Speaker 1: Hello, and welcome to another episode of the Odd Lots podcast.
Speaker 2: I'm Joe Wisenthal and I'm Tracy Alloway.
Speaker 1: Tracy, you know obviously recording this September twenty twenty three.
Speaker 1: Inflation has come way down over the last year, but
Speaker 1: there is definitely anxiety about, well, could we see another wave,
Speaker 1: particularly if we don't have a recession, Like, no one
Speaker 1: is really convinced that it's over.
Speaker 2: Right, So gas prices are starting to creep up again.
Speaker 2: House prices have been incredibly stable and also starting to
Speaker 2: rise slightly, so that could also figure into shelter costs.
Speaker 2: But I think generally there is this concern that are
Speaker 2: we going to see another leg up in inflation? And
Speaker 2: part of the reason there seems to be this concern
Speaker 2: is because, as we've discussed on this podcast before, everyone
Speaker 2: tends to reach for the nineteen seventies as the big
Speaker 2: parallel or analogy for periods of higher inflation.
Speaker 1: Right, you know, when we were out in Jackson Hole,
Speaker 1: I guess in August that was when Larry Summers tweeted
Speaker 1: that famous chart saying, you know it was a good reminder,
Speaker 1: right that this was when you.
Speaker 2: Were looking at the mountains and thinking of USCPI charge.
Speaker 1: Yeah, the Grand Teetons looked like the USCPI from nineteen
Speaker 1: seventy four to nineteen eighty five. But it's true that
Speaker 1: throughout the seventies there were multiple times where people sort
Speaker 1: of breathed a sigh of relief, they said, inflation has
Speaker 1: been licked, and then it came back. And it's really
Speaker 1: you know, there's this story that there's all this respon
Speaker 1: irresponsible policy and then finally Vulgar came and smashed inflation,
Speaker 1: and it really did not exactly happen like.
Speaker 3: That, right.
Speaker 2: I always find that kind of weird because Arthur Burns
Speaker 2: hiked RAITs a lot before Vulker did the same thing.
Speaker 2: But you're absolutely right, and the inflation of the nineteen
Speaker 2: seventies it's important in many ways, possibly not the right ones,
Speaker 2: but one of the ways that's important is it tends
Speaker 2: to be the period that a lot of our policy
Speaker 2: makers and economists and academics kind of came of age in,
Speaker 2: and it tends to be the one that they go
Speaker 2: back to to explain what's happening now. And so, you know,
Speaker 2: there are some shades of the nineteen seventies to our
Speaker 2: current situation. You did have supply shocks in the form
Speaker 2: of oil. There was I think some fiscal stimulus from
Speaker 2: the Vietnam War going into the nineteen seventies, things like that.
Speaker 2: But overall, the sort of standard interpretation of the nineteen
Speaker 2: seventies is that monetarist view the old like Milton Friedman,
Speaker 2: inflation is always in everywhere a monetary phenomenon and basically
Speaker 2: blaming the FED for not reacting fast enough.
Speaker 1: You're absolutely right, and you mentioned that the nineteen seventies
Speaker 1: looms so large. You know, policy makers the FED, in
Speaker 1: particular central bankers, they take a lot of pride in
Speaker 1: the fact that they defeated inflation, that inflation has been stable,
Speaker 1: that they sort of embedded this idea of stable and
Speaker 1: inflation expectations. They prize that stability quite a bit. You
Speaker 1: and I we joke a lot about how we both
Speaker 1: started our careers in two thousand and eight right on
Speaker 1: the eve of the crisis.
Speaker 2: And we're always worried about defuse.
Speaker 1: We're always worried about, you know, crisis and downturn and
Speaker 1: surging unemployment. So it had, you know, and you look
Speaker 1: at the people who now make policy today, many of them,
Speaker 1: as you said, came of age then. But again, it
Speaker 1: feels as though if we're going to have a conversation
Speaker 1: about possible second waves, if we're going to compare and
Speaker 1: contrast now with the nineteen seventies, then actually we better
Speaker 1: get a better handle on what really happened in the
Speaker 1: nineteen seventies, because I don't think that outside of these
Speaker 1: vague things like oh, they let policy run too loose
Speaker 1: and some oil and gas lines, that actually we've really
Speaker 1: you know, that there is a crisp, coherent story like yeah,
Speaker 1: but why was inflation so persistent and so reoccurring throughout,
Speaker 1: you know, roughly a decade.
Speaker 2: The ghost of Paul Volker is going to be so
Speaker 2: mad at us, But I think we should do that.
Speaker 3: Well.
Speaker 1: I am very excited. We have the perfect guest, someone
Speaker 1: who has done original research on nineteen seventies inflation and
Speaker 1: really sort of broke down what happened. We're going to
Speaker 1: be speaking with Itamar Drexler. He is a professor of
Speaker 1: finance at the University of Pennsylvania, someone who's done a
Speaker 1: lot of research on this period and what it means.
Speaker 1: Professor Drexler, thank you so much for coming on odd Laws.
Speaker 3: Thank you very much for having me. This is really
Speaker 3: fun and nice to talk about a topic I care
Speaker 3: a lot about and think is very interesting.
Speaker 1: Excellent. Well, you know what, why don't we start with
Speaker 1: if you were just in a room full of random
Speaker 1: economists and you said, well, what caused the nineteen seventies inflation?
Speaker 1: Why did it keep coming back? What sort of just
Speaker 1: like you know, we mentioned in the beginning, you know,
Speaker 1: the the gas lines and the end of the Vietnam War,
Speaker 1: and maybe policymakers were not strong enough in fighting it.
Speaker 1: But what is the sort of macro consensus about what
Speaker 1: happened in that decade?
Speaker 3: So I think the most common story narrati is that
Speaker 3: the Fed there were at the outset, say, some kind
Speaker 3: of shocks that led to the beginning of inflation, but
Speaker 3: that once inflation got going, the FED did not respond
Speaker 3: aggressively enough to increases in inflation by raising the FED
Speaker 3: funds rate as later policy would dictate, which is that,
Speaker 3: according to the tailor rule, the FED has to raise
Speaker 3: the nominal rate more than one for one with expected inflation.
Speaker 3: What that does is raise the real interest rate. They're
Speaker 3: by lowering demand or what they call demand management, and
Speaker 3: preventing inflation. From accommodating inflation by letting it go up,
Speaker 3: and so not doing that, they overtime lost credibility, and
Speaker 3: that meant that if people expected inflation to go up,
Speaker 3: inflation would actually go up because the FED wasn't actually
Speaker 3: leaning into it. It wasn't making it wasn't slowing demand
Speaker 3: in the face of say, increasing inflation expectations. That, to
Speaker 3: the best that I understand, is kind of the most
Speaker 3: common narrative.
Speaker 2: Right, So the ideas the prices started to rise, the
Speaker 2: FED basically lost control of inflation expectations, and then you
Speaker 2: got this self reinforcing cycle of the wage price spiral
Speaker 2: where people start demanding more money. And then it wasn't
Speaker 2: until Paul Volker came in told everyone whose boss re
Speaker 2: established the Fed's credibility and kind of deflated those inflation
Speaker 2: expectations that things got better. Right, Yeah, So your paper
Speaker 2: takes a very different view to that whole narrative. You
Speaker 2: kind of placed the blames squarely on an element of
Speaker 2: financial regulation that actually Joe I realized this has popped
Speaker 2: up a couple times on all thoughts, most notably in
Speaker 2: our episodes with Josh Younger and Lev Menon where we
Speaker 2: were talking about the origins of your dollars in shadow banks,
Speaker 2: but you place it on REGQ. Can you talk a
Speaker 2: little bit more about that thesis.
Speaker 3: Yeah, sure, So reg Q does come up a lot.
Speaker 3: It's a very famous banking regulation. Historically, people, many banking
Speaker 3: people and monetary people are well aware of it. So
Speaker 3: red Q was a regulation that came out of the
Speaker 3: nineteen thirty three Banking Act that allowed the Fed to
Speaker 3: place a ceiling on what banks could pay, what kind
Speaker 3: of interest rates banks could pay on different kinds of deposits,
Speaker 3: and for example, checking deposits had to pay a zero
Speaker 3: interest rate. Savings deposits had their own ceiling, and then
Speaker 3: CDs could have their own ceiling. For almost all of
Speaker 3: the time from nineteen thirty three until nineteen sixty five,
Speaker 3: the FED put the ceiling above the Fed Funds rate,
Speaker 3: so when it would raise the Fed Funds rate, it
Speaker 3: would raise the ceiling, and so basically it didn't bind.
Speaker 3: Maybe it would prevent you from setting some crazy rate,
Speaker 3: but it didn't bind. But starting in sixty five, they
Speaker 3: didn't raise it, so that when they would raise the
Speaker 3: Fed Funds rate, deposits couldn't keep up with the Fed
Speaker 3: Funds rate.
Speaker 2: So the reason they put in that restriction was because
Speaker 2: my understanding is that in the nineteen thirties there was
Speaker 2: there were a lot of bank failures, and so there
Speaker 2: was concern that if banks were competing with each other
Speaker 2: to attract depositors, so just raising deposit rates to uneconomic levels,
Speaker 2: that it would lead to more bank failure. So they thought, well,
Speaker 2: we'll put a cap on this and then we'll have
Speaker 2: healthier competition.
Speaker 3: Is that right, that's the story that's told. I know
Speaker 3: it's impossible to say that's exactly what was in their mind,
Speaker 3: but yes, also that act established they have d IC
Speaker 3: and deposit insurance, So in some sense it makes it
Speaker 3: makes sense if you're going to give people insurance, you
Speaker 3: don't want them to attract deposits by doing crazy things.
Speaker 1: Right because if you're if you know that you're insured.
Speaker 1: I could just go out and say, oh, here, here's
Speaker 1: ten percent.
Speaker 2: The Bank of Joe and Tracy will offer fifty percent.
Speaker 1: Interest cent I collect all of the deposits from everyone else,
Speaker 1: and maybe I fail because whatever I'm doing with that,
Speaker 1: but I got all the deposit I mean, let's do it.
Speaker 2: Yeah, okay, So I stopped you right up. In the
Speaker 2: late nineteen sixties. So in the late nineteen sixties they
Speaker 2: make this change.
Speaker 3: Yeah, they decide, they debate it, but they just to
Speaker 3: use this rule as a tool of monetary policy very consciously.
Speaker 3: So this is part of a general wave of what
Speaker 3: was called credit controls that many developed countries used and
Speaker 3: had been exploring for a while. It was a popular
Speaker 3: idea that you could influence directly the price and quantity
Speaker 3: of credit in order to do monetary policy and not
Speaker 3: just leave it to the short term rate. And so
Speaker 3: this was used in the UK famously, in France and
Speaker 3: Italy and Belgium. In the Netherlands, there was an awareness
Speaker 3: that credit controls of various types were used, usually consisting
Speaker 3: of often together controls on the level of interest rates
Speaker 3: you could pay on deposit, ceilings on what you could
Speaker 3: charge for loans, or ceilings on the quantity of loans
Speaker 3: you could make, or loan growth.
Speaker 1: You know, it's interesting because and I will get to
Speaker 1: the whole debunking of the popular story, or at least
Speaker 1: the reinterpretation of the popular story. Actually have two questions
Speaker 1: from a professional standpoint, how did this become an area
Speaker 1: of interest and research.
Speaker 3: For Yeah, so it's a little bit out of left
Speaker 3: field for me and my co authors. I have two
Speaker 3: very common co authors that we've worked a ton together
Speaker 3: at NYU, Alexisavov and Philip Novel, and we work on
Speaker 3: monetary policy and banking. We're coming at it from a
Speaker 3: finance point of view and the way we got to
Speaker 3: this so we think a lot about these things. We
Speaker 3: did not think so much about inflation. We're working on
Speaker 3: how the business of banking works and how bank's ability
Speaker 3: to raise deposits is influenced by monetary policy, how much
Speaker 3: money they make on deposits, spreads, And we're presenting some
Speaker 3: of our work and we noticed that if you just
Speaker 3: g the FED Funds rate against deposit rates, the average
Speaker 3: deposit rate that banks pay, you can see very clearly
Speaker 3: that in the nineteen sixties and seventies the average deposit
Speaker 3: rate barely reacted at all to the Fed Funds rate. Now,
Speaker 3: that's not a discovery, because I knew about regulation Q
Speaker 3: and just had never never been in my face that way.
Speaker 3: And there's a very famous graph coming out of the
Speaker 3: literature of the standard now narrative Clarida Galley Gertler is
Speaker 3: the most famous paper with thousands of citations. That is
Speaker 3: a similar graph, but instead of deposit rates, which they
Speaker 3: don't consider, they have the Fed funds are in inflation. And
Speaker 3: that's the famous graph that shows that before nineteen eighty two,
Speaker 3: the Fed funds rate just mostly kind of sticks to inflation,
Speaker 3: whereas afterwards, with Vulcar and green Span, it reacts more
Speaker 3: than one for one. And the idea was that sensitivity
Speaker 3: heightens the sensitivity and of policy in people's reaction to inflation.
Speaker 3: But here we saw that deposit rates are also kind
Speaker 3: of look like that. I thought the timing was sort
Speaker 3: of better. And if you think that the people's deposits
Speaker 3: is an important part of their savings, which it is
Speaker 3: an important aspect of transmission of monetary policy across our mind,
Speaker 3: that maybe another thing that could have gone in there
Speaker 3: is that deposit rates did not react at all, and
Speaker 3: we knew that reg Q was there, so we start
Speaker 3: to thinking maybe that has something to do with the
Speaker 3: macro of the time and inflation. You start to look,
Speaker 3: there's a lot of there's a lot of smoke and
Speaker 3: fire there.
Speaker 1: Before we get into the specific sort of discovery of
Speaker 1: your research. One thing that strikes me is interesting and
Speaker 1: Tracy mentioned this at the beginning, which is the sort
Speaker 1: of we think of vulgar as the start of this
Speaker 1: sort of monitorius turn in policy in which the entire
Speaker 1: goal or the thinking at the time was, well, we
Speaker 1: can solve the inflation problem, if we can solve the
Speaker 1: supply of money problem, if we can sort of get
Speaker 1: a handle on the supply of money problem, then inflation
Speaker 1: will take care of itself. Judging by what you're saying
Speaker 1: about credit controls and this, like, Okay, this is how
Speaker 1: much we want to have in checking, This is how
Speaker 1: much we want to have in people's savings accounts, this
Speaker 1: is the cap on CDs. It felt it sounds like
Speaker 1: this was brewing for a while, that it was very
Speaker 1: popular already for some time for policymakers to really think
Speaker 1: about like bucketing different types of money and keeping sort
Speaker 1: of lid or handle on each of.
Speaker 3: Them the way we hear things now. I also had
Speaker 3: the impression that there was a lot of monetarism at
Speaker 3: the time looking for it. It's after the fact not
Speaker 3: as much of my impression. Certainly, these ideas are out there,
Speaker 3: but I feel like the monitorism specifically comes somewhat later. Actually,
Speaker 3: if you read the way they talked about it, demand
Speaker 3: management often sounds not that different than we talk about
Speaker 3: it today. What I will say is, I usually say
Speaker 3: this at the end of the talk, is I think
Speaker 3: so there was a lot of there was it by
Speaker 3: the end, a lot of looking at growth and the
Speaker 3: money supply and in trying to keep tamping down growth
Speaker 3: in this and a big part of the money supply
Speaker 3: and the most responsive are deposits. So jumping sort of
Speaker 3: to something I usually say at the end, I think
Speaker 3: that I'm not a big fan of moneitorism, and I
Speaker 3: think most of the mainstream macro and monetari is not.
Speaker 3: Now doesn't mean it's wrong, but I think monitoris a
Speaker 3: little bit don't understand their own theory. So what I
Speaker 3: mean by this is if you want to reinterpret what
Speaker 3: happened in terms of moneitorism, so you start out with
Speaker 3: why do people hold money? This is like standard monitorism.
Speaker 3: Money is you know, pays no interest and so it's
Speaker 3: a dominated asset and must have some other use. And
Speaker 3: as you raise, as you lower the interest rate, you
Speaker 3: make it more you know, easy for people to have
Speaker 3: money and they can spend more. So the thing is
Speaker 3: it treats each each money as just number of dollars.
Speaker 3: But in the what you see in the right Q
Speaker 3: time is when you don't let deposits pay the interest
Speaker 3: that they want, each dollar is now missing a lot
Speaker 3: of interest. So in that sense, its opportunity cost is
Speaker 3: going way up. So people take out deposits. There's less dollars,
Speaker 3: but each dollar is much more money, much more dominated
Speaker 3: than it was before. So though you have less dollars,
Speaker 3: the cost to people holding those dollars is way bigger
Speaker 3: when the number of dollars is smaller, when this ceiling
Speaker 3: binds tightly. And so that actually suggests that if you
Speaker 3: sort of don't make this jump of thinking about the
Speaker 3: number of dollars, but the opportunity cost of holding dollars,
Speaker 3: the amount of money that's that's that's sort of burning
Speaker 3: a hole in people's pocket, is actually much higher when
Speaker 3: were high and the ceiling was binding, then when there
Speaker 3: was more dollars but the ceiling was not binding.
Speaker 2: The ghost of Milton Friedman is going to haunt us
Speaker 2: too on this podcast. Okay, well, take that line of thinking,
Speaker 2: or that pushback on the monetarist view and apply it
Speaker 2: to the binding REGQ ceiling and inflation in the nineteen seventies.
Speaker 2: So you know prices are going up, but banks are
Speaker 2: restricted from paying out more deposits to savers. How does
Speaker 2: that impact prices?
Speaker 3: The idea was that by not letting them pay the
Speaker 3: interest that they want, some deposits would leave the banks.
Speaker 3: That was the in fact intention, That is what happened.
Speaker 3: It was called disintermediation, and so deposits would flow out.
Speaker 3: The idea I believe was that this would tampen down
Speaker 3: demand because credit growth was the source of excess demand,
Speaker 3: and that would help, just like raising the interest rate
Speaker 3: should help. However, what we argue was it led to
Speaker 3: the disintermediation, but instead of having a stronger effect on
Speaker 3: demand or only an effect on demand, what it had
Speaker 3: a strong effect was on the supply by firms, by producers,
Speaker 3: because it's been well documented that each of the times
Speaker 3: that the Fed funds rate went above the ceiling rate,
Speaker 3: which happened a lot during this time periods, whenever they
Speaker 3: raised rates, then as deposits flowed out, there were credit crunches,
Speaker 3: meaning firms wanted credit. Banks wanted to raise more deposits,
Speaker 3: they couldn't pay the rate they couldn't get enough deposits,
Speaker 3: so they started to ration firms. And so if the
Speaker 3: credit became scarce and expensive, now firms need credit to
Speaker 3: do business. I think that's kind of clear. So it's
Speaker 3: an input. Think of it like oil, but a much
Speaker 3: more important input. If you can't get it, what do
Speaker 3: you do? You fall behind in producing things. You cut supply,
Speaker 3: and you raise prices because it's more expensive to produce.
Speaker 3: And so we show that each of these cycles where
Speaker 3: they raised rates where the ceiling was binding, you see both. Well,
Speaker 3: you see this is known. You see both inflation and
Speaker 3: a decrease in output. And then we look across firms
Speaker 3: and we show that more credit constraint, firms raised prices
Speaker 3: more and cut output, more, cut employment, more cut investment,
Speaker 3: more inventories more.
Speaker 1: All right, let's talk about the data that you collected,
Speaker 1: because it's a good story, right that. Okay, the money
Speaker 1: leaves the banking system, supply of credit therefore becomes ration,
Speaker 1: and then you have all these supply side constraints and
Speaker 1: that contributes to inflation. It's a good story. What is
Speaker 1: the actual data that you looked at to establish your claim?
Speaker 3: So there's there's the aggregate part of the data, which
Speaker 3: I think is important to see, but for economists usually
Speaker 3: can't by itself be convincing because you're just looking at
Speaker 3: the time series for the whole country.
Speaker 1: Wait, you can't do economics just by like looking at
Speaker 1: two big charts.
Speaker 3: I think you could do.
Speaker 1: I've made my whole career on that.
Speaker 3: I think. Actually that's a lot of times very important
Speaker 3: and the most convincing thing to people. But if you
Speaker 3: are in the business of being the you know, a skeptic,
Speaker 3: then that is not going to be enough. So we
Speaker 3: look at a lot of aggregate things, So looking at
Speaker 3: how deposits flowed out whenever the ceiling was binding, they
Speaker 3: flowed out more when it was when the gap between
Speaker 3: the fems right and the ceiling was more. We looked
Speaker 3: at unfilled orders or backlogs of orders that rose during
Speaker 3: that time. So I don't know which of these you
Speaker 3: find the most compelling. But then, like I said the
Speaker 3: second part of the paper, we looked at the cross
Speaker 3: section of firms to say, okay, let's look at something
Speaker 3: that just compares firms that were more exposed to this
Speaker 3: problem versus less exposed holding constant things you know that
Speaker 3: are aggregate, like the fed's credibility, like oil shocks, any
Speaker 3: of these things that you want to try to difference
Speaker 3: out in order to just focus on exposure to the
Speaker 3: particular channel that you think is at work.
Speaker 2: So just to be clear, we're talking about disintermediation and
Speaker 2: the idea that money can flow out of banks because
Speaker 2: they can't compete on deposits, and then that could lead
Speaker 2: to less investment. But what about just savings itself, Like
Speaker 2: how does REGQ and the deposit rate cap impact people's
Speaker 2: behavior when it comes to spending versus savings?
Speaker 3: Right, that apps actually the first line of reasoning that
Speaker 3: we went through. So we actually had two papers on this,
Speaker 3: but I'm talking to you about the supply one, but
Speaker 3: I'll tell you about the demand one. So that also
Speaker 3: makes inflation worse because so both effects go in the
Speaker 3: same direction, which I can tell you in a second
Speaker 3: how that happens. So if you want to if you're
Speaker 3: thinking about saving, and let's say that for you, the
Speaker 3: marginal saving is deposit, which for people at that time
Speaker 3: and even today a lot of people, it is. And
Speaker 3: you see the rate and you see that you're getting
Speaker 3: a terrible real rate, right, it's way below the inflation rate.
Speaker 3: At times it was seven eight nine percent below inflation
Speaker 3: because the cap was like five to five and a
Speaker 3: half percent. Inflation was fourteen percent at one point. That's
Speaker 3: just a complete disaster. So that on the margin would
Speaker 3: push you to try to consume, not to save. So
Speaker 3: if anything, it makes people want to consume more. At
Speaker 3: the same time, and for the same reason, there's less
Speaker 3: credit to firms, so they can't produce as much. Both
Speaker 3: effects go in the direction of higher prices. The production
Speaker 3: effect lower supply. The demand effect increases you know, would
Speaker 3: increase by itself total output. But both of them are
Speaker 3: making inflation go higher. So it's kind of a bad
Speaker 3: situation in that respect.
Speaker 2: Right, And it kind of gets to the heart part
Speaker 2: of how transmission of monetary policy is supposed to work.
Speaker 2: Because you're supposed to propagate these interest rate changes out
Speaker 2: into the system. Rates go up, people are supposed to
Speaker 2: hold on to more of their money. But if you
Speaker 2: have a deposit rate cap, then that isn't happening.
Speaker 3: Yeah, so usually so a sign of what microeconomists think
Speaker 3: of a sign of dysfunction is when you have wedges
Speaker 3: and here there's a giant wedge, there's a wedge between
Speaker 3: the rate that depositors get the savings rate, and the
Speaker 3: rate that borrowers pay the borrowing rate. The economy always
Speaker 3: tries to push you to make those things equal. So
Speaker 3: if people are willing to pay you a lot for loans,
Speaker 3: then you pay people higher deposit rates, and then there's
Speaker 3: more savings and the equilibrium is where they meet. But
Speaker 3: here you couldn't. It's like a big friction sand in
Speaker 3: the gears. So what you get is two rates. You
Speaker 3: get a low rate for saver and a high rate
Speaker 3: for borrowers. And so it's like asking, was the rate
Speaker 3: to hire too low? Well, it was too high and
Speaker 3: too low, and that's because of this wedge in between.
Speaker 3: That is like a classical sign of a part problem
Speaker 3: when you have different prices for the same thing on
Speaker 3: both sides and it's not coming together.
Speaker 2: Wait, can I ask a devil's advocate monetarist question? If
Speaker 2: Milton Friedman was in the room with us right now,
Speaker 2: maybe he would ask this. But like, there must be
Speaker 2: a monetarist interpretation of the impact of REDQ as well,
Speaker 2: which I imagine would be like, well, if you make
Speaker 2: deposits unattractive, then maybe you're inhibiting monetary growth the growth
Speaker 2: that was there.
Speaker 3: That was the way that monitors saw that, and when
Speaker 3: you saw no evidence of that, No, I think it's
Speaker 3: the opposite when they raised interest rates because this gap grew.
Speaker 3: It's always deposits were flowing out. It's the clearest thing
Speaker 3: in the data. So in that sense, it looks like
Speaker 3: you're reducing the rate of money growth. But I'm arguing
Speaker 3: that it made each dollar if you want to have
Speaker 3: that monitors right, like them each dollar much more money,
Speaker 3: Like do you mind having dollars if if they pay
Speaker 3: if you know your deposits pay the Fed funds right,
Speaker 3: and you earn a real rate, it's not a big deal.
Speaker 3: If they're earning minus eight percent real rate, that's all
Speaker 3: that's really money. Like, it's really bad. You have to
Speaker 3: sort of think what was the point of monetaring.
Speaker 2: It's like the nature of the money kind of changes almost.
Speaker 3: I think it becomes more money.
Speaker 1: I mean, this is like they use the term hot potato, right.
Speaker 1: People didn't want to hold quick question and then a
Speaker 1: longer question. Was this an an extremely profitable period for banks?
Speaker 3: Surprisingly, I don't think it was that profitable, And it's
Speaker 3: a good question why. But I think also the rates
Speaker 3: at which they the real rates at which they lent out,
Speaker 3: for example, for long term mortgages and stuff, which is
Speaker 3: what a lot of snls did, were also lowered by
Speaker 3: this kind of thing. So actually, at the time people
Speaker 3: thought that when you get rid of REGQ, it would
Speaker 3: make the banks very unprofitable. I tell you what it
Speaker 3: did do It led to the SNL crisis. I guess
Speaker 3: they shouldn't be kid. It's well known that lifting the
Speaker 3: ceilings on deposit rates left snls having to pay fair
Speaker 3: market rates, which made a big hole in their balance.
Speaker 1: Getting back to your supply side analysis, and you mentioned
Speaker 1: you sort of tried to go sector bisector. Who would
Speaker 1: be particularly in like, okay, who, all things being equal,
Speaker 1: who is exposed to this sort of severe rationing of
Speaker 1: credit from the banking system having less money? What did
Speaker 1: you find when you look at the sort of sectoral breakdowns,
Speaker 1: what kind of things pop up?
Speaker 3: So should should be specific and say that the database
Speaker 3: we have, because we needed a database of lots of information,
Speaker 3: is the nbr CS Database on Manufacturing Industries. So already
Speaker 3: it's all manufacturers, okay, So we need the prices they charge,
Speaker 3: and we need stuff on their inputs, and so it's
Speaker 3: all different kinds of manufacturing. And so that by the
Speaker 3: construction of our measure, are companies that need to pay
Speaker 3: a lot upfront in terms of production costs and labor
Speaker 3: costs relative to the money they would have from the
Speaker 3: last cycle of selling, relative to the operating margins that
Speaker 3: they have. So I don't remember exactly which ones were
Speaker 3: like high, if it was like textiles versus I think
Speaker 3: the tobacco was low. But so I can't say that
Speaker 3: that manufacturers that could tell you exactly which ones were
Speaker 3: more and which ones or less. But you'd think that
Speaker 3: somebody carrying a lot of inventory a lot of upfront
Speaker 3: costs would need a lot of credit, and somebody who
Speaker 3: doesn't you know at all, and maybe the tobacco manufacturers,
Speaker 3: it's not as big of a deal.
Speaker 2: So you had less investment because of the disintermediation dynamics
Speaker 2: that you described. Meanwhile, you also had people spending more
Speaker 2: because they're not incentivized to save their money and put
Speaker 2: it in deposits that are less than inflation. That seems
Speaker 2: like a bad dynamic.
Speaker 3: Yeah, I think it's I think it's quite a bad dinneric.
Speaker 1: So Okay, well, which is great. Are I really appreciate it? No,
Speaker 1: I understand the seventies.
Speaker 2: So when you did the research, I mean, did you
Speaker 2: find one of those factors, like the supply side versus
Speaker 2: the demand side, which one was bigger.
Speaker 3: You can see in the aggregate data that the net effect,
Speaker 3: meaning the one that overwhelms is the supply one. Because
Speaker 3: in this part, I think is not new because despite
Speaker 3: all the narrative focusing on the feds inability to control demand,
Speaker 3: the four cycles in the seventies, sixties, and seventies, which
Speaker 3: are the stagflationary cycles, were called that because each time
Speaker 3: that inflation went up, output was dropping at the same time.
Speaker 3: By the way, it's quite different than what we've seen recently.
Speaker 3: So that's well known. And so you when we first started,
Speaker 3: we're like, why are they keep talking about demand when
Speaker 3: clearly output is going down. But the reason people say
Speaker 3: that is because they took the decrease in output as
Speaker 3: like basically exogenous like stuff happened like oil happened before
Speaker 3: there was some other crisis that happened, and so they're like, okay,
Speaker 3: well we can't do anything about that. That's just our job,
Speaker 3: the fed's job. To deal with that. And so in
Speaker 3: light of these various supply shocks that apparently kept happening,
Speaker 3: the FED didn't do a good job controlling demand. Whereas
Speaker 3: we're saying these supply shocks, it's happened all the time,
Speaker 3: and it happened in this fashion, it's not a coincidence. Actually,
Speaker 3: it was a huge financial friction that made this happen.
Speaker 1: Why you know, you mentioned, look, if credit is going
Speaker 1: to be rational, investment is going to go down. Investment
Speaker 1: is also a demand impulse, right, So building factories is
Speaker 1: you know, that's someone else's income, that's activity. Company is
Speaker 1: going out of business and laying off workers, we would
Speaker 1: think would be disinflationary, right, So why is it that,
Speaker 1: as you describe, you have this sort of rationing of credit,
Speaker 1: this credit constraint that hurt a lot of manufacturers. Why,
Speaker 1: I mean, just intuitively that could you know, and it
Speaker 1: sounds like it could be a disinflationary Oh.
Speaker 3: Absolutely, But the thing we actually are not emphasizing the
Speaker 3: investment that's that is there, but we're emphasizing the ongoing operations.
Speaker 3: So I think classically, oftentimes people think of credit as
Speaker 3: going to investment, but most of the credit the stock
Speaker 3: of credit to firms is like working cap, not just
Speaker 3: working capital, but you pay upfront for a lot of things,
Speaker 3: like just to take an extreme case, if you deal
Speaker 3: with the contractor, you pay them usually half upfront. It's
Speaker 3: not like you tell them, yeah, go build my house
Speaker 3: and when you're done, I'll pay you. So people pay
Speaker 3: for materials in labor in large part, this is where
Speaker 3: trade credit comes in and all these things. Companies need
Speaker 3: a lot of credit up front. So we're talking about
Speaker 3: the direct operations of the firm. It is also true
Speaker 3: that you saw a decrease in investment, and like you're
Speaker 3: saying that by itself could be interpreted as lower demand.
Speaker 3: So it's not our emphasis in this part.
Speaker 1: So you know, again going to when Vulker came and
Speaker 1: I've been plugging this a lot lately, but I was,
Speaker 1: you know, I finally read the book Secret to the Temple,
Speaker 1: and it totally changed my perspective on like, at least
Speaker 1: the first few years of the Vulker regime, because it
Speaker 1: was not actually a simple story of like finally we're
Speaker 1: gonna get tough. It was just like all of these
Speaker 1: levers being pulled and the huge swings in the fed
Speaker 1: funds rate and it was kind of a the first
Speaker 1: few years seemed like a total mess. What did actually then,
Speaker 1: in your view, create the real durable turn in inflation.
Speaker 3: So yeah, we look at this in both papers. I
Speaker 3: think the timing lines up very well. I would say,
Speaker 3: bet this is heresy. Now it's better than the vulcar
Speaker 3: rate hike. With the two stages of the deregulation of
Speaker 3: reg Q, the first one being the first major deregulation
Speaker 3: at the end of nineteen seventy eight and nineteen seventy nine,
Speaker 3: and then for this one, the total essentially getting rid
Speaker 3: of almost the rest of it at the end of
Speaker 3: nineteen eighty two, and both were associated with huge inflows
Speaker 3: of the respective deposits that were, you know, deregulated, And
Speaker 3: we look at banks that were benefited more from this
Speaker 3: versus less and sort of see the unwind of what
Speaker 3: we're seeing before, and then connect it to firms that
Speaker 3: were located in areas that were able to borrow from
Speaker 3: those banks, as well as the ones that were more
Speaker 3: financially dependent in areas that were more affected by the deregulation,
Speaker 3: and they show the unwinding and these so that they
Speaker 3: increased production and raised prices or cut price, you know,
Speaker 3: raise prices lesser, cut prices more than the other ones.
Speaker 3: And I think if you look at the COOTE now
Speaker 3: you know, inflation is very messy. Now that we've gone
Speaker 3: through it, you can see how hard I just to
Speaker 3: know exactly where it is. But inflation starts to come
Speaker 3: down at the end of seventy nine, beginning of eighty,
Speaker 3: several quarters before Volker's like big rate hike. So that
Speaker 3: is not going to convince any monetary person my story,
Speaker 3: but I do think that it's there if you want
Speaker 3: to be convinced.
Speaker 1: The market was pricing it in preemptively efficient markets.
Speaker 3: Well, I'm talking about the inflation.
Speaker 1: Yeah, yeah, yeah, yeah.
Speaker 3: I think I think bond markets didn't think that Vulkar
Speaker 3: had won until like the mid mid nineteen eighty four.
Speaker 3: So ten year rates were as high in mid eighty
Speaker 3: four as they had been before Volcar raised rates.
Speaker 1: Wow, And Tracy, that's when Bill Gross slammed the accelerator.
Speaker 1: As we talk about no right, like it was like
Speaker 1: the raids stayed really high. And that's what he said,
Speaker 1: is like that's when you knew the moment.
Speaker 3: Was like he knew go all in knew.
Speaker 2: I want to bring us up to present day because
Speaker 2: I mean, it's very useful to have this overview of
Speaker 2: the nineteen seventies. But maybe there are some lessons here
Speaker 2: that we can apply specifically to what's happening now in
Speaker 2: twenty twenty three. And let me start with a really
Speaker 2: simple one, which we've discussed on this podcast before, notably
Speaker 2: with Barclay's Joe abat the Money Market Strategist. We don't
Speaker 2: have that binding constraint of reg Q anymore, and yet
Speaker 2: it feels like it's been a relatively slow process to
Speaker 2: see banks in the US raise their deposit rate. And
Speaker 2: I was looking before the show. The average bank rate
Speaker 2: according to bankrate dot com on retail deposit savings accounts
Speaker 2: is still only like zero point five eight percent, which
Speaker 2: is kind of crazy. It's higher on certificates of deposit
Speaker 2: and money market funds and things like that. But why
Speaker 2: aren't we seeing more of a pass through from higher
Speaker 2: benchmark rates?
Speaker 3: Yeah. So, actually a lot of work we've done is
Speaker 3: on this and the effect of this in times after
Speaker 3: reg Q. That's where we started with. I mean, the
Speaker 3: simple answer is they have a lot of market power,
Speaker 3: and so people aren't leaving despite the lack of higher rates.
Speaker 3: You saw after SVB that there's a lot of discussion
Speaker 3: that now people will wake up to the fact that
Speaker 3: rates are really low, they'll demand rates.
Speaker 2: Yeah, it still hasn't really happened.
Speaker 3: No, it really, it really hasn't. It happens. It's some
Speaker 3: small banks. But I was quite skeptical at the time
Speaker 3: because you don't you know, you don't get everybody can't
Speaker 3: be asleep and they just wake up. Like I know,
Speaker 3: we all listen to odd lots and yeah, most people
Speaker 3: still the majority of the world is still not listening.
Speaker 3: So your market share could grow a lot.
Speaker 2: I'm gonna I'm going to renew my call to improve
Speaker 2: the transmission of monetary policy and defeat inflation. We all
Speaker 2: need to find a savings account with a high interest rate,
Speaker 2: So go out and do it. Do the market research.
Speaker 3: So they have they have a lot of market power.
Speaker 3: It's a very big part of the of the banking business.
Speaker 3: The difference is is that they could raise it if
Speaker 3: they wanted, if people became aware, if they left banks
Speaker 3: to go to other banks, and so that's kind of
Speaker 3: that's a response, that's their optimal response, whereas in the seventies,
Speaker 3: they wanted to raise the rates and couldn't. That's very different.
Speaker 3: So they were kind of like a like a super monopolist,
Speaker 3: but so much of a monopolist, and they didn't want
Speaker 3: to be like even a monopolist doesn't want to set
Speaker 3: the price so high you can't sell anything.
Speaker 1: So thinking about now versus the nineteen seventies, there are
Speaker 1: two ways that I could think of that maybe the
Speaker 1: economy is fundamentally different. But let me start with the
Speaker 1: one that's sort of most directly to this. In the
Speaker 1: late in the seventies, the banks are probably like the
Speaker 1: main game in town for credit, whereas today there's all
Speaker 1: kinds of different ways that a firm of any sort,
Speaker 1: even a manufacturer, there's a you know, the bond.
Speaker 2: Market, bond market loaded.
Speaker 1: Since then we talk about private credit and private lending,
Speaker 1: et cetera. Talk to us just start like, how much
Speaker 1: more important were banks for the provision of credit in
Speaker 1: the time that you focus on then versus today?
Speaker 3: So I do think they were more important. I want
Speaker 3: to push back a little bit because I've learned myself
Speaker 3: over time. Certainly the bond market's big, and certainly there
Speaker 3: are other non bank sources of credit. However, I do
Speaker 3: think that the diminishment of bank's importance has multiple times
Speaker 3: been overstated. Just to give you some data and looked
Speaker 3: at this. So, there are about one thousand firms in
Speaker 3: the US that are rated, meaning that they can issue bonds,
Speaker 3: out of the about three thousand, five hundred firms that
Speaker 3: are listed on the stock market. There were about half
Speaker 3: as many firms that could issue bonds by the end
Speaker 3: of the seventies out of about four thousand, five hundred
Speaker 3: firms that were listed. In any case, that's not that
Speaker 3: many firms. They are gigantic on average, so in terms
Speaker 3: of valuate they're very important. But there are about seven
Speaker 3: hundred thousand firms with over twenty people, which means that
Speaker 3: six hundred and ninety nine thousand of them cannot issue bonds.
Speaker 1: We're talking about today, yes, okay.
Speaker 3: And there were about three hundred and fifty thousand firms
Speaker 3: at that time that were above twenty people and so
Speaker 3: couldn't issue bonds. And so although there's been an expansion
Speaker 3: of this, the vast majority we have a firm. People
Speaker 3: call them small firms, but that makes you think of
Speaker 3: like a laundromat. They get a lot bigger than that,
Speaker 3: so small medium firms cannot. It's just very few even
Speaker 3: out of the stock market. Like I said, two thirds
Speaker 3: don't issue bonds.
Speaker 1: Right, So even today there is a huge pool of
Speaker 1: companies that really, if they need credit, need to go
Speaker 1: to a bank or.
Speaker 3: Something like the bank.
Speaker 1: Now, the other way that maybe the economy feels like
Speaker 1: it could be different than the nineteen seventies is huge
Speaker 1: drivers of you know, the US economy maybe are less
Speaker 1: credit center. I'm think you like tech for example, or
Speaker 1: software in which we don't really associate them with like borrowing.
Speaker 1: Was the economy inherently more credit sensitive? I would imagine
Speaker 1: in a manufacturing economy you have to build factories or
Speaker 1: even just maintain inventory. Was the economy just sort of
Speaker 1: more and were more companies in perpetual need of credit
Speaker 1: than today?
Speaker 3: I don't know the answer to that. I would have
Speaker 3: actually guessed that with financial deepening in general, were more financialized.
Speaker 3: I should just say, just to not give the wrong
Speaker 3: the press. I don't think that the inflation of the
Speaker 3: last couple of years was due to financial friction per se.
Speaker 3: I think the analogy is, and I believe this for
Speaker 3: a long time that the main driver was the supply
Speaker 3: chain shocks. It's in that respect that I think it's similar.
Speaker 3: I make the increase in demand due to transfers or
Speaker 3: fiscal or I was thought that was secondary. I thought
Speaker 3: that once the supply chain gets solved, the effect will
Speaker 3: be largely diminishment of that. So that that's been my opinion.
Speaker 3: I think more people are there now than the world
Speaker 3: like a year ago, but that's the analogy the way
Speaker 3: I see it.
Speaker 2: Just to press on this interest rate sensitivity point. I
Speaker 2: know I mentioned before that we've talked about reg Q
Speaker 2: in passing a few times with Josh Junger and Lev
Speaker 2: Menon in one or two other episodes. But if it
Speaker 2: sounds familiar to our listeners, it might also be because
Speaker 2: it came up in a very famous speech made by
Speaker 2: Ben Bernanke in two thousand and seven, where he was
Speaker 2: talking about how sensitive the housing market was to change
Speaker 2: in the FED funds rate, and he basically said, because
Speaker 2: we don't have REGQ ceilings anymore on deposit rates, that
Speaker 2: means that deposits are a much diminished source of housing finance.
Speaker 2: So everything is going to be fine, And that turned
Speaker 2: out not to be the case.
Speaker 3: So it's true that Bernanki and if you actually you
Speaker 3: go back and read his papers from the eighties and
Speaker 3: not just him, there was a lot of understanding that
Speaker 3: REGQ made it so that housing was very credit sensitive
Speaker 3: when REGQ was there. So for the reason we said
Speaker 3: banks would lose deposits, one of the main forms of
Speaker 3: bank lending is mortgages and also loans to contractors, and
Speaker 3: so you would see house market basically dry up, and
Speaker 3: then when deposits came back in, housing would be on
Speaker 3: a tear. And it was the impression of a lot
Speaker 3: of monetary people that once REGQ was abolished in nineteen
Speaker 3: eighty two, first, this was the reason we didn't see
Speaker 3: these kinds of wild gyrations anymore. And also they assumed,
Speaker 3: which I think was wrong, that deposits would transmit policy then,
Speaker 3: you know, one for one, which was sort of true
Speaker 3: right when reg Q was abolished and became less and
Speaker 3: less true until your question of why are deposit rates
Speaker 3: so pathetically low?
Speaker 1: Now, well, going back, I mean, policy must makers must
Speaker 1: have seen this wadge that you were talking about in
Speaker 1: real time, and it must have sort of been obvious
Speaker 1: that they could keep hiking rates to fight inflation, but
Speaker 1: that there was it would have minimal impact on actual
Speaker 1: rates of deposit that people got. Were they what were
Speaker 1: they saying at the time. Was there an awareness that
Speaker 1: this was a tension, that this was impeding the transmission
Speaker 1: of monetary policy? And if you said that, as you
Speaker 1: pointed out, historically they would sort of lift the cap
Speaker 1: over time along with the Fed Fund rate, why wasn't that.
Speaker 3: Lifting so a couple things. I think they definitely saw
Speaker 3: the credit crunches. They actually didn't like those. Weirdly, even
Speaker 3: though they wanted there to be less credit, they just
Speaker 3: didn't want it to be like that hysterical. So I
Speaker 3: think they thought this was helping partly that the monitor's
Speaker 3: view would tell you, look, there are less deposits, so
Speaker 3: less money growth, and this should be helping inflation and so.
Speaker 3: And of course, whenever they eased up, the deposits would
Speaker 3: flow back in, which would look like a lot of
Speaker 3: money creations. So this was kind of annoying them very much.
Speaker 3: But it's also tell people it's like giving a sick
Speaker 3: patient the medicine, Well, if they get sicker. There's two conclusions,
Speaker 3: and unfortunately they're diametrically opposite. One is that the medicine
Speaker 3: is not working. The other one is that you didn't
Speaker 3: give the patient enough medicine. So if the medicine's making
Speaker 3: them sicker, the second one is not going to be
Speaker 3: that good. And they if you read, they thought that
Speaker 3: there must be lots of other avenues that banks are
Speaker 3: able to circumvent this. One view was that this is
Speaker 3: like barely holding the dam, and that these guys are
Speaker 3: finding lots of ways around it. If you look at
Speaker 3: total credit growth, they did not find many ways around it.
Speaker 3: They did many things that you guys have mentioned, like
Speaker 3: the beginning of money market mutual funds, the Euro Many
Speaker 3: many financial innovations come from this time period. It's scuchly
Speaker 3: a really interesting time period, but they did not actually
Speaker 3: circumvent it that much.
Speaker 1: Tracy, this is a real diversion. But I you know,
Speaker 1: after college, my first job was in a now tro
Speaker 1: food is grocery store.
Speaker 2: Oh, I've heard your sandwich stories.
Speaker 1: This is not a sandwich story. I just want to say,
Speaker 1: I've been around a lot of people in my life
Speaker 1: that did like very strange like self medication to like
Speaker 1: treat a sickness, and they would get worse and worse
Speaker 1: and convince themselves that they're getting healthier and healthier. So
Speaker 1: I feel like, you know, like I'm just going to
Speaker 1: like do nothing but like take golden seal or like
Speaker 1: eat pure Leona or something like that, and they get
Speaker 1: sicker and sicker and more more emaciated, and it's like
Speaker 1: maybe it's not working anyway. I just understand that phenomenon firsthand.
Speaker 2: Thank you Joe for that insight.
Speaker 1: I want to, you know, just sort of wrap it
Speaker 1: up this idea that the reg Q, as you describe it,
Speaker 1: had really two effects. And there was the demand effect
Speaker 1: because the hot potato effect on money, It's like it
Speaker 1: was just terrible to hold cash and so you spend it.
Speaker 1: And then, as you mentioned, the sort of supply chain side,
Speaker 1: the supply disruption raising the cost of capital for companies
Speaker 1: and then companies have a markup, and then so went
Speaker 1: beyond that. How do you you just sort of establish
Speaker 1: that it wasn't mostly the demand side because I think,
Speaker 1: you know, you know, you're saying, like, well, there's this
Speaker 1: consistent throughput. Maybe the story now is the story then
Speaker 1: supply side impairment. But as you say, you also found
Speaker 1: this demand effect from the failure to transmit monetary policy effectively.
Speaker 1: What gives you the confidence that it wasn't just that
Speaker 1: hot potato effect.
Speaker 3: Well on the neck part is just that you see
Speaker 3: that as inflation's going up, output growth is going down,
Speaker 3: including negative output growth. And then we have this chart
Speaker 3: at the beginning where you see unfilled orders going up
Speaker 3: and up, which by which could by itself look like
Speaker 3: a lot of demand. But the peak of unfilled orders
Speaker 3: is when growth is negative.
Speaker 1: What year is this?
Speaker 3: This is actually throughout the whole time period. If you
Speaker 3: look it tracks unfilled orders leads inflation by a quarter
Speaker 3: or two. In the way. This is just beautiful, and
Speaker 3: it's just it's the quantity of unfilled orders. So we're
Speaker 3: deflating it by prices. There's not a mechanical effect. So
Speaker 3: if you just look at it goes up and inflation follows,
Speaker 3: and when it peaks and starts to go down, inflation
Speaker 3: starts to decrease. And like I said, all all sequly
Speaker 3: might think, well, people are just ordering so much stuff,
Speaker 3: but actually output growth is falling and even negative at
Speaker 3: the peak of this thing.
Speaker 2: Let me ask a question to sort of sum it up.
Speaker 2: But we started this conversation talking about how the memory
Speaker 2: of the nineteen seventies inflation, the traditional interpretation of it,
Speaker 2: kind of looms large in a lot of people's minds,
Speaker 2: especially policymakers and economists and academics looking at it through
Speaker 2: the lens that you described, what should be our biggest
Speaker 2: takeaway of that period and what should the lesson be
Speaker 2: for twenty twenty three.
Speaker 3: It's odd question. I tell you. Some of the inferences
Speaker 3: I make. I think that the focus of monetary policy
Speaker 3: and the way it understands histories mostly through excess demand
Speaker 3: causing inflation and variation in demand causing business cycles. And
Speaker 3: I think I think there's a lot of evidence that
Speaker 3: many times supply was just as important, if not more,
Speaker 3: in driving both inflationary episodes and business cycles. And actually,
Speaker 3: although it didn't happen this time, credit crunches with which
Speaker 3: many of the business cycles. If you look at people
Speaker 3: who do history in the post war business cycles, many
Speaker 3: of them involved credit crunches of one form or another.
Speaker 3: And I guess there to say is that monetary policy
Speaker 3: and that with the financial friction, can have an impact
Speaker 3: on supply, not just demand. In terms of looking forward,
Speaker 3: for example, we had supply chain issues, unfilled orders, I
Speaker 3: would look for those kinds of things. If we have
Speaker 3: more of those going forward, I would get very worried.
Speaker 3: Like the auto industry was a perfect proxy. So long
Speaker 3: as autos weren't being produced anywhere near the level they
Speaker 3: were before, I felt like that's an indication that the
Speaker 3: problem inherently is still there. If we were to go
Speaker 3: back to that, I'd be quite worried about it.
Speaker 1: Tomar Drexlert, thank you so much for coming on Odd Lots.
Speaker 1: You're gonna have to maybe send us some of these
Speaker 1: charts because I think that's fascinating. The idea that right now,
Speaker 1: like it is tough to disambiguit between supplies, it too
Speaker 1: much supply is a too little demand. But if if
Speaker 1: we're if it's if the worst of the inflationary waves
Speaker 1: of that period were actually periods of not you know,
Speaker 1: declining growth or declining rates of growth, that's a pretty
Speaker 1: strong sounds like a strong indication, So we got to
Speaker 1: show that.
Speaker 3: Thank you very much, Thank.
Speaker 1: You so much. That was a great conversation, Tracy. I
Speaker 1: really enjoyed that conversation. I mean, there's obviously a lot there,
Speaker 1: but it also just generally seems to be the case,
Speaker 1: like we can't always talk about nineteen seventies nineteen seventies
Speaker 1: without really like digging into the actually, you know, they
Speaker 1: severed the gold huge seventy on oil shock, all these
Speaker 1: you know, spendthrift Keynesians running around, and then finally stern
Speaker 1: tall Paul comes in and lays down the law. And
Speaker 1: it sounds like those are you know, ohen unions of course,
Speaker 1: and unions demanding that they get a pay rise, the
Speaker 1: cost of living adjustments so forth. There's a lot there,
Speaker 1: and it's all sort of this big soup of ideas.
Speaker 1: So it's sort of helpful to actually think about, like, okay,
Speaker 1: let's talk about how monetary policy work back then.
Speaker 2: Right totally. And I also think, unfortunately, except to a
Speaker 2: select few maybe US two and a few other people,
Speaker 2: like reg Q, is just not that sexy a topic
Speaker 2: now compared to the gold standard and things like that.
Speaker 2: So I can see why it hasn't been a focus
Speaker 2: of a lot of research historically. When it comes to
Speaker 2: the nineteen seventies period of inflation. I also have to say,
Speaker 2: you know, a lot of what's going on right now
Speaker 2: with the discussion over interest rates and inflation, it feels
Speaker 2: like there are the same people who are sort of
Speaker 2: complaining that rates are too high now are also the
Speaker 2: people who were complaining that, right, it's too.
Speaker 1: Low for the last fifteen three years.
Speaker 2: And so the wedge idea, like the idea that like
Speaker 2: rates were both kind of too low and too high
Speaker 2: or just like not well suited to the problem that
Speaker 2: was trying to be solved, uh, is a very attractive
Speaker 2: one to me. Like it feels a lot more nuanced.
Speaker 1: Absolutely. Also, it's just sort of interesting to think of
Speaker 1: the cost of credit as a business input, right, And
Speaker 1: so as item mentioned, of course, you know it's not
Speaker 1: going to be conducive to a boom if you have
Speaker 1: companies literally going out of business or not building new factories.
Speaker 1: But if you have operations, ongoing operations that require credit
Speaker 1: to continue going and the cost goes up but it
Speaker 1: doesn't destroy the business, then it sort of makes sense
Speaker 1: that you know that that comes through as a higher cost. Also,
Speaker 1: it sort of fits in these days maybe a little
Speaker 1: bit with some of our conversations about housing and real estate,
Speaker 1: right and the impairment of new development. And then now
Speaker 1: we see house prices going up, and why do we
Speaker 1: never have enough housing supply to have sustained deflation or
Speaker 1: disinflation in shelter. It still feels like that sort of
Speaker 1: rate component of supply still matters, at least in some way.
Speaker 2: Yeah, well, now that we're done trashing Paul Volker's legacy.
Speaker 3: Shall we leave it there?
Speaker 1: He did, you know, he did some good. Let's leave
Speaker 1: it there.
Speaker 3: Okay.
Speaker 2: This has been another episode of the Audlots Podcast. I'm
Speaker 2: Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 1: And I'm Joe Wisenthal. You can follow me at the Stalwart.
Speaker 1: Follow our guest Itamar Drexler. He's at idrex, Follow our
Speaker 1: producers Carmen Rodriguez at Carmen Arman and Dashel Bennett at
Speaker 1: Dashbot and special thanks to our producer Moses Ondam.
Speaker 2: And we have some exciting Odd Lots news. If you
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