1 00:00:04,840 --> 00:00:07,760 Speaker 1: On this episode of News World. I'm really delighted because 2 00:00:07,760 --> 00:00:11,280 Speaker 1: we have an extraordinarily experienced person to help us with 3 00:00:11,560 --> 00:00:14,520 Speaker 1: probably the biggest topic that I run into with people 4 00:00:14,520 --> 00:00:17,440 Speaker 1: these days, and that's the economy in general, but also 5 00:00:17,560 --> 00:00:20,919 Speaker 1: particularly the fact that we're experiencing the most inflation in 6 00:00:20,920 --> 00:00:23,439 Speaker 1: a forty year period. When you go to the grocery 7 00:00:23,440 --> 00:00:26,360 Speaker 1: store and the price of meat and milk are shockingly high, 8 00:00:26,440 --> 00:00:28,600 Speaker 1: or you go to the gas station and a phillip 9 00:00:28,640 --> 00:00:30,880 Speaker 1: costs a lot more than you thought it would, and 10 00:00:30,920 --> 00:00:33,400 Speaker 1: then they're all the supply chain issues with I think 11 00:00:33,479 --> 00:00:36,200 Speaker 1: ninety ships still offshore. There are a lot of things 12 00:00:36,280 --> 00:00:39,960 Speaker 1: are going on that affect our economy, and to make 13 00:00:40,080 --> 00:00:43,560 Speaker 1: sense of the current economy, I wanted to really listen 14 00:00:43,640 --> 00:00:47,240 Speaker 1: to an expert and have you joined me in learning 15 00:00:47,280 --> 00:00:50,120 Speaker 1: from somebody who really knows what they're doing. And I 16 00:00:50,240 --> 00:00:53,760 Speaker 1: was thrilled when Thomas Hanig said he would chat with us. 17 00:00:54,080 --> 00:00:57,040 Speaker 1: He served as Vice Chairman of the Federal Deposit Insurance 18 00:00:57,080 --> 00:01:01,320 Speaker 1: Corporation from two twelve till two In eighteen, he was 19 00:01:01,480 --> 00:01:05,080 Speaker 1: President and chief executive officer of the Federal Reserve Bank 20 00:01:05,080 --> 00:01:08,160 Speaker 1: of Kansas City and a member of the Federal Reserve 21 00:01:08,240 --> 00:01:12,440 Speaker 1: System's Federal Open Market Committee from nineteen ninety one to 22 00:01:12,520 --> 00:01:17,160 Speaker 1: twenty eleven. He currently is a Distinguished Senior Fellow at 23 00:01:17,160 --> 00:01:20,679 Speaker 1: the Mercadis Center at George Mason University, which has become 24 00:01:21,000 --> 00:01:25,120 Speaker 1: a remarkable center for serious intellectual thought about these issues. 25 00:01:33,200 --> 00:01:34,520 Speaker 1: First of all, let me to say I want to 26 00:01:34,560 --> 00:01:37,960 Speaker 1: thank you for joining us. Well, thank you for having me. 27 00:01:38,040 --> 00:01:40,480 Speaker 1: I'm delighted to be joining you, and I hope I 28 00:01:40,520 --> 00:01:44,200 Speaker 1: can give some explanations of this, but it is a 29 00:01:44,200 --> 00:01:47,240 Speaker 1: difficult time and a difficult topic for people at the moment. 30 00:01:47,880 --> 00:01:51,320 Speaker 1: Let me ask you the most basic of questions, which 31 00:01:51,400 --> 00:01:54,920 Speaker 1: is how do you describe inflation and what causes it. 32 00:01:55,760 --> 00:01:59,320 Speaker 1: I actually define inflation more broadly than some people, because 33 00:01:59,360 --> 00:02:03,360 Speaker 1: I think it ludes asset inflation as well as retail 34 00:02:03,400 --> 00:02:06,880 Speaker 1: prices and producer prices. So let me go to the 35 00:02:06,920 --> 00:02:10,480 Speaker 1: retail prices and producer prices, and that is the goods 36 00:02:10,520 --> 00:02:14,079 Speaker 1: that you and I buy at the grocery store or 37 00:02:14,320 --> 00:02:19,760 Speaker 1: hardware store or wherever. Tickets. They are systematically increasing in 38 00:02:19,840 --> 00:02:24,720 Speaker 1: price over time, and they are continuing to do that 39 00:02:24,880 --> 00:02:28,119 Speaker 1: at a high rate. And that's what's going on right now. 40 00:02:28,120 --> 00:02:31,519 Speaker 1: When you have consumer prices going up six point eight percent, 41 00:02:31,560 --> 00:02:35,360 Speaker 1: and producer prices go up over nine percent from a 42 00:02:35,400 --> 00:02:37,960 Speaker 1: month to month. We see prices going up, we notice 43 00:02:38,000 --> 00:02:41,720 Speaker 1: it at the grocery store. So that's the nature of inflation. 44 00:02:41,760 --> 00:02:44,600 Speaker 1: And then there's the asset inflation, which we have had 45 00:02:44,639 --> 00:02:47,440 Speaker 1: for actually well over a decade, and that is the 46 00:02:47,520 --> 00:02:50,680 Speaker 1: price of homes are going up at a breakneck speed 47 00:02:50,800 --> 00:02:55,360 Speaker 1: right now, the stock markets booming, other assets are increasing, 48 00:02:55,520 --> 00:02:58,919 Speaker 1: and that's an asset inflation. And I think Paul Voker 49 00:02:59,040 --> 00:03:01,800 Speaker 1: used to say those are cousins, but they do affect 50 00:03:01,800 --> 00:03:05,680 Speaker 1: our lives, both the asset and the general price inflation 51 00:03:05,800 --> 00:03:09,079 Speaker 1: that we all are experiencing right now. Let me ask 52 00:03:09,080 --> 00:03:12,200 Speaker 1: you the distinction for a second. Looking back in history, 53 00:03:12,960 --> 00:03:17,200 Speaker 1: sometimes you get these really weird price rises. The famous 54 00:03:17,240 --> 00:03:21,880 Speaker 1: tulip bubble is probably the most commonly referred to, but 55 00:03:22,080 --> 00:03:24,840 Speaker 1: actually aren't inflationary so much as they're just a bubble. 56 00:03:25,120 --> 00:03:28,080 Speaker 1: There's somehow people get into a frenzy to some easton. 57 00:03:28,160 --> 00:03:31,920 Speaker 1: I think the housing crisis we got into almost a 58 00:03:32,000 --> 00:03:34,560 Speaker 1: decade and a half ago had the characteristics of a 59 00:03:34,600 --> 00:03:36,960 Speaker 1: bubble rather than of inflation. I mean, is that a 60 00:03:36,960 --> 00:03:39,480 Speaker 1: fair thing to distinguish and if it is, how do 61 00:03:39,520 --> 00:03:43,280 Speaker 1: you distinguish whether you're just riding the wave of inflation, 62 00:03:43,360 --> 00:03:46,080 Speaker 1: which means that what looks like your house is worth more, 63 00:03:46,120 --> 00:03:49,360 Speaker 1: except actually it's in cheaper dollars, so the actual real 64 00:03:49,480 --> 00:03:52,040 Speaker 1: value of the house is the same. And those moments 65 00:03:52,040 --> 00:03:56,840 Speaker 1: when people go crazy and will pay virtually any price 66 00:03:56,880 --> 00:03:59,720 Speaker 1: for no good reason, thinking that it's going to permanently 67 00:03:59,800 --> 00:04:03,839 Speaker 1: keep going up. Well, bubbles are I think unique from 68 00:04:03,920 --> 00:04:06,880 Speaker 1: general price rises. I mean, if you have increases in 69 00:04:06,960 --> 00:04:09,800 Speaker 1: prices in housing and other things for over decades, you 70 00:04:09,920 --> 00:04:12,960 Speaker 1: probably have asset inflation. Now you can get a bubble. 71 00:04:13,200 --> 00:04:16,400 Speaker 1: You mentioned the tulip mania and then the housing that's 72 00:04:16,480 --> 00:04:20,800 Speaker 1: usually also precipitated by a very significant credit expansion. So 73 00:04:20,880 --> 00:04:24,679 Speaker 1: credit becomes very easy. For some reason, everyone thinks housing 74 00:04:24,800 --> 00:04:27,359 Speaker 1: can't go wrong, so I'm going to invest. I'm going 75 00:04:27,400 --> 00:04:30,640 Speaker 1: to speculate in housing, and therefore I do so because 76 00:04:30,680 --> 00:04:32,960 Speaker 1: I can get the credit, I can get a zero 77 00:04:33,040 --> 00:04:36,520 Speaker 1: down payment I can use. In the tulipe case, tulips, 78 00:04:36,520 --> 00:04:38,800 Speaker 1: I've already had to borrow more money to get more 79 00:04:38,960 --> 00:04:43,400 Speaker 1: of something. Those are usually credit induced bubbles, and they 80 00:04:43,520 --> 00:04:46,679 Speaker 1: usually collapse when people finally figure out wait a minute, 81 00:04:46,720 --> 00:04:49,520 Speaker 1: the value isn't there, and we don't have enough, we're extended, 82 00:04:49,560 --> 00:04:51,919 Speaker 1: we can't make the payments, and then everything implodes. And 83 00:04:52,000 --> 00:04:55,880 Speaker 1: that's what happened in housing and other kinds of mania 84 00:04:55,920 --> 00:04:58,800 Speaker 1: that have taken place over the centuries. Yeah, it turns 85 00:04:58,839 --> 00:05:01,880 Speaker 1: out that the tulips in fact to tulip, yes, not 86 00:05:02,040 --> 00:05:05,680 Speaker 1: a store of value. That's right, it's not all. Let 87 00:05:05,760 --> 00:05:09,200 Speaker 1: me ask you about this whole question of establishing an 88 00:05:09,200 --> 00:05:14,400 Speaker 1: effect easy or cheap money. I mean, hasn't the Federal 89 00:05:14,400 --> 00:05:19,400 Speaker 1: Reserve now followed a general policy of what one chairman 90 00:05:19,440 --> 00:05:22,839 Speaker 1: described as helicopter money when he said that he knew 91 00:05:22,839 --> 00:05:25,640 Speaker 1: how to avoid a depression. You just fill up helicopters 92 00:05:25,640 --> 00:05:27,960 Speaker 1: with cash and dump them. They've been doing it through 93 00:05:28,000 --> 00:05:31,640 Speaker 1: the banks rather than through helicopters. Isn't the level of 94 00:05:32,560 --> 00:05:37,240 Speaker 1: money that they have poured into the system almost unprecedented? Frankly, 95 00:05:37,279 --> 00:05:39,480 Speaker 1: I think of it in the historical context, I know 96 00:05:39,560 --> 00:05:42,360 Speaker 1: you're a historian. Think of the Fed's balance sheet, and 97 00:05:42,520 --> 00:05:47,159 Speaker 1: it is increasing what's called its reserves, banks reserves, or 98 00:05:47,600 --> 00:05:51,240 Speaker 1: based money. Between the founding of the Federal Reserve in 99 00:05:51,360 --> 00:05:56,560 Speaker 1: nineteen thirteen to the two thousand and eight period, they 100 00:05:56,800 --> 00:06:02,360 Speaker 1: increase their total liabilities to a nine hundred billion dollars, 101 00:06:02,400 --> 00:06:07,680 Speaker 1: and between two thousand and eight and twenty sixteen those 102 00:06:08,000 --> 00:06:11,960 Speaker 1: liabilities increased another four and a half trillion, and then 103 00:06:12,120 --> 00:06:15,440 Speaker 1: in this most recent pandemic, in reaction to that and 104 00:06:15,480 --> 00:06:18,239 Speaker 1: their monthly injections of one hundred and twenty billion a month, 105 00:06:18,600 --> 00:06:22,520 Speaker 1: they've increased it to nearly nine trillion in liabilities. So 106 00:06:22,680 --> 00:06:26,400 Speaker 1: that's unprecedented. And that base money is money that is 107 00:06:26,440 --> 00:06:30,320 Speaker 1: available to the banks to lend, and that has I 108 00:06:30,360 --> 00:06:36,920 Speaker 1: think created a lot of the asset inflation. And remember 109 00:06:37,000 --> 00:06:40,159 Speaker 1: in doing that, they've kept their policy rates at zero 110 00:06:40,279 --> 00:06:42,719 Speaker 1: or near zero for most of that period, and that, 111 00:06:43,040 --> 00:06:46,599 Speaker 1: of course, when you lower interest rates, you increase asset values. 112 00:06:47,200 --> 00:06:52,000 Speaker 1: And it has been an unprecedented decade of very accommodated 113 00:06:52,080 --> 00:06:55,320 Speaker 1: monetary policy all the way to the present. Even as 114 00:06:55,440 --> 00:06:59,360 Speaker 1: they have outlined their tapering plans, that's still an expansion 115 00:06:59,800 --> 00:07:03,840 Speaker 1: of policy through March. So it's a very significant increase 116 00:07:04,000 --> 00:07:07,000 Speaker 1: in the amount of base money. Now, for helicopter money, 117 00:07:07,120 --> 00:07:09,159 Speaker 1: the FETE has to be part of that, but in 118 00:07:09,200 --> 00:07:14,120 Speaker 1: this instance, more recently, and I understand well intentioned, the 119 00:07:14,200 --> 00:07:17,360 Speaker 1: amount of COVID relief that was put forward, was put 120 00:07:17,400 --> 00:07:20,679 Speaker 1: into the hands of consumers, both middle class and those 121 00:07:20,720 --> 00:07:23,920 Speaker 1: who lost their jobs and lower middle class, and that's 122 00:07:23,960 --> 00:07:26,880 Speaker 1: putting spending power in the hands exalt with the increasing 123 00:07:26,920 --> 00:07:29,760 Speaker 1: savings and the increase in spending, and that is of course, 124 00:07:30,040 --> 00:07:35,120 Speaker 1: has served to increased demand generally, and from an inflation 125 00:07:35,120 --> 00:07:38,560 Speaker 1: point of view, increasing demand does put upward pressure on 126 00:07:38,640 --> 00:07:41,600 Speaker 1: prices of goods, that is, the supply of goods. So 127 00:07:42,160 --> 00:07:46,960 Speaker 1: somewhat complicated answer, but that's the nature of this inflationary 128 00:07:47,040 --> 00:07:50,560 Speaker 1: beast today. The FET has been following this policy. I mean, 129 00:07:50,800 --> 00:07:55,960 Speaker 1: if I understand it correctly, if you're at like six 130 00:07:56,080 --> 00:08:01,040 Speaker 1: or seven percent inflation in the consumer price and the 131 00:08:01,080 --> 00:08:03,840 Speaker 1: FED is basically shoving the money out of zero or 132 00:08:03,960 --> 00:08:08,880 Speaker 1: one half percent, you're virtually guaranteed to be able to 133 00:08:08,880 --> 00:08:10,680 Speaker 1: make money out of it. I mean, the banks are 134 00:08:10,720 --> 00:08:15,440 Speaker 1: being given this extraordinary opportunity. Aren't they to pile up 135 00:08:15,440 --> 00:08:17,720 Speaker 1: as much as they can because they're going to pay 136 00:08:17,760 --> 00:08:21,000 Speaker 1: back at one half percent what they're going to loan 137 00:08:21,040 --> 00:08:23,880 Speaker 1: out at seven or eight percent. The answer is yes. 138 00:08:24,080 --> 00:08:27,000 Speaker 1: It is an extraordinary benefit to the banks because when 139 00:08:27,040 --> 00:08:31,320 Speaker 1: the FED buys government securities from the primary dealers, which 140 00:08:31,320 --> 00:08:36,240 Speaker 1: are mostly banks, not all, but mostly banks. They buy 141 00:08:36,320 --> 00:08:39,600 Speaker 1: that and they actually create a deposit, They increase their 142 00:08:39,640 --> 00:08:43,199 Speaker 1: deposits that they hold with the FED out of basically nothing. Right, 143 00:08:43,280 --> 00:08:47,079 Speaker 1: it's Fiat currency, and even if they didn't use that money, 144 00:08:47,160 --> 00:08:51,880 Speaker 1: but they only get say ten basis points, that's ten 145 00:08:51,920 --> 00:08:56,839 Speaker 1: basis points that they have that they didn't actually make 146 00:08:56,840 --> 00:08:59,040 Speaker 1: a loan for. It's just sitting there and they're earning 147 00:08:59,040 --> 00:09:01,280 Speaker 1: off it, and the FEDS made it possible. And then 148 00:09:01,400 --> 00:09:04,240 Speaker 1: the question becomes, well, they can make more now if 149 00:09:04,280 --> 00:09:06,400 Speaker 1: they lend it, and the FED then has to pay 150 00:09:06,440 --> 00:09:09,400 Speaker 1: more on reserves to keep them from Lenynette. That would 151 00:09:09,720 --> 00:09:13,440 Speaker 1: increase demand in the economy and risk making inflation worse. 152 00:09:13,760 --> 00:09:18,559 Speaker 1: So the whole dynamics become very pro demand and I 153 00:09:18,600 --> 00:09:23,720 Speaker 1: think pro inflation over a long period. Yes, So I'm 154 00:09:23,720 --> 00:09:26,319 Speaker 1: really puzzled by this, again because of my own background 155 00:09:26,320 --> 00:09:29,800 Speaker 1: of having run for office in the seventies. I lost 156 00:09:29,840 --> 00:09:32,480 Speaker 1: twice and I finally got elected in seventy eight, and 157 00:09:32,600 --> 00:09:35,760 Speaker 1: I was in the middle of both the Carter inflation 158 00:09:35,880 --> 00:09:39,680 Speaker 1: and Poker's relentless efforts to bring it under control, which 159 00:09:39,760 --> 00:09:44,240 Speaker 1: led to a very severe recession in nineteen eighty two. 160 00:09:44,720 --> 00:09:47,200 Speaker 1: But which did break the back of the inflation automately. 161 00:09:47,760 --> 00:09:51,040 Speaker 1: Why would the FED have said for months that the 162 00:09:51,120 --> 00:09:56,680 Speaker 1: inflation was transitory when historically we know that once these 163 00:09:56,679 --> 00:09:59,680 Speaker 1: things get started, they don't just peter out on their own, 164 00:09:59,679 --> 00:10:05,079 Speaker 1: I mean actually build expectation which compounds and accelerates the inflation. 165 00:10:05,760 --> 00:10:09,160 Speaker 1: Wasn't the FED sort of rejecting every evidence of history 166 00:10:09,200 --> 00:10:12,079 Speaker 1: about how these cycles work well in a way they 167 00:10:12,120 --> 00:10:14,520 Speaker 1: weren't in those meetings. I can't say for sure, but 168 00:10:14,760 --> 00:10:18,800 Speaker 1: the idea I believe is that this was an inflationary 169 00:10:18,800 --> 00:10:23,360 Speaker 1: spirit related to the pandemic that temporarily caused the supply 170 00:10:23,440 --> 00:10:27,640 Speaker 1: of goods to decrease. And so when you have the 171 00:10:27,679 --> 00:10:30,800 Speaker 1: same amount of money and pure goods, you get inflation 172 00:10:30,880 --> 00:10:34,439 Speaker 1: from that. And once the logistics problems were to be solved, 173 00:10:34,440 --> 00:10:38,079 Speaker 1: then this would self correct and they would be able 174 00:10:38,120 --> 00:10:40,600 Speaker 1: to continue on. And the fact of the matter is 175 00:10:41,040 --> 00:10:45,360 Speaker 1: Number one, supply was partly logistics, but there was more 176 00:10:45,400 --> 00:10:48,839 Speaker 1: to it. The logistics are deep. It will take months 177 00:10:48,840 --> 00:10:52,600 Speaker 1: for that to correct. Number two. Prior to that, we've 178 00:10:52,600 --> 00:10:57,600 Speaker 1: seen our global trade and trade of the United States 179 00:10:57,600 --> 00:11:02,000 Speaker 1: with other nations come under stress. We've introduced new trade tariffs, 180 00:11:02,080 --> 00:11:06,360 Speaker 1: the sort of thing that also constrains the supply going forward, 181 00:11:06,400 --> 00:11:09,719 Speaker 1: so that's more structural. And then thirdly, with the pandemic, 182 00:11:09,840 --> 00:11:13,600 Speaker 1: I think that we had a situation in which people 183 00:11:13,679 --> 00:11:15,920 Speaker 1: left the jobs, many of them baby boomers, and they 184 00:11:16,120 --> 00:11:18,520 Speaker 1: might not have left that soon, but now that they've gone, 185 00:11:18,520 --> 00:11:21,520 Speaker 1: they're not coming back. So you do have this labor shortage, 186 00:11:21,559 --> 00:11:25,079 Speaker 1: which then puts pressure on labor prices, which then carry 187 00:11:25,080 --> 00:11:28,040 Speaker 1: over to consumer prices. So these things were not as 188 00:11:28,080 --> 00:11:31,719 Speaker 1: transitory as the FED had thought they might be. On 189 00:11:31,760 --> 00:11:34,560 Speaker 1: the other side of this, which is I think a 190 00:11:34,640 --> 00:11:39,240 Speaker 1: major part of their responsibility is that the recovery for 191 00:11:40,000 --> 00:11:44,400 Speaker 1: the economy following the pandemic started in let's say the 192 00:11:44,520 --> 00:11:48,680 Speaker 1: summer of twenty twenty at the latest, the fall, and 193 00:11:48,760 --> 00:11:54,960 Speaker 1: yet their pandemic policies of increasing that is, the buying 194 00:11:55,160 --> 00:11:59,000 Speaker 1: government debt and mortgage back to securities at the rate 195 00:11:59,000 --> 00:12:02,200 Speaker 1: of one hundred and twenty billion dollars per month, a 196 00:12:02,400 --> 00:12:06,040 Speaker 1: very very accommodated policy went on even though the economy 197 00:12:06,160 --> 00:12:10,160 Speaker 1: was covering, therefore increasing that demand, the ability to have 198 00:12:10,240 --> 00:12:13,480 Speaker 1: demand in the economy from more money was going on. 199 00:12:13,720 --> 00:12:18,600 Speaker 1: So you had a temporary but also somewhat permanent strain 200 00:12:18,679 --> 00:12:23,400 Speaker 1: on supply and a very significant increase in the ability 201 00:12:23,480 --> 00:12:27,480 Speaker 1: to create demand. And then you had the COVID relief packages, 202 00:12:27,520 --> 00:12:31,640 Speaker 1: which also was spending that created additional demand. You have 203 00:12:31,720 --> 00:12:35,360 Speaker 1: to get inflation. I don't know that they anticipated that, 204 00:12:35,520 --> 00:12:38,360 Speaker 1: but they tended to emphasize one side and not the other, 205 00:12:38,840 --> 00:12:43,800 Speaker 1: the temporary side and not the permanent increases in money 206 00:12:43,840 --> 00:12:48,360 Speaker 1: creation and the permanent decrease in supply factors. I was 207 00:12:48,480 --> 00:12:53,200 Speaker 1: very much foreign. I advocated a dramatic increase in money 208 00:12:53,600 --> 00:12:57,400 Speaker 1: in twenty twenty because Letso was the ambassador of the 209 00:12:57,480 --> 00:12:59,840 Speaker 1: Vatican and we were living in Rome and you could 210 00:12:59,840 --> 00:13:04,280 Speaker 1: see how badly the pandemic had hit Italy, and I 211 00:13:04,280 --> 00:13:07,040 Speaker 1: had just assumed there was going to be substantially worse 212 00:13:07,080 --> 00:13:10,880 Speaker 1: than people expected back in March of twenty twenty. So 213 00:13:10,920 --> 00:13:13,760 Speaker 1: I was very much for a short term sort of 214 00:13:13,920 --> 00:13:17,520 Speaker 1: jolt of adrenaline with pretty big bailout. But I was 215 00:13:17,559 --> 00:13:20,240 Speaker 1: also for stopping it. Which is one of the problems 216 00:13:20,240 --> 00:13:22,640 Speaker 1: when you get into these cycles is that once you 217 00:13:22,679 --> 00:13:25,560 Speaker 1: had used to just passing really big bills, you think, well, allow, 218 00:13:25,600 --> 00:13:28,520 Speaker 1: let's do a couple more. And it struck me that 219 00:13:28,559 --> 00:13:33,320 Speaker 1: you had these two parallel, very inflationary fiscal policy pouring 220 00:13:33,320 --> 00:13:36,640 Speaker 1: money out of the Congress, combined with a very inflationary 221 00:13:36,679 --> 00:13:39,360 Speaker 1: monetary policy coming out of the Fed, and so you 222 00:13:39,400 --> 00:13:43,959 Speaker 1: had sort of a double whammy encouraging the larger economy 223 00:13:44,040 --> 00:13:47,880 Speaker 1: to have pretty massive price rises. I think you're correct. 224 00:13:47,920 --> 00:13:52,280 Speaker 1: I also was very much supportive of the immediate actions 225 00:13:52,320 --> 00:13:55,400 Speaker 1: taken by both the Congress and by the Fed to 226 00:13:56,120 --> 00:13:59,720 Speaker 1: address that terrible shock from the pandemic that was going on, 227 00:14:00,520 --> 00:14:03,679 Speaker 1: and those were going to be stimulative. The difficulty is 228 00:14:03,760 --> 00:14:06,880 Speaker 1: that when you continue them, as you've just described, well 229 00:14:06,920 --> 00:14:10,760 Speaker 1: passed the start of the recovery, then you are just 230 00:14:11,520 --> 00:14:15,880 Speaker 1: creating this enormous demand when you still have some significant 231 00:14:15,920 --> 00:14:19,600 Speaker 1: supply constraints, you are going to get inflation. And to 232 00:14:19,680 --> 00:14:23,560 Speaker 1: judge that those supply constraints are only temporary, now look 233 00:14:23,600 --> 00:14:26,000 Speaker 1: at the structural factors that we're going on. That's how 234 00:14:26,000 --> 00:14:28,600 Speaker 1: they got behind the curve. But it has been the 235 00:14:28,600 --> 00:14:33,400 Speaker 1: federal reserves operating kind of approach when there is a 236 00:14:33,440 --> 00:14:36,480 Speaker 1: crisis two thousand and eight or a slow down twenty 237 00:14:36,480 --> 00:14:40,520 Speaker 1: fourteen fifteen, that you stimulate pretty significantly, but then you 238 00:14:40,560 --> 00:14:44,520 Speaker 1: withdraw it very slowly, and therein lies I think the 239 00:14:44,560 --> 00:14:49,120 Speaker 1: genesis of inflationary impulses that carry through and now we're 240 00:14:49,160 --> 00:15:08,720 Speaker 1: seeing it in this environment pretty dramatically. So I'm really 241 00:15:08,760 --> 00:15:13,520 Speaker 1: struck with the degree to which the policy of providing 242 00:15:14,280 --> 00:15:19,000 Speaker 1: financial aid to individuals has led to maybe the toughest 243 00:15:19,080 --> 00:15:22,840 Speaker 1: job market in terms of trying to hire people since 244 00:15:22,920 --> 00:15:28,080 Speaker 1: World War Two. It's amazing to me how many restaurants, stores, etc. 245 00:15:28,760 --> 00:15:31,480 Speaker 1: Just can't find anybody. It may well be the part 246 00:15:31,520 --> 00:15:34,880 Speaker 1: of the logistics problem is that older truckers, having gotten 247 00:15:34,920 --> 00:15:37,680 Speaker 1: off the road for a year, looking around at their 248 00:15:37,800 --> 00:15:41,120 Speaker 1: financial situation and said, you know, I just assume not 249 00:15:41,240 --> 00:15:43,600 Speaker 1: go back to driving. And so they've had I think 250 00:15:43,600 --> 00:15:48,800 Speaker 1: a genuine shrinkage of the skilled employment group. And that's 251 00:15:48,840 --> 00:15:52,280 Speaker 1: another inflationary pressure in a way, isn't it. Absolutely it is. 252 00:15:52,320 --> 00:15:55,160 Speaker 1: I mean, the cost of labor is part of the 253 00:15:55,240 --> 00:15:57,960 Speaker 1: product and it has to be recovered in the prices, 254 00:15:58,000 --> 00:16:01,200 Speaker 1: so you pass the labor cost through to the ultimate price. 255 00:16:01,760 --> 00:16:05,960 Speaker 1: And I do think that the relief packages did allow 256 00:16:06,040 --> 00:16:10,920 Speaker 1: people to stay home understandably so, but like I said, 257 00:16:11,160 --> 00:16:14,480 Speaker 1: for those in the baby boom generation that left, they're saying, well, 258 00:16:14,520 --> 00:16:16,480 Speaker 1: I was going to retire in such an experiod. I'll 259 00:16:16,520 --> 00:16:19,840 Speaker 1: just do it now. You do have situations where we 260 00:16:20,000 --> 00:16:26,120 Speaker 1: carry the support for unemployment longer than we had in history, 261 00:16:26,200 --> 00:16:29,080 Speaker 1: because we didn't really end it until this past September, 262 00:16:29,560 --> 00:16:32,680 Speaker 1: and so people have those savings, they're not anxious to 263 00:16:32,680 --> 00:16:35,080 Speaker 1: get back in the market. But you do notice that 264 00:16:35,120 --> 00:16:38,960 Speaker 1: when those benefits ended, we started seeing a pickup in 265 00:16:39,040 --> 00:16:42,760 Speaker 1: monthly hiring, and that reflects I think the fact that well, 266 00:16:43,000 --> 00:16:45,480 Speaker 1: I've got to go back to work now, and you'll 267 00:16:45,480 --> 00:16:49,240 Speaker 1: see that probably continue through but at a much slower 268 00:16:49,280 --> 00:16:51,400 Speaker 1: pace because you did have so many drop out of 269 00:16:51,400 --> 00:16:53,800 Speaker 1: the labor force and now we have these issues of 270 00:16:53,880 --> 00:16:58,520 Speaker 1: recurring viruses. People are still afraid, even though there are 271 00:16:58,520 --> 00:17:01,000 Speaker 1: different debates on that. I think the recovery in the 272 00:17:01,080 --> 00:17:04,800 Speaker 1: labor market will be slower than people anticipated as well, 273 00:17:05,240 --> 00:17:08,760 Speaker 1: and that means more inflationary pressures. One of the reasons 274 00:17:08,760 --> 00:17:10,560 Speaker 1: I really want to do this, and I'm so grateful 275 00:17:10,600 --> 00:17:12,439 Speaker 1: that you found the time to talk with us, is 276 00:17:12,880 --> 00:17:16,119 Speaker 1: when I saw that the producer price index had jumped 277 00:17:16,680 --> 00:17:20,399 Speaker 1: nine point six percent over the previous twelve months, and 278 00:17:20,440 --> 00:17:23,960 Speaker 1: it isn't eight tens of a percent in November alone. 279 00:17:24,400 --> 00:17:26,959 Speaker 1: First of all, just for all our listeners. Can you 280 00:17:27,000 --> 00:17:31,280 Speaker 1: describe briefly why the producer price index matters and why 281 00:17:31,320 --> 00:17:36,399 Speaker 1: it's a leading indicator of future consumer price indexes. Well, 282 00:17:36,400 --> 00:17:40,480 Speaker 1: it's very important because producer price index is kind of 283 00:17:40,640 --> 00:17:43,800 Speaker 1: a measure of the cost of production, if you will, 284 00:17:44,280 --> 00:17:47,320 Speaker 1: the goods that go into the final product that you 285 00:17:47,400 --> 00:17:51,160 Speaker 1: and I consume, some of the agricultural costs that are 286 00:17:51,200 --> 00:17:54,280 Speaker 1: in the final goods in the store and so forth. 287 00:17:54,440 --> 00:17:56,880 Speaker 1: It's like labor, if you will. It's some of that input. 288 00:17:56,960 --> 00:17:59,600 Speaker 1: And so you watch it very carefully and you see 289 00:17:59,640 --> 00:18:03,600 Speaker 1: that the costs for certain kinds of energy and input 290 00:18:03,680 --> 00:18:07,320 Speaker 1: for final goods, those are all having an effect on 291 00:18:07,760 --> 00:18:11,280 Speaker 1: the cost of production. And that's why it's followed so closely, 292 00:18:11,680 --> 00:18:15,600 Speaker 1: because nine point six would suggest that we were going 293 00:18:15,640 --> 00:18:20,040 Speaker 1: to see more inflation, that is, in the consumer price 294 00:18:20,119 --> 00:18:23,160 Speaker 1: inflation in the months ahead. And so when I saw 295 00:18:23,200 --> 00:18:28,320 Speaker 1: that number, it became more concerned about the inflationary outlook 296 00:18:28,320 --> 00:18:30,720 Speaker 1: that I was even before that. Do you think that 297 00:18:31,000 --> 00:18:35,440 Speaker 1: sense of being aware that this is starting to really 298 00:18:36,840 --> 00:18:40,399 Speaker 1: drift towards being out of control will penetrate the Federal 299 00:18:40,440 --> 00:18:43,800 Speaker 1: Reserve team because they clearly have all the data and 300 00:18:43,960 --> 00:18:46,640 Speaker 1: this had to be a much bigger jump than they 301 00:18:46,640 --> 00:18:51,120 Speaker 1: were projecting. Well, I think Chairman Powell as much as 302 00:18:51,600 --> 00:18:54,520 Speaker 1: said so yesterday that this was a bigger jump than 303 00:18:54,560 --> 00:18:59,959 Speaker 1: than anticipated. That's why they've accelerated their plans to remove 304 00:19:00,200 --> 00:19:05,000 Speaker 1: this highly accommodative quantitative easing program they've been engaged in 305 00:19:05,080 --> 00:19:07,760 Speaker 1: for almost two years. They've come to recognize it. Now 306 00:19:07,760 --> 00:19:13,400 Speaker 1: they're walking a very fine, difficult line because if they 307 00:19:13,440 --> 00:19:18,240 Speaker 1: were to move quickly to try and stanch the inflation, 308 00:19:18,880 --> 00:19:23,440 Speaker 1: they would very likely, at least history would say, risk 309 00:19:23,600 --> 00:19:26,560 Speaker 1: a recession, and they don't want to do that. As 310 00:19:26,560 --> 00:19:28,119 Speaker 1: you mentioned, you don't want to do it in twenty 311 00:19:28,160 --> 00:19:30,959 Speaker 1: twenty two, and you'd like to avoid it beyond that 312 00:19:31,000 --> 00:19:34,440 Speaker 1: if you can. On the other hand, they also realize 313 00:19:34,480 --> 00:19:37,000 Speaker 1: that if they don't do something and inflation goes from 314 00:19:37,040 --> 00:19:42,320 Speaker 1: six point eight percent to seven percent to eight percent, 315 00:19:42,680 --> 00:19:46,320 Speaker 1: then they're going to create another source of future recession 316 00:19:46,720 --> 00:19:49,000 Speaker 1: because that means interest rates are going to have to 317 00:19:49,040 --> 00:19:54,040 Speaker 1: go up to compensate for this very significant rise of inflation. 318 00:19:54,400 --> 00:19:56,600 Speaker 1: And if they do that, then they're going to have 319 00:19:56,800 --> 00:19:59,639 Speaker 1: what I call face the Volker moment. Do you do 320 00:19:59,680 --> 00:20:02,280 Speaker 1: these extrain things that get it under control, and then 321 00:20:02,320 --> 00:20:05,240 Speaker 1: you have a very harsh outcome for that, and so 322 00:20:05,280 --> 00:20:07,720 Speaker 1: they're walking this fine line. And then add to that 323 00:20:08,080 --> 00:20:12,920 Speaker 1: the following very significant pressure on them. The federal debt, 324 00:20:12,960 --> 00:20:15,560 Speaker 1: which was I'm going to round these numbers off about 325 00:20:15,600 --> 00:20:19,360 Speaker 1: ten trillion dollars in two thousand and eight, was about 326 00:20:19,359 --> 00:20:23,040 Speaker 1: twenty trillion dollars in twenty sixteen, and is very close 327 00:20:23,080 --> 00:20:26,800 Speaker 1: to thirty trillion dollars today. So as interest rates rise 328 00:20:27,440 --> 00:20:31,240 Speaker 1: and inflation would precipitate even more of that, then the 329 00:20:31,359 --> 00:20:34,720 Speaker 1: cost to the federal government of funding this thirty trillion 330 00:20:34,720 --> 00:20:36,679 Speaker 1: dollars is going to go up significantly. And now you 331 00:20:36,720 --> 00:20:38,960 Speaker 1: have a new problem, and they're going to be putting 332 00:20:38,960 --> 00:20:41,560 Speaker 1: a lot of pressure on the Fed not to accelerate 333 00:20:41,800 --> 00:20:45,879 Speaker 1: interest rates up too quickly. But if they don't move 334 00:20:45,960 --> 00:20:48,040 Speaker 1: and slow the inflation, then they're going to have a 335 00:20:48,040 --> 00:20:50,440 Speaker 1: worse problem in the future. So they are in a 336 00:20:50,560 --> 00:20:55,399 Speaker 1: very difficult situation. When I was Speaker, we passed the 337 00:20:55,440 --> 00:20:59,879 Speaker 1: only four consecutive balanced budgets in your lifetime. I had 338 00:21:00,160 --> 00:21:03,080 Speaker 1: great moment where Greenspan, who at that time was Chair 339 00:21:03,080 --> 00:21:06,000 Speaker 1: of the FED, testified in the Senate that the Federal 340 00:21:06,080 --> 00:21:08,960 Speaker 1: Reserve Staff was now studying how they would manage the 341 00:21:09,000 --> 00:21:12,400 Speaker 1: monetary policy if there was no debt, which we didn't 342 00:21:12,440 --> 00:21:15,600 Speaker 1: quite get to, but it was an exhilarating moment. I'm 343 00:21:15,640 --> 00:21:19,520 Speaker 1: a big believer in balancing budgets outside of wartime and 344 00:21:19,840 --> 00:21:22,399 Speaker 1: gradually shrinking the debt. But you raise a point that 345 00:21:22,400 --> 00:21:24,719 Speaker 1: I think almost nobody looks at, which is, if they 346 00:21:24,760 --> 00:21:29,960 Speaker 1: have a significant rise in interest rates for bonds, the 347 00:21:30,040 --> 00:21:34,720 Speaker 1: effect that will have on financing the federal debt will 348 00:21:34,760 --> 00:21:37,320 Speaker 1: crowd out an amazing amount of spending. I'm not sure 349 00:21:37,359 --> 00:21:40,800 Speaker 1: anybody conservatives in terms of national defense and liberals in 350 00:21:40,920 --> 00:21:43,600 Speaker 1: terms of social policy. I don't think anybody's looked at 351 00:21:44,040 --> 00:21:48,879 Speaker 1: how much we are hostage to a potential catastrophic increase 352 00:21:49,280 --> 00:21:53,480 Speaker 1: in debt service. And it just strikes me that historically, 353 00:21:53,480 --> 00:21:56,160 Speaker 1: when you look at other countries that run into these 354 00:21:56,240 --> 00:21:59,160 Speaker 1: kinds of things, this gets to be very, very difficult 355 00:21:59,600 --> 00:22:03,639 Speaker 1: and very unpopular. It will be very difficult and very unpopular. 356 00:22:03,680 --> 00:22:06,800 Speaker 1: And remember, there is an argument that is being presented 357 00:22:07,200 --> 00:22:09,959 Speaker 1: that we're the reserve currency number one of the world, 358 00:22:10,440 --> 00:22:14,439 Speaker 1: and the Fed prints money, we can print enough to 359 00:22:14,560 --> 00:22:17,400 Speaker 1: pay We'll never default on our debt because we can 360 00:22:17,440 --> 00:22:20,840 Speaker 1: print it. The problem with that argument is It's true 361 00:22:20,880 --> 00:22:22,800 Speaker 1: you can print the money, but the value of your 362 00:22:22,800 --> 00:22:26,160 Speaker 1: currency still goes down and people slowly begin to rely 363 00:22:26,240 --> 00:22:29,000 Speaker 1: on it. Last, I think, not to get off the topic, 364 00:22:29,040 --> 00:22:33,560 Speaker 1: but that's why you get these alternatives like cryptocurrencies proliferating, 365 00:22:33,600 --> 00:22:36,159 Speaker 1: because people are looking for an alternative, and that is 366 00:22:36,480 --> 00:22:39,240 Speaker 1: I think unfortunate. And now to bring this back in 367 00:22:39,280 --> 00:22:42,000 Speaker 1: the equilibrium, I think, mister spy, you have to remember 368 00:22:42,040 --> 00:22:46,280 Speaker 1: we have had an economy developed for nearly a decade 369 00:22:46,280 --> 00:22:49,560 Speaker 1: with a small rise in interest rates in twenty eighteen 370 00:22:49,600 --> 00:22:52,840 Speaker 1: and so forth, but over a decade, an economic system 371 00:22:52,880 --> 00:22:58,119 Speaker 1: that has developed equilibrium around nearly a zero interest rate environment. 372 00:22:58,960 --> 00:23:01,720 Speaker 1: So think about moving that and moving that up to 373 00:23:02,160 --> 00:23:06,280 Speaker 1: historically what we'll call a real rate of three or 374 00:23:06,320 --> 00:23:10,040 Speaker 1: four percent. It won't be painless, it won't be easy, 375 00:23:10,240 --> 00:23:12,640 Speaker 1: it won't be quick. It's going to be a very 376 00:23:12,680 --> 00:23:15,359 Speaker 1: difficult path if we decide to take that path, and 377 00:23:15,400 --> 00:23:17,640 Speaker 1: if we don't, then we're going to have I think, 378 00:23:17,680 --> 00:23:23,120 Speaker 1: more asset inflation, more price inflation. Well, if I think 379 00:23:23,160 --> 00:23:26,320 Speaker 1: back to my childhood and you think about what, for example, 380 00:23:26,880 --> 00:23:30,920 Speaker 1: home mortgage is used to cost, and also how much 381 00:23:30,960 --> 00:23:34,840 Speaker 1: more cautious people were about investing capital in new businesses, etc. 382 00:23:35,600 --> 00:23:38,640 Speaker 1: We've been through a period where we've learned, i think, 383 00:23:38,680 --> 00:23:42,560 Speaker 1: a whole set of really bad habits, and the price 384 00:23:42,600 --> 00:23:47,080 Speaker 1: of breaking all those habits could become psychologically very challenging 385 00:23:47,320 --> 00:23:52,440 Speaker 1: and politically very challenging for both parties because people would 386 00:23:52,440 --> 00:23:54,600 Speaker 1: be suddenly shocked with a level of pain that they 387 00:23:54,640 --> 00:23:57,520 Speaker 1: just are not used to. The Japanese one through this 388 00:23:57,680 --> 00:24:00,520 Speaker 1: starting at eighty nine, and they couldn't hope with it, 389 00:24:00,880 --> 00:24:03,080 Speaker 1: and so they just propped up a bunch of these 390 00:24:03,119 --> 00:24:06,960 Speaker 1: companies that were dead. They're essentially zombie companies, and it 391 00:24:07,080 --> 00:24:10,920 Speaker 1: crippled their economy for over twenty years because they couldn't 392 00:24:10,920 --> 00:24:14,160 Speaker 1: bring themselves to deal with getting rid of the stuff 393 00:24:14,200 --> 00:24:17,160 Speaker 1: that no longer worked. That's one of the downsides of 394 00:24:17,240 --> 00:24:22,000 Speaker 1: having a extended period of zero interest rates, whether it's 395 00:24:22,080 --> 00:24:26,440 Speaker 1: Japan or the United States, you keep zombie companies still operating, 396 00:24:26,520 --> 00:24:28,639 Speaker 1: you become less efficient. And if you think about it, 397 00:24:28,640 --> 00:24:32,800 Speaker 1: over the last decade until very recently, we had a 398 00:24:32,800 --> 00:24:36,560 Speaker 1: growth rate that was lower than historic average. We had 399 00:24:37,000 --> 00:24:40,560 Speaker 1: real wages didn't really increase because our productivity wasn't increasing. 400 00:24:41,040 --> 00:24:44,640 Speaker 1: Those are the consequences, but they come very slowly. It's 401 00:24:44,680 --> 00:24:47,000 Speaker 1: not like a shock, so you're not paying attention to it, 402 00:24:47,600 --> 00:24:50,920 Speaker 1: and then trying to understand it. Now, given this long 403 00:24:51,040 --> 00:24:54,480 Speaker 1: period of easy money, is very difficult for the consumer 404 00:24:54,480 --> 00:24:57,000 Speaker 1: in the public. Although I don't sell them short, they'll 405 00:24:57,040 --> 00:24:59,520 Speaker 1: pick it up and understand it fairly quickly and won't 406 00:24:59,560 --> 00:25:02,320 Speaker 1: be happy about it. I suspect, right, I mean, because 407 00:25:02,359 --> 00:25:06,119 Speaker 1: I think the average person they experience the consequences of 408 00:25:06,119 --> 00:25:09,840 Speaker 1: it without necessarily understanding the mechanisms. It's correct, and the 409 00:25:09,920 --> 00:25:13,159 Speaker 1: consequences in the short term, and then we've avoided some 410 00:25:13,240 --> 00:25:17,600 Speaker 1: of the really long term consequences of inflation again, of 411 00:25:17,840 --> 00:25:22,800 Speaker 1: real loss of productivity. And that is something that is 412 00:25:22,920 --> 00:25:26,560 Speaker 1: the thin line that the FED has to walk, and 413 00:25:26,800 --> 00:25:29,239 Speaker 1: actually the Congress has to walk going forward from here. 414 00:25:29,359 --> 00:25:48,439 Speaker 1: And you know, historically there was a real argument about 415 00:25:48,440 --> 00:25:52,760 Speaker 1: whether the Fed's primary responsibility is to try to maintain 416 00:25:52,920 --> 00:25:57,679 Speaker 1: economic employment or whether the Fed's primary responsibility is to 417 00:25:57,800 --> 00:25:59,840 Speaker 1: try to maintain the value of the dollar. And it 418 00:26:00,200 --> 00:26:03,840 Speaker 1: seems to me that just because of political reality, the 419 00:26:03,960 --> 00:26:08,359 Speaker 1: bias always ends up being in favor of focusing on 420 00:26:08,480 --> 00:26:12,399 Speaker 1: employment at the cost of the stability of the dollar's value. 421 00:26:12,760 --> 00:26:15,280 Speaker 1: But does that strike you that that's the reasonably accurate 422 00:26:15,520 --> 00:26:18,760 Speaker 1: description it is. I would describe it slightly different than 423 00:26:18,800 --> 00:26:21,600 Speaker 1: that is my own view, and I actually remember Paul 424 00:26:21,640 --> 00:26:24,440 Speaker 1: Volker mentioned in the several times that maintain the value 425 00:26:24,440 --> 00:26:27,200 Speaker 1: of the dollar, maintaining the purchasing power of the dollar 426 00:26:27,280 --> 00:26:31,639 Speaker 1: and keeping inflation low, the long term consequences is better employment. 427 00:26:32,760 --> 00:26:37,520 Speaker 1: The short term consequences maybe a temporary slowdown and employment, 428 00:26:37,600 --> 00:26:41,880 Speaker 1: but the long term is better employment, better investment, therefore 429 00:26:41,920 --> 00:26:45,280 Speaker 1: better productivity, better real wages. But those are all come 430 00:26:45,320 --> 00:26:47,880 Speaker 1: in the long run, and people when you have a slowdown, 431 00:26:47,960 --> 00:26:50,720 Speaker 1: when it fixed immediately and put pressure on the FED 432 00:26:50,760 --> 00:26:54,520 Speaker 1: to lower those rates, you quantitative easy, take care of 433 00:26:54,560 --> 00:26:56,919 Speaker 1: the problem, and everything will be fine. And yet you 434 00:26:57,080 --> 00:27:00,480 Speaker 1: kind of build for the next moment because you're building 435 00:27:00,480 --> 00:27:03,320 Speaker 1: that equilibrium around that zero rate and keeping it there. 436 00:27:03,320 --> 00:27:08,240 Speaker 1: And the long term consequences were I wish the system 437 00:27:08,320 --> 00:27:11,560 Speaker 1: and I understand Congress, I mean, you get elected every 438 00:27:11,560 --> 00:27:13,520 Speaker 1: two years, you have to deal with that. But the 439 00:27:13,600 --> 00:27:16,760 Speaker 1: FED was supposed to be independent and therefore be able 440 00:27:16,800 --> 00:27:20,280 Speaker 1: to think long term. And as a Swiss central banker 441 00:27:20,320 --> 00:27:22,920 Speaker 1: once told me many years ago, that the central bank's 442 00:27:22,960 --> 00:27:24,600 Speaker 1: job was to take a look at the long runs, 443 00:27:24,600 --> 00:27:27,280 Speaker 1: although the short run can take care of itself, and 444 00:27:27,320 --> 00:27:30,159 Speaker 1: we shouldn't forget that it was long. Actually, when we 445 00:27:30,160 --> 00:27:32,960 Speaker 1: were going through this in eighty one, part of what 446 00:27:33,000 --> 00:27:35,520 Speaker 1: they had to do was break what had become a 447 00:27:35,560 --> 00:27:39,480 Speaker 1: fever of wage increases. And I'd been endorsed by the 448 00:27:39,520 --> 00:27:43,520 Speaker 1: professional our traffic controllers, and they had a contract coming up, 449 00:27:43,920 --> 00:27:47,600 Speaker 1: and they had designed a very very aggressive strategy around 450 00:27:47,680 --> 00:27:50,960 Speaker 1: the assumption that Jimmy Carter would get reelected. And it 451 00:27:51,040 --> 00:27:53,840 Speaker 1: was very clear once Reagan got elected. They had a 452 00:27:53,880 --> 00:27:56,960 Speaker 1: guy who had himself been a union president, he had 453 00:27:57,040 --> 00:27:59,520 Speaker 1: led a strike, he understood a great deal about what 454 00:27:59,520 --> 00:28:03,120 Speaker 1: he was doing, and they were just running into a collision. 455 00:28:03,119 --> 00:28:05,119 Speaker 1: And I met with their senior leaders and they said, guys, 456 00:28:05,440 --> 00:28:08,640 Speaker 1: you know, you really have to rethink this because this 457 00:28:08,760 --> 00:28:11,239 Speaker 1: is not Jimmy Carter. So I happen to go down 458 00:28:11,280 --> 00:28:13,600 Speaker 1: to the White House for some meeting and I was 459 00:28:13,640 --> 00:28:16,160 Speaker 1: talking with Drew Lewis, who was Secretary of Transportation at 460 00:28:16,160 --> 00:28:18,919 Speaker 1: the time, and I said, do we really have to 461 00:28:18,960 --> 00:28:24,520 Speaker 1: take on the only union that endorsed me? And he said, 462 00:28:24,600 --> 00:28:27,440 Speaker 1: let me pose a simple question to you. He said, 463 00:28:27,920 --> 00:28:33,000 Speaker 1: we have nineteen thousand air traffic controllers whose contractor is 464 00:28:33,080 --> 00:28:36,160 Speaker 1: coming up in June, and they've said if we don't 465 00:28:36,160 --> 00:28:39,200 Speaker 1: do what they want, they're going to strike. We have 466 00:28:39,600 --> 00:28:44,720 Speaker 1: six hundred and thirty five thousand postal employees and their 467 00:28:44,760 --> 00:28:48,760 Speaker 1: contract is coming up in August. Now we have to 468 00:28:48,880 --> 00:28:53,240 Speaker 1: stop the spiral of inflation at one of those two points, 469 00:28:53,520 --> 00:28:56,280 Speaker 1: which one do you want to recommend President Reagan that 470 00:28:56,440 --> 00:28:59,320 Speaker 1: we tackle. I went immediately back and called the guys 471 00:28:59,320 --> 00:29:03,520 Speaker 1: at Patcoys. This is a matter of long term national strategy. 472 00:29:03,760 --> 00:29:06,440 Speaker 1: They will never give in. And of course they were 473 00:29:06,440 --> 00:29:08,920 Speaker 1: so locked into the emotions of it they couldn't get 474 00:29:08,920 --> 00:29:11,000 Speaker 1: out of it. But I've never forgotten that they had 475 00:29:11,040 --> 00:29:14,440 Speaker 1: sat down with the Volcer, they had designed a clear strategy. 476 00:29:15,280 --> 00:29:18,920 Speaker 1: They were going to break the fever pay raise driven inflation, 477 00:29:19,400 --> 00:29:21,560 Speaker 1: and they were going to break the fever of a 478 00:29:21,640 --> 00:29:24,280 Speaker 1: fiscal policy in the Congress, and they were going to 479 00:29:24,360 --> 00:29:27,080 Speaker 1: move towards This is really where the supply side demand 480 00:29:27,160 --> 00:29:29,280 Speaker 1: side thing starts with. They were going to try to 481 00:29:29,440 --> 00:29:33,960 Speaker 1: increase supply to mop up the inflation, rather than shrinking 482 00:29:34,000 --> 00:29:37,840 Speaker 1: the inflation down to the level of current capabilities. And 483 00:29:37,920 --> 00:29:41,240 Speaker 1: I remember the second phase of that was about I guess. 484 00:29:41,280 --> 00:29:43,720 Speaker 1: Mid September of eighty two, I was deeply involved in 485 00:29:43,760 --> 00:29:46,040 Speaker 1: campaigns around the country. I knew we were just going 486 00:29:46,080 --> 00:29:48,520 Speaker 1: to get killed because people didn't care that this was 487 00:29:48,600 --> 00:29:52,160 Speaker 1: Jimmy Carter's inflation by eighty two to become Reagan's recession. 488 00:29:52,640 --> 00:29:55,440 Speaker 1: And I called the Secretary of the the Treasury at the time, 489 00:29:55,680 --> 00:29:59,280 Speaker 1: former head of Merrill Lynch, and said, you know, if 490 00:29:59,280 --> 00:30:01,080 Speaker 1: in fact it's some point you guys are going to 491 00:30:01,160 --> 00:30:04,080 Speaker 1: lower the interest rate, is there any way to do 492 00:30:04,120 --> 00:30:07,760 Speaker 1: it before the election? And he said, nowt We're not 493 00:30:07,800 --> 00:30:11,800 Speaker 1: even going to have that discussion. I said, all right, well, 494 00:30:11,840 --> 00:30:13,600 Speaker 1: we're going to take a bloodbath. But you know, we 495 00:30:13,680 --> 00:30:17,880 Speaker 1: lost twenty nine seats, very painful, but we did break 496 00:30:17,920 --> 00:30:21,720 Speaker 1: the back of the inflation, and by nineteen eighty four 497 00:30:21,720 --> 00:30:25,200 Speaker 1: Reagan could campaign on Morning in America and launched really 498 00:30:25,760 --> 00:30:28,400 Speaker 1: was about a thirty year cycle of investment in growth 499 00:30:28,400 --> 00:30:31,560 Speaker 1: and jobs and then the system once again the long 500 00:30:31,640 --> 00:30:34,880 Speaker 1: run matters. People talk about the dollar and it's a 501 00:30:34,880 --> 00:30:38,160 Speaker 1: fiat currency, and I keep saying, yes, so what makes 502 00:30:38,200 --> 00:30:41,000 Speaker 1: it valuable to the rest of the world. It's because 503 00:30:41,040 --> 00:30:45,240 Speaker 1: we have one of the strongest economies historically and even 504 00:30:45,280 --> 00:30:47,640 Speaker 1: now compared to the rest of the world. We are 505 00:30:47,920 --> 00:30:51,560 Speaker 1: an industrial might, we have a strong financial system, we 506 00:30:51,640 --> 00:30:54,200 Speaker 1: have a rule of law. Those are the things that 507 00:30:54,360 --> 00:30:56,600 Speaker 1: keep the dollar strong. But if you give that up, 508 00:30:57,160 --> 00:30:59,560 Speaker 1: if you weaken that for the short term, then the 509 00:30:59,640 --> 00:31:03,240 Speaker 1: long he will be someone else's. And you can't forget that. 510 00:31:03,360 --> 00:31:06,240 Speaker 1: And it's a very hard sell, though in the heat 511 00:31:06,280 --> 00:31:09,400 Speaker 1: of the moment. Listen, let me ask one last giant 512 00:31:09,480 --> 00:31:11,920 Speaker 1: question that we will not hold you too, although we 513 00:31:11,920 --> 00:31:14,600 Speaker 1: are putting you on tape. If you had to guess, 514 00:31:15,320 --> 00:31:19,000 Speaker 1: what do you think this cycle of breaking the inflation? 515 00:31:19,560 --> 00:31:21,640 Speaker 1: How far out do you think it goes before we 516 00:31:21,640 --> 00:31:24,440 Speaker 1: were able to actually break it? Well, it's a guestament 517 00:31:24,480 --> 00:31:26,520 Speaker 1: because I don't know what the Federal Reserve is going 518 00:31:26,560 --> 00:31:30,040 Speaker 1: to do for sure. And here's what gives me some pause. 519 00:31:30,520 --> 00:31:33,200 Speaker 1: They said they were going to do three rate increases 520 00:31:33,240 --> 00:31:36,360 Speaker 1: at least that was the chart. Three rate increases a 521 00:31:36,440 --> 00:31:39,720 Speaker 1: quarter point each at seventy five basis points. Right now, 522 00:31:39,880 --> 00:31:44,320 Speaker 1: real interest rates are quite negative, like four percent negative. 523 00:31:44,960 --> 00:31:47,239 Speaker 1: So if that's the pace, and I think we'll have 524 00:31:47,280 --> 00:31:52,760 Speaker 1: inflation well beyond twenty twenty three unless supplies just suddenly 525 00:31:52,800 --> 00:31:57,080 Speaker 1: begin to flow in and trade problems end, then I 526 00:31:57,120 --> 00:32:00,120 Speaker 1: think we're looking well past twenty twenty three. If they 527 00:32:00,160 --> 00:32:03,560 Speaker 1: were to not only accelerate the tapering, but actually the 528 00:32:03,680 --> 00:32:05,800 Speaker 1: interest rates, if they had to slow down, it would 529 00:32:05,840 --> 00:32:08,160 Speaker 1: be mild. They'd have to be careful that then you 530 00:32:08,200 --> 00:32:11,920 Speaker 1: could perhaps get inflation back into containing twenty three twenty four. 531 00:32:12,600 --> 00:32:15,480 Speaker 1: But it depends on what choices they make and the 532 00:32:15,520 --> 00:32:19,000 Speaker 1: amount of pressure that they feel as this inflationary period 533 00:32:19,080 --> 00:32:23,440 Speaker 1: continues on. So I'm thinking two years is the best 534 00:32:23,840 --> 00:32:28,320 Speaker 1: we can get, maybe longer opinion on what choices the 535 00:32:28,320 --> 00:32:31,280 Speaker 1: Federal Open Market Committee makes. I really want to thank you, 536 00:32:31,280 --> 00:32:36,560 Speaker 1: and I hope you have a good, if inflationary holiday. 537 00:32:36,640 --> 00:32:38,959 Speaker 1: And I really appreciate you're taking the time to educate 538 00:32:39,400 --> 00:32:42,920 Speaker 1: me and our listeners on a topic that's going to 539 00:32:43,000 --> 00:32:44,920 Speaker 1: be a major topic for the next few years. And 540 00:32:45,080 --> 00:32:48,120 Speaker 1: I think this is a really helpful conversation. I want 541 00:32:48,160 --> 00:32:50,320 Speaker 1: to thank you well. You're very welcome. I hope it 542 00:32:50,400 --> 00:32:52,840 Speaker 1: was helpful at least, because, like you say, it affects 543 00:32:52,920 --> 00:33:00,000 Speaker 1: every person's life going forward. Thank you to my guests, 544 00:33:00,040 --> 00:33:03,280 Speaker 1: Thomas Hunting. You can read more about the FED meetings, 545 00:33:03,320 --> 00:33:07,200 Speaker 1: inflation and supply chain issues on our show page. At 546 00:33:07,280 --> 00:33:11,120 Speaker 1: Newtsworld dot com. Newts World is produced by Gingwish three 547 00:33:11,240 --> 00:33:16,160 Speaker 1: sixty and iHeartMedia. Our executive producer is Debbie Myers, our 548 00:33:16,200 --> 00:33:20,680 Speaker 1: producer is Garnsey Sloan, and our researcher is Rachel Peterson. 549 00:33:21,240 --> 00:33:24,600 Speaker 1: The artwork for the show was created by Steve Penley. 550 00:33:25,120 --> 00:33:28,320 Speaker 1: Special thanks to the team at Gingwich three sixty. If 551 00:33:28,360 --> 00:33:31,160 Speaker 1: you've been enjoying Newtsworld, I hope you'll go to Apple 552 00:33:31,240 --> 00:33:34,560 Speaker 1: Podcasts and both rate us with five stars and give 553 00:33:34,640 --> 00:33:37,560 Speaker 1: us a review so others can learn what it's all about. 554 00:33:38,240 --> 00:33:40,760 Speaker 1: Right now, listeners of newts World can sign up for 555 00:33:40,840 --> 00:33:45,200 Speaker 1: my three free weekly columns at Gingwich three sixty dot 556 00:33:45,200 --> 00:33:50,160 Speaker 1: com slash newsletter. I'm newt Gingrich. This is Newtsworld.