00:28:25,840 --> 00:28:30,119
Speaker 3: we look at banks that were benefited more from this

563
00:28:30,320 --> 00:28:33,560
Speaker 3: versus less and sort of see the unwind of what

564
00:28:33,600 --> 00:28:36,159
Speaker 3: we're seeing before, and then connect it to firms that

565
00:28:36,640 --> 00:28:39,080
Speaker 3: were located in areas that were able to borrow from

566
00:28:39,080 --> 00:28:41,200
Speaker 3: those banks, as well as the ones that were more

567
00:28:41,200 --> 00:28:45,880
Speaker 3: financially dependent in areas that were more affected by the deregulation,

568
00:28:46,160 --> 00:28:48,640
Speaker 3: and they show the unwinding and these so that they

569
00:28:48,680 --> 00:28:52,040
Speaker 3: increased production and raised prices or cut price, you know,

570
00:28:52,160 --> 00:28:54,880
Speaker 3: raise prices lesser, cut prices more than the other ones.

571
00:28:55,040 --> 00:28:56,720
Speaker 3: And I think if you look at the COOTE now

572
00:28:56,920 --> 00:28:59,000
Speaker 3: you know, inflation is very messy. Now that we've gone

573
00:28:59,000 --> 00:29:00,280
Speaker 3: through it, you can see how hard I just to

574
00:29:00,360 --> 00:29:03,480
Speaker 3: know exactly where it is. But inflation starts to come

575
00:29:03,560 --> 00:29:06,479
Speaker 3: down at the end of seventy nine, beginning of eighty,

576
00:29:06,720 --> 00:29:10,280
Speaker 3: several quarters before Volker's like big rate hike. So that

577
00:29:10,360 --> 00:29:13,160
Speaker 3: is not going to convince any monetary person my story,

578
00:29:13,200 --> 00:29:16,200
Speaker 3: but I do think that it's there if you want

579
00:29:16,240 --> 00:29:17,400
Speaker 3: to be convinced.

580
00:29:17,000 --> 00:29:20,680
Speaker 1: The market was pricing it in preemptively efficient markets.

581
00:29:21,480 --> 00:29:23,120
Speaker 3: Well, I'm talking about the inflation.

582
00:29:23,200 --> 00:29:24,400
Speaker 1: Yeah, yeah, yeah, yeah.

583
00:29:24,400 --> 00:29:27,040
Speaker 3: I think I think bond markets didn't think that Vulkar

584
00:29:27,320 --> 00:29:31,120
Speaker 3: had won until like the mid mid nineteen eighty four.

585
00:29:31,240 --> 00:29:33,760
Speaker 3: So ten year rates were as high in mid eighty

586
00:29:33,760 --> 00:29:35,800
Speaker 3: four as they had been before Volcar raised rates.

587
00:29:35,840 --> 00:29:39,200
Speaker 1: Wow, And Tracy, that's when Bill Gross slammed the accelerator.

588
00:29:39,240 --> 00:29:41,000
Speaker 1: As we talk about no right, like it was like

589
00:29:41,160 --> 00:29:43,240
Speaker 1: the raids stayed really high. And that's what he said,

590
00:29:43,440 --> 00:29:44,920
Speaker 1: is like that's when you knew the moment.

591
00:29:44,720 --> 00:29:46,320
Speaker 3: Was like he knew go all in knew.

592
00:29:46,360 --> 00:29:48,880
Speaker 2: I want to bring us up to present day because

593
00:29:49,000 --> 00:29:51,360
Speaker 2: I mean, it's very useful to have this overview of

594
00:29:51,400 --> 00:29:53,680
Speaker 2: the nineteen seventies. But maybe there are some lessons here

595
00:29:53,720 --> 00:29:56,640
Speaker 2: that we can apply specifically to what's happening now in

596
00:29:56,680 --> 00:29:58,760
Speaker 2: twenty twenty three. And let me start with a really

597
00:29:58,760 --> 00:30:02,120
Speaker 2: simple one, which we've discussed on this podcast before, notably

598
00:30:02,200 --> 00:30:07,600
Speaker 2: with Barclay's Joe abat the Money Market Strategist. We don't

599
00:30:07,640 --> 00:30:11,600
Speaker 2: have that binding constraint of reg Q anymore, and yet

600
00:30:11,920 --> 00:30:15,120
Speaker 2: it feels like it's been a relatively slow process to

601
00:30:15,200 --> 00:30:18,280
Speaker 2: see banks in the US raise their deposit rate. And

602
00:30:18,320 --> 00:30:20,600
Speaker 2: I was looking before the show. The average bank rate

603
00:30:20,840 --> 00:30:26,120
Speaker 2: according to bankrate dot com on retail deposit savings accounts

604
00:30:26,240 --> 00:30:29,720
Speaker 2: is still only like zero point five eight percent, which

605
00:30:29,800 --> 00:30:32,360
Speaker 2: is kind of crazy. It's higher on certificates of deposit

606
00:30:32,400 --> 00:30:34,760
Speaker 2: and money market funds and things like that. But why

607
00:30:34,760 --> 00:30:37,920
Speaker 2: aren't we seeing more of a pass through from higher

608
00:30:37,920 --> 00:30:38,760
Speaker 2: benchmark rates?

609
00:30:39,160 --> 00:30:41,520
Speaker 3: Yeah. So, actually a lot of work we've done is

610
00:30:41,560 --> 00:30:43,920
Speaker 3: on this and the effect of this in times after

611
00:30:44,000 --> 00:30:47,280
Speaker 3: reg Q. That's where we started with. I mean, the

612
00:30:47,320 --> 00:30:49,240
Speaker 3: simple answer is they have a lot of market power,

613
00:30:49,320 --> 00:30:52,920
Speaker 3: and so people aren't leaving despite the lack of higher rates.

614
00:30:52,920 --> 00:30:55,760
Speaker 3: You saw after SVB that there's a lot of discussion

615
00:30:55,800 --> 00:30:57,680
Speaker 3: that now people will wake up to the fact that

616
00:30:57,760 --> 00:31:00,520
Speaker 3: rates are really low, they'll demand rates.

617
00:31:00,560 --> 00:31:01,960
Speaker 2: Yeah, it still hasn't really happened.

618
00:31:02,000 --> 00:31:04,120
Speaker 3: No, it really, it really hasn't. It happens. It's some

619
00:31:04,160 --> 00:31:06,760
Speaker 3: small banks. But I was quite skeptical at the time

620
00:31:06,840 --> 00:31:09,880
Speaker 3: because you don't you know, you don't get everybody can't

621
00:31:09,880 --> 00:31:11,840
Speaker 3: be asleep and they just wake up. Like I know,

622
00:31:11,880 --> 00:31:14,960
Speaker 3: we all listen to odd lots and yeah, most people

623
00:31:15,040 --> 00:31:17,200
Speaker 3: still the majority of the world is still not listening.

624
00:31:17,200 --> 00:31:18,479
Speaker 3: So your market share could grow a lot.

625
00:31:18,560 --> 00:31:22,720
Speaker 2: I'm gonna I'm going to renew my call to improve

626
00:31:22,800 --> 00:31:26,120
Speaker 2: the transmission of monetary policy and defeat inflation. We all

627
00:31:26,120 --> 00:31:28,800
Speaker 2: need to find a savings account with a high interest rate,

628
00:31:28,920 --> 00:31:30,840
Speaker 2: So go out and do it. Do the market research.

629
00:31:31,160 --> 00:31:33,400
Speaker 3: So they have they have a lot of market power.

630
00:31:33,440 --> 00:31:36,520
Speaker 3: It's a very big part of the of the banking business.

631
00:31:36,800 --> 00:31:39,440
Speaker 3: The difference is is that they could raise it if

632
00:31:39,480 --> 00:31:42,520
Speaker 3: they wanted, if people became aware, if they left banks

633
00:31:42,520 --> 00:31:44,400
Speaker 3: to go to other banks, and so that's kind of

634
00:31:44,640 --> 00:31:48,360
Speaker 3: that's a response, that's their optimal response, whereas in the seventies,

635
00:31:48,720 --> 00:31:51,959
Speaker 3: they wanted to raise the rates and couldn't. That's very different.

636
00:31:52,000 --> 00:31:54,840
Speaker 3: So they were kind of like a like a super monopolist,

637
00:31:54,920 --> 00:31:56,720
Speaker 3: but so much of a monopolist, and they didn't want

638
00:31:56,760 --> 00:31:58,600
Speaker 3: to be like even a monopolist doesn't want to set

639
00:31:58,640 --> 00:32:00,920
Speaker 3: the price so high you can't sell anything.

640
00:32:16,360 --> 00:32:19,920
Speaker 1: So thinking about now versus the nineteen seventies, there are

641
00:32:19,960 --> 00:32:22,040
Speaker 1: two ways that I could think of that maybe the

642
00:32:22,120 --> 00:32:24,680
Speaker 1: economy is fundamentally different. But let me start with the

643
00:32:24,720 --> 00:32:27,440
Speaker 1: one that's sort of most directly to this. In the

644
00:32:27,520 --> 00:32:29,960
Speaker 1: late in the seventies, the banks are probably like the

645
00:32:30,800 --> 00:32:34,240
Speaker 1: main game in town for credit, whereas today there's all

646
00:32:34,320 --> 00:32:37,400
Speaker 1: kinds of different ways that a firm of any sort,

647
00:32:37,440 --> 00:32:39,680
Speaker 1: even a manufacturer, there's a you know, the bond.

648
00:32:39,440 --> 00:32:40,520
Speaker 2: Market, bond market loaded.

649
00:32:40,640 --> 00:32:42,880
Speaker 1: Since then we talk about private credit and private lending,

650
00:32:42,880 --> 00:32:46,160
Speaker 1: et cetera. Talk to us just start like, how much

651
00:32:46,280 --> 00:32:49,440
Speaker 1: more important were banks for the provision of credit in

652
00:32:49,480 --> 00:32:51,760
Speaker 1: the time that you focus on then versus today?

653
00:32:52,040 --> 00:32:55,000
Speaker 3: So I do think they were more important. I want

654
00:32:55,040 --> 00:32:57,800
Speaker 3: to push back a little bit because I've learned myself

655
00:32:57,840 --> 00:33:01,080
Speaker 3: over time. Certainly the bond market's big, and certainly there

656
00:33:01,080 --> 00:33:05,480
Speaker 3: are other non bank sources of credit. However, I do

657
00:33:05,520 --> 00:33:09,560
Speaker 3: think that the diminishment of bank's importance has multiple times

658
00:33:09,600 --> 00:33:13,120
Speaker 3: been overstated. Just to give you some data and looked

659
00:33:13,160 --> 00:33:17,240
Speaker 3: at this. So, there are about one thousand firms in

660
00:33:17,280 --> 00:33:20,440
Speaker 3: the US that are rated, meaning that they can issue bonds,

661
00:33:20,920 --> 00:33:23,440
Speaker 3: out of the about three thousand, five hundred firms that

662
00:33:23,440 --> 00:33:26,000
Speaker 3: are listed on the stock market. There were about half

663
00:33:26,000 --> 00:33:28,280
Speaker 3: as many firms that could issue bonds by the end

664
00:33:28,320 --> 00:33:30,880
Speaker 3: of the seventies out of about four thousand, five hundred

665
00:33:30,920 --> 00:33:33,880
Speaker 3: firms that were listed. In any case, that's not that

666
00:33:33,920 --> 00:33:37,080
Speaker 3: many firms. They are gigantic on average, so in terms

667
00:33:37,080 --> 00:33:39,240
Speaker 3: of valuate they're very important. But there are about seven

668
00:33:39,360 --> 00:33:42,920
Speaker 3: hundred thousand firms with over twenty people, which means that

669
00:33:43,600 --> 00:33:47,760
Speaker 3: six hundred and ninety nine thousand of them cannot issue bonds.

670
00:33:47,920 --> 00:33:50,000
Speaker 1: We're talking about today, yes, okay.

671
00:33:49,680 --> 00:33:51,880
Speaker 3: And there were about three hundred and fifty thousand firms

672
00:33:51,880 --> 00:33:54,920
Speaker 3: at that time that were above twenty people and so

673
00:33:55,160 --> 00:33:58,720
Speaker 3: couldn't issue bonds. And so although there's been an expansion

674
00:33:58,720 --> 00:34:00,680
Speaker 3: of this, the vast majority we have a firm. People

675
00:34:00,680 --> 00:34:02,360
Speaker 3: call them small firms, but that makes you think of

676
00:34:02,360 --> 00:34:04,320
Speaker 3: like a laundromat. They get a lot bigger than that,

677
00:34:04,600 --> 00:34:08,440
Speaker 3: so small medium firms cannot. It's just very few even

678
00:34:08,480 --> 00:34:10,360
Speaker 3: out of the stock market. Like I said, two thirds

679
00:34:10,600 --> 00:34:12,000
Speaker 3: don't issue bonds.

680
00:34:11,920 --> 00:34:14,719
Speaker 1: Right, So even today there is a huge pool of

681
00:34:14,760 --> 00:34:16,799
Speaker 1: companies that really, if they need credit, need to go

682
00:34:16,800 --> 00:34:17,279
Speaker 1: to a bank or.

683
00:34:17,280 --> 00:34:18,000
Speaker 3: Something like the bank.

684
00:34:18,239 --> 00:34:20,719
Speaker 1: Now, the other way that maybe the economy feels like

685
00:34:20,760 --> 00:34:23,720
Speaker 1: it could be different than the nineteen seventies is huge

686
00:34:23,800 --> 00:34:28,000
Speaker 1: drivers of you know, the US economy maybe are less

687
00:34:28,000 --> 00:34:30,279
Speaker 1: credit center. I'm think you like tech for example, or

688
00:34:30,360 --> 00:34:33,840
Speaker 1: software in which we don't really associate them with like borrowing.

689
00:34:34,480 --> 00:34:39,040
Speaker 1: Was the economy inherently more credit sensitive? I would imagine

690
00:34:39,040 --> 00:34:42,719
Speaker 1: in a manufacturing economy you have to build factories or

691
00:34:42,760 --> 00:34:46,200
Speaker 1: even just maintain inventory. Was the economy just sort of

692
00:34:46,280 --> 00:34:49,400
Speaker 1: more and were more companies in perpetual need of credit

693
00:34:49,920 --> 00:34:50,640
Speaker 1: than today?

694
00:34:51,080 --> 00:34:52,719
Speaker 3: I don't know the answer to that. I would have

695
00:34:52,880 --> 00:34:57,360
Speaker 3: actually guessed that with financial deepening in general, were more financialized.

696
00:34:57,840 --> 00:34:59,640
Speaker 3: I should just say, just to not give the wrong

697
00:34:59,640 --> 00:35:01,840
Speaker 3: the press. I don't think that the inflation of the

698
00:35:01,920 --> 00:35:04,799
Speaker 3: last couple of years was due to financial friction per se.

699
00:35:04,880 --> 00:35:07,719
Speaker 3: I think the analogy is, and I believe this for

700
00:35:07,760 --> 00:35:10,640
Speaker 3: a long time that the main driver was the supply

701
00:35:10,760 --> 00:35:15,240
Speaker 3: chain shocks. It's in that respect that I think it's similar.

702
00:35:15,280 --> 00:35:18,239
Speaker 3: I make the increase in demand due to transfers or

703
00:35:18,239 --> 00:35:20,600
Speaker 3: fiscal or I was thought that was secondary. I thought

704
00:35:20,640 --> 00:35:24,200
Speaker 3: that once the supply chain gets solved, the effect will

705
00:35:24,239 --> 00:35:27,120
Speaker 3: be largely diminishment of that. So that that's been my opinion.

706
00:35:27,200 --> 00:35:30,080
Speaker 3: I think more people are there now than the world

707
00:35:30,120 --> 00:35:32,839
Speaker 3: like a year ago, but that's the analogy the way

708
00:35:32,840 --> 00:35:33,279
Speaker 3: I see it.

709
00:35:33,640 --> 00:35:36,239
Speaker 2: Just to press on this interest rate sensitivity point. I

710
00:35:36,280 --> 00:35:39,239
Speaker 2: know I mentioned before that we've talked about reg Q

711
00:35:39,560 --> 00:35:42,480
Speaker 2: in passing a few times with Josh Junger and Lev

712
00:35:42,560 --> 00:35:45,960
Speaker 2: Menon in one or two other episodes. But if it

713
00:35:46,080 --> 00:35:49,280
Speaker 2: sounds familiar to our listeners, it might also be because

714
00:35:49,280 --> 00:35:52,560
Speaker 2: it came up in a very famous speech made by

715
00:35:52,600 --> 00:35:55,600
Speaker 2: Ben Bernanke in two thousand and seven, where he was

716
00:35:55,640 --> 00:36:00,000
Speaker 2: talking about how sensitive the housing market was to change

717
00:36:00,440 --> 00:36:02,960
Speaker 2: in the FED funds rate, and he basically said, because

718
00:36:03,000 --> 00:36:06,399
Speaker 2: we don't have REGQ ceilings anymore on deposit rates, that

719
00:36:06,440 --> 00:36:09,920
Speaker 2: means that deposits are a much diminished source of housing finance.

720
00:36:09,960 --> 00:36:12,879
Speaker 2: So everything is going to be fine, And that turned

721
00:36:12,880 --> 00:36:13,840
Speaker 2: out not to be the case.

722
00:36:14,440 --> 00:36:16,680
Speaker 3: So it's true that Bernanki and if you actually you

723
00:36:16,719 --> 00:36:18,239
Speaker 3: go back and read his papers from the eighties and

724
00:36:18,440 --> 00:36:21,080
Speaker 3: not just him, there was a lot of understanding that

725
00:36:21,160 --> 00:36:24,560
Speaker 3: REGQ made it so that housing was very credit sensitive

726
00:36:24,680 --> 00:36:27,279
Speaker 3: when REGQ was there. So for the reason we said

727
00:36:27,320 --> 00:36:29,719
Speaker 3: banks would lose deposits, one of the main forms of

728
00:36:29,719 --> 00:36:34,160
Speaker 3: bank lending is mortgages and also loans to contractors, and

729
00:36:34,200 --> 00:36:37,799
Speaker 3: so you would see house market basically dry up, and

730
00:36:37,880 --> 00:36:40,560
Speaker 3: then when deposits came back in, housing would be on

731
00:36:40,640 --> 00:36:43,000
Speaker 3: a tear. And it was the impression of a lot

732
00:36:43,040 --> 00:36:46,040
Speaker 3: of monetary people that once REGQ was abolished in nineteen

733
00:36:46,080 --> 00:36:48,560
Speaker 3: eighty two, first, this was the reason we didn't see

734
00:36:48,560 --> 00:36:52,680
Speaker 3: these kinds of wild gyrations anymore. And also they assumed,

735
00:36:52,920 --> 00:36:56,960
Speaker 3: which I think was wrong, that deposits would transmit policy then,

736
00:36:57,480 --> 00:37:00,359
Speaker 3: you know, one for one, which was sort of true

737
00:37:00,440 --> 00:37:02,799
Speaker 3: right when reg Q was abolished and became less and

738
00:37:02,840 --> 00:37:06,160
Speaker 3: less true until your question of why are deposit rates

739
00:37:06,200 --> 00:37:07,160
Speaker 3: so pathetically low?

740
00:37:07,239 --> 00:37:11,359
Speaker 1: Now, well, going back, I mean, policy must makers must

741
00:37:11,400 --> 00:37:13,839
Speaker 1: have seen this wadge that you were talking about in

742
00:37:13,920 --> 00:37:16,720
Speaker 1: real time, and it must have sort of been obvious

743
00:37:16,840 --> 00:37:20,239
Speaker 1: that they could keep hiking rates to fight inflation, but

744
00:37:20,280 --> 00:37:23,760
Speaker 1: that there was it would have minimal impact on actual

745
00:37:23,920 --> 00:37:26,600
Speaker 1: rates of deposit that people got. Were they what were

746
00:37:26,640 --> 00:37:29,200
Speaker 1: they saying at the time. Was there an awareness that

747
00:37:29,239 --> 00:37:31,839
Speaker 1: this was a tension, that this was impeding the transmission

748
00:37:31,840 --> 00:37:34,279
Speaker 1: of monetary policy? And if you said that, as you

749
00:37:34,360 --> 00:37:37,160
Speaker 1: pointed out, historically they would sort of lift the cap

750
00:37:37,280 --> 00:37:39,680
Speaker 1: over time along with the Fed Fund rate, why wasn't that.

751
00:37:39,719 --> 00:37:43,719
Speaker 3: Lifting so a couple things. I think they definitely saw

752
00:37:43,760 --> 00:37:46,839
Speaker 3: the credit crunches. They actually didn't like those. Weirdly, even

753
00:37:46,840 --> 00:37:49,320
Speaker 3: though they wanted there to be less credit, they just

754
00:37:49,360 --> 00:37:52,759
Speaker 3: didn't want it to be like that hysterical. So I

755
00:37:52,800 --> 00:37:56,000
Speaker 3: think they thought this was helping partly that the monitor's

756
00:37:56,080 --> 00:37:57,840
Speaker 3: view would tell you, look, there are less deposits, so

757
00:37:57,920 --> 00:38:00,879
Speaker 3: less money growth, and this should be helping inflation and so.

758
00:38:01,000 --> 00:38:03,919
Speaker 3: And of course, whenever they eased up, the deposits would

759
00:38:03,920 --> 00:38:05,440
Speaker 3: flow back in, which would look like a lot of

760
00:38:05,480 --> 00:38:08,399
Speaker 3: money creations. So this was kind of annoying them very much.

761
00:38:08,640 --> 00:38:10,680
Speaker 3: But it's also tell people it's like giving a sick

762
00:38:10,760 --> 00:38:14,440
Speaker 3: patient the medicine, Well, if they get sicker. There's two conclusions,

763
00:38:14,440 --> 00:38:18,080
Speaker 3: and unfortunately they're diametrically opposite. One is that the medicine

764
00:38:18,160 --> 00:38:19,959
Speaker 3: is not working. The other one is that you didn't

765
00:38:19,960 --> 00:38:24,120
Speaker 3: give the patient enough medicine. So if the medicine's making

766
00:38:24,120 --> 00:38:26,360
Speaker 3: them sicker, the second one is not going to be

767
00:38:26,440 --> 00:38:29,040
Speaker 3: that good. And they if you read, they thought that

768
00:38:29,040 --> 00:38:31,640
Speaker 3: there must be lots of other avenues that banks are

769
00:38:31,680 --> 00:38:34,640
Speaker 3: able to circumvent this. One view was that this is

770
00:38:34,760 --> 00:38:37,400
Speaker 3: like barely holding the dam, and that these guys are

771
00:38:37,440 --> 00:38:39,239
Speaker 3: finding lots of ways around it. If you look at

772
00:38:39,239 --> 00:38:42,200
Speaker 3: total credit growth, they did not find many ways around it.

773
00:38:42,239 --> 00:38:44,160
Speaker 3: They did many things that you guys have mentioned, like

774
00:38:44,400 --> 00:38:47,840
Speaker 3: the beginning of money market mutual funds, the Euro Many

775
00:38:47,880 --> 00:38:50,839
Speaker 3: many financial innovations come from this time period. It's scuchly

776
00:38:50,880 --> 00:38:52,560
Speaker 3: a really interesting time period, but they did not actually

777
00:38:52,600 --> 00:38:53,600
Speaker 3: circumvent it that much.

778
00:38:53,719 --> 00:38:56,239
Speaker 1: Tracy, this is a real diversion. But I you know,

779
00:38:56,400 --> 00:39:00,120
Speaker 1: after college, my first job was in a now tro

780
00:39:00,239 --> 00:39:01,280
Speaker 1: food is grocery store.

781
00:39:01,400 --> 00:39:03,680
Speaker 2: Oh, I've heard your sandwich stories.

782
00:39:03,680 --> 00:39:05,560
Speaker 1: This is not a sandwich story. I just want to say,

783
00:39:05,600 --> 00:39:07,880
Speaker 1: I've been around a lot of people in my life

784
00:39:08,200 --> 00:39:11,960
Speaker 1: that did like very strange like self medication to like

785
00:39:12,000 --> 00:39:14,400
Speaker 1: treat a sickness, and they would get worse and worse

786
00:39:14,480 --> 00:39:17,719
Speaker 1: and convince themselves that they're getting healthier and healthier. So

787
00:39:17,800 --> 00:39:19,360
Speaker 1: I feel like, you know, like I'm just going to

788
00:39:19,440 --> 00:39:21,920
Speaker 1: like do nothing but like take golden seal or like

789
00:39:21,960 --> 00:39:24,399
Speaker 1: eat pure Leona or something like that, and they get

790
00:39:24,400 --> 00:39:28,160
Speaker 1: sicker and sicker and more more emaciated, and it's like

791
00:39:28,400 --> 00:39:32,799
Speaker 1: maybe it's not working anyway. I just understand that phenomenon firsthand.

792
00:39:33,320 --> 00:39:35,200
Speaker 2: Thank you Joe for that insight.

793
00:39:35,320 --> 00:39:37,080
Speaker 1: I want to, you know, just sort of wrap it

794
00:39:37,200 --> 00:39:41,440
Speaker 1: up this idea that the reg Q, as you describe it,

795
00:39:41,480 --> 00:39:44,080
Speaker 1: had really two effects. And there was the demand effect

796
00:39:44,160 --> 00:39:46,960
Speaker 1: because the hot potato effect on money, It's like it

797
00:39:47,040 --> 00:39:49,520
Speaker 1: was just terrible to hold cash and so you spend it.

798
00:39:49,760 --> 00:39:53,000
Speaker 1: And then, as you mentioned, the sort of supply chain side,

799
00:39:53,000 --> 00:39:56,440
Speaker 1: the supply disruption raising the cost of capital for companies

800
00:39:56,480 --> 00:39:58,520
Speaker 1: and then companies have a markup, and then so went

801
00:39:58,560 --> 00:40:01,680
Speaker 1: beyond that. How do you you just sort of establish

802
00:40:01,760 --> 00:40:05,560
Speaker 1: that it wasn't mostly the demand side because I think,

803
00:40:05,600 --> 00:40:08,200
Speaker 1: you know, you know, you're saying, like, well, there's this

804
00:40:08,280 --> 00:40:12,200
Speaker 1: consistent throughput. Maybe the story now is the story then

805
00:40:12,560 --> 00:40:15,640
Speaker 1: supply side impairment. But as you say, you also found

806
00:40:15,719 --> 00:40:20,239
Speaker 1: this demand effect from the failure to transmit monetary policy effectively.

807
00:40:20,719 --> 00:40:22,880
Speaker 1: What gives you the confidence that it wasn't just that

808
00:40:23,160 --> 00:40:24,120
Speaker 1: hot potato effect.

809
00:40:24,360 --> 00:40:26,840
Speaker 3: Well on the neck part is just that you see

810
00:40:26,840 --> 00:40:29,759
Speaker 3: that as inflation's going up, output growth is going down,

811
00:40:29,840 --> 00:40:33,160
Speaker 3: including negative output growth. And then we have this chart

812
00:40:33,160 --> 00:40:36,080
Speaker 3: at the beginning where you see unfilled orders going up

813
00:40:36,120 --> 00:40:38,840
Speaker 3: and up, which by which could by itself look like

814
00:40:38,840 --> 00:40:42,200
Speaker 3: a lot of demand. But the peak of unfilled orders

815
00:40:42,239 --> 00:40:43,680
Speaker 3: is when growth is negative.

816
00:40:43,840 --> 00:40:44,760
Speaker 1: What year is this?

817
00:40:44,760 --> 00:40:46,960
Speaker 3: This is actually throughout the whole time period. If you

818
00:40:47,000 --> 00:40:51,040
Speaker 3: look it tracks unfilled orders leads inflation by a quarter

819
00:40:51,160 --> 00:40:53,400
Speaker 3: or two. In the way. This is just beautiful, and

820
00:40:53,440 --> 00:40:56,120
Speaker 3: it's just it's the quantity of unfilled orders. So we're

821
00:40:56,160 --> 00:40:58,759
Speaker 3: deflating it by prices. There's not a mechanical effect. So

822
00:40:58,760 --> 00:41:01,800
Speaker 3: if you just look at it goes up and inflation follows,

823
00:41:01,840 --> 00:41:03,920
Speaker 3: and when it peaks and starts to go down, inflation

824
00:41:04,239 --> 00:41:06,720
Speaker 3: starts to decrease. And like I said, all all sequly

825
00:41:06,800 --> 00:41:08,840
Speaker 3: might think, well, people are just ordering so much stuff,

826
00:41:08,880 --> 00:41:11,560
Speaker 3: but actually output growth is falling and even negative at

827
00:41:11,560 --> 00:41:12,359
Speaker 3: the peak of this thing.

828
00:41:12,920 --> 00:41:15,839
Speaker 2: Let me ask a question to sort of sum it up.

829
00:41:16,080 --> 00:41:19,840
Speaker 2: But we started this conversation talking about how the memory

830
00:41:19,920 --> 00:41:23,680
Speaker 2: of the nineteen seventies inflation, the traditional interpretation of it,

831
00:41:23,760 --> 00:41:26,080
Speaker 2: kind of looms large in a lot of people's minds,

832
00:41:26,160 --> 00:41:31,080
Speaker 2: especially policymakers and economists and academics looking at it through

833
00:41:31,120 --> 00:41:35,640
Speaker 2: the lens that you described, what should be our biggest

834
00:41:35,640 --> 00:41:38,680
Speaker 2: takeaway of that period and what should the lesson be

835
00:41:38,760 --> 00:41:39,799
Speaker 2: for twenty twenty three.

836
00:41:40,000 --> 00:41:43,960
Speaker 3: It's odd question. I tell you. Some of the inferences

837
00:41:44,000 --> 00:41:49,320
Speaker 3: I make. I think that the focus of monetary policy

838
00:41:49,800 --> 00:41:54,560
Speaker 3: and the way it understands histories mostly through excess demand

839
00:41:54,760 --> 00:41:59,200
Speaker 3: causing inflation and variation in demand causing business cycles. And

840
00:41:59,280 --> 00:42:01,960
Speaker 3: I think I think there's a lot of evidence that

841
00:42:02,760 --> 00:42:06,800
Speaker 3: many times supply was just as important, if not more,

842
00:42:07,000 --> 00:42:12,160
Speaker 3: in driving both inflationary episodes and business cycles. And actually,

843
00:42:12,200 --> 00:42:15,160
Speaker 3: although it didn't happen this time, credit crunches with which

844
00:42:15,239 --> 00:42:17,360
Speaker 3: many of the business cycles. If you look at people

845
00:42:17,400 --> 00:42:20,319
Speaker 3: who do history in the post war business cycles, many

846
00:42:20,360 --> 00:42:23,240
Speaker 3: of them involved credit crunches of one form or another.

847
00:42:23,520 --> 00:42:26,000
Speaker 3: And I guess there to say is that monetary policy

848
00:42:26,160 --> 00:42:29,160
Speaker 3: and that with the financial friction, can have an impact

849
00:42:29,200 --> 00:42:32,960
Speaker 3: on supply, not just demand. In terms of looking forward,

850
00:42:33,480 --> 00:42:37,840
Speaker 3: for example, we had supply chain issues, unfilled orders, I

851
00:42:37,880 --> 00:42:41,279
Speaker 3: would look for those kinds of things. If we have

852
00:42:41,400 --> 00:42:43,880
Speaker 3: more of those going forward, I would get very worried.

853
00:42:43,960 --> 00:42:47,000
Speaker 3: Like the auto industry was a perfect proxy. So long

854
00:42:47,000 --> 00:42:50,359
Speaker 3: as autos weren't being produced anywhere near the level they

855
00:42:50,400 --> 00:42:53,560
Speaker 3: were before, I felt like that's an indication that the

856
00:42:53,600 --> 00:42:56,719
Speaker 3: problem inherently is still there. If we were to go

857
00:42:56,760 --> 00:42:59,880
Speaker 3: back to that, I'd be quite worried about it.

858
00:43:00,040 --> 00:43:03,120
Speaker 1: Tomar Drexlert, thank you so much for coming on Odd Lots.

859
00:43:03,160 --> 00:43:05,040
Speaker 1: You're gonna have to maybe send us some of these

860
00:43:05,120 --> 00:43:08,240
Speaker 1: charts because I think that's fascinating. The idea that right now,

861
00:43:08,360 --> 00:43:11,319
Speaker 1: like it is tough to disambiguit between supplies, it too

862
00:43:11,360 --> 00:43:14,120
Speaker 1: much supply is a too little demand. But if if

863
00:43:14,160 --> 00:43:17,360
Speaker 1: we're if it's if the worst of the inflationary waves

864
00:43:17,400 --> 00:43:20,400
Speaker 1: of that period were actually periods of not you know,

865
00:43:20,520 --> 00:43:23,839
Speaker 1: declining growth or declining rates of growth, that's a pretty

866
00:43:23,880 --> 00:43:25,600
Speaker 1: strong sounds like a strong indication, So we got to

867
00:43:25,600 --> 00:43:25,880
Speaker 1: show that.

868
00:43:26,160 --> 00:43:27,400
Speaker 3: Thank you very much, Thank.

869
00:43:27,280 --> 00:43:42,200
Speaker 1: You so much. That was a great conversation, Tracy. I

870
00:43:42,280 --> 00:43:46,160
Speaker 1: really enjoyed that conversation. I mean, there's obviously a lot there,

871
00:43:46,280 --> 00:43:48,960
Speaker 1: but it also just generally seems to be the case,

872
00:43:49,120 --> 00:43:52,440
Speaker 1: like we can't always talk about nineteen seventies nineteen seventies

873
00:43:52,480 --> 00:43:56,480
Speaker 1: without really like digging into the actually, you know, they

874
00:43:56,680 --> 00:44:01,960
Speaker 1: severed the gold huge seventy on oil shock, all these

875
00:44:02,080 --> 00:44:06,840
Speaker 1: you know, spendthrift Keynesians running around, and then finally stern

876
00:44:07,280 --> 00:44:10,719
Speaker 1: tall Paul comes in and lays down the law. And

877
00:44:11,280 --> 00:44:13,920
Speaker 1: it sounds like those are you know, ohen unions of course,

878
00:44:14,000 --> 00:44:17,080
Speaker 1: and unions demanding that they get a pay rise, the

879
00:44:17,120 --> 00:44:20,080
Speaker 1: cost of living adjustments so forth. There's a lot there,

880
00:44:20,120 --> 00:44:22,759
Speaker 1: and it's all sort of this big soup of ideas.

881
00:44:23,080 --> 00:44:25,680
Speaker 1: So it's sort of helpful to actually think about, like, okay,

882
00:44:25,719 --> 00:44:28,040
Speaker 1: let's talk about how monetary policy work back then.

883
00:44:28,040 --> 00:44:31,400
Speaker 2: Right totally. And I also think, unfortunately, except to a

884
00:44:31,480 --> 00:44:34,120
Speaker 2: select few maybe US two and a few other people,

885
00:44:34,200 --> 00:44:36,480
Speaker 2: like reg Q, is just not that sexy a topic

886
00:44:36,600 --> 00:44:39,080
Speaker 2: now compared to the gold standard and things like that.

887
00:44:39,120 --> 00:44:42,520
Speaker 2: So I can see why it hasn't been a focus

888
00:44:42,560 --> 00:44:44,839
Speaker 2: of a lot of research historically. When it comes to

889
00:44:44,960 --> 00:44:48,160
Speaker 2: the nineteen seventies period of inflation. I also have to say,

890
00:44:48,440 --> 00:44:50,360
Speaker 2: you know, a lot of what's going on right now

891
00:44:50,400 --> 00:44:54,600
Speaker 2: with the discussion over interest rates and inflation, it feels

892
00:44:54,640 --> 00:44:56,880
Speaker 2: like there are the same people who are sort of

893
00:44:56,920 --> 00:44:59,759
Speaker 2: complaining that rates are too high now are also the

894
00:44:59,760 --> 00:45:02,000
Speaker 2: people who were complaining that, right, it's too.

895
00:45:01,880 --> 00:45:04,440
Speaker 1: Low for the last fifteen three years.

896
00:45:05,000 --> 00:45:08,360
Speaker 2: And so the wedge idea, like the idea that like

897
00:45:08,600 --> 00:45:11,600
Speaker 2: rates were both kind of too low and too high

898
00:45:11,680 --> 00:45:13,719
Speaker 2: or just like not well suited to the problem that

899
00:45:13,800 --> 00:45:16,719
Speaker 2: was trying to be solved, uh, is a very attractive

900
00:45:16,760 --> 00:45:18,680
Speaker 2: one to me. Like it feels a lot more nuanced.

901
00:45:19,640 --> 00:45:23,279
Speaker 1: Absolutely. Also, it's just sort of interesting to think of

902
00:45:23,840 --> 00:45:26,719
Speaker 1: the cost of credit as a business input, right, And

903
00:45:26,800 --> 00:45:30,600
Speaker 1: so as item mentioned, of course, you know it's not

904
00:45:31,080 --> 00:45:32,880
Speaker 1: going to be conducive to a boom if you have

905
00:45:32,880 --> 00:45:35,880
Speaker 1: companies literally going out of business or not building new factories.

906
00:45:35,960 --> 00:45:39,880
Speaker 1: But if you have operations, ongoing operations that require credit

907
00:45:40,040 --> 00:45:42,360
Speaker 1: to continue going and the cost goes up but it

908
00:45:42,400 --> 00:45:45,080
Speaker 1: doesn't destroy the business, then it sort of makes sense

909
00:45:45,200 --> 00:45:48,600
Speaker 1: that you know that that comes through as a higher cost. Also,

910
00:45:49,200 --> 00:45:51,399
Speaker 1: it sort of fits in these days maybe a little

911
00:45:51,400 --> 00:45:54,280
Speaker 1: bit with some of our conversations about housing and real estate,

912
00:45:54,400 --> 00:45:56,759
Speaker 1: right and the impairment of new development. And then now

913
00:45:56,800 --> 00:45:58,719
Speaker 1: we see house prices going up, and why do we

914
00:45:58,760 --> 00:46:02,560
Speaker 1: never have enough housing supply to have sustained deflation or

915
00:46:02,600 --> 00:46:06,160
Speaker 1: disinflation in shelter. It still feels like that sort of

916
00:46:06,480 --> 00:46:09,680
Speaker 1: rate component of supply still matters, at least in some way.

917
00:46:09,800 --> 00:46:13,759
Speaker 2: Yeah, well, now that we're done trashing Paul Volker's legacy.

918
00:46:13,480 --> 00:46:14,279
Speaker 3: Shall we leave it there?

919
00:46:15,400 --> 00:46:18,920
Speaker 1: He did, you know, he did some good. Let's leave

920
00:46:18,960 --> 00:46:19,239
Speaker 1: it there.

921
00:46:19,440 --> 00:46:19,760
Speaker 3: Okay.

922
00:46:20,000 --> 00:46:23,120
Speaker 2: This has been another episode of the Audlots Podcast. I'm

923
00:46:23,120 --> 00:46:26,120
Speaker 2: Tracy Alloway. You can follow me at Tracy Alloway.

924
00:46:25,960 --> 00:46:28,880
Speaker 1: And I'm Joe Wisenthal. You can follow me at the Stalwart.

925
00:46:29,160 --> 00:46:33,080
Speaker 1: Follow our guest Itamar Drexler. He's at idrex, Follow our

926
00:46:33,120 --> 00:46:36,680
Speaker 1: producers Carmen Rodriguez at Carmen Arman and Dashel Bennett at

927
00:46:36,760 --> 00:46:40,360
Speaker 1: Dashbot and special thanks to our producer Moses Ondam.

928
00:46:40,080 --> 00:46:43,000
Speaker 2: And we have some exciting Odd Lots news. If you

929
00:46:43,120 --> 00:46:46,080
Speaker 2: are a Bloomberg dot Com subscriber, you can now get

930
00:46:46,120 --> 00:46:49,560
Speaker 2: access to all of our new Lots More episodes. Those

931
00:46:49,600 --> 00:46:52,040
Speaker 2: are the ones in which Joe and I talk about

932
00:46:52,080 --> 00:46:55,839
Speaker 2: the markets or whatever is interesting us on that particular day,

933
00:46:56,280 --> 00:46:58,680
Speaker 2: with lots of our colleagues here at Bloomberg and some

934
00:46:58,719 --> 00:47:02,480
Speaker 2: of our favorite adlots guts. Plus, you get access to

935
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Speaker 2: add free odd Lots episodes. This is very exciting. You

936
00:47:07,000 --> 00:47:10,440
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937
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Speaker 2: more episodes exclusively through Apple Podcasts.

938
00:47:13,680 --> 00:47:16,719
Speaker 1: Go to Bloomberg dot com slash odd Lots, where we

939
00:47:16,800 --> 00:47:19,680
Speaker 1: have transcripts, a blog, and a newsletter, and you can

940
00:47:19,760 --> 00:47:23,080
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941
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942
00:47:27,440 --> 00:47:29,080
Speaker 1: There's going to be a lot of interest in this one,

943
00:47:29,160 --> 00:47:29,880
Speaker 1: a lot of debates.

944
00:47:29,880 --> 00:47:30,680
Speaker 3: To go check it out.

945
00:47:30,840 --> 00:47:33,680
Speaker 2: And if you enjoy odd Lots, if you like it

946
00:47:33,719 --> 00:47:37,960
Speaker 2: when we talk heterodox interpretations of past periods of monetary

947
00:47:38,000 --> 00:47:41,520
Speaker 2: policy history, then please leave us a positive review on

948
00:47:41,560 --> 00:47:44,200
Speaker 2: your favorite podcast platform. Thanks for listening.

949
00:48:01,160 --> 00:48:01,359
Speaker 3: Four