Speaker 1: This is Bloomberg Wall Street Week. What's the state of
Speaker 1: corporate governance? The deficit is a real issue. The US
Speaker 1: economy continues to send mixed signals to the financial stories
Speaker 1: that keep our world. Fed action to con concerns over
Speaker 1: dollar liquidity and encouraging China data the five hundred wealthiest
Speaker 1: people in the world. Through the eyes of the most
Speaker 1: influential voices Larry Summers, the former Treasury Secretary, Star CEO,
Speaker 1: Kevin Johnson sec Chairman j Clayton. Bloomberg wool Street Week
Speaker 1: with David Weston from Bloomberg Radio. Full speed ahead, one
Speaker 1: point nine trillion dollars, one hundred million vaccinations and strong
Speaker 1: new projections for growth. But is there a speed limit
Speaker 1: to how fast Weekend drive this economy? This is Bloomberg
Speaker 1: Wall Street Week. This week devoted to the eye word
Speaker 1: that is inflation. I'm David Weston, So where does this
Speaker 1: all lead to? Yields continue to climb, At what point
Speaker 1: does the FED need to step in? And if it does,
Speaker 1: where does that leave the dollar? When it comes to
Speaker 1: understanding the intricate mechanism that is our financial system, there
Speaker 1: is no one, no one like Ray Dalio, founder of
Speaker 1: Bridgewater Associates. Ray is clear that he's not saying what
Speaker 1: the US should do. Indeed, he has written a book
Speaker 1: on how capitalism needs to be reformed. But Ray has
Speaker 1: a clear and certain view about the consequences of fiscal
Speaker 1: and monetary policy, whatever those policies may be. So we
Speaker 1: turned to him this week to get a sense of
Speaker 1: where we may be headed. Think of the economy as
Speaker 1: being um, like an individual um and their pulses dropping.
Speaker 1: When the pulse is dropping, the doctors come running in
Speaker 1: with the stimulant, and they inject stimulant. Now that the
Speaker 1: economy is rebounding, he's um, and inflation pressures are rebounding UM,
Speaker 1: there's not the same pressure to administer that stimulation. When
Speaker 1: it happens, when it becomes a problem is first the
Speaker 1: rising interest rates start hurting financial asset prices. First, typically
Speaker 1: they hurt bonds, then they pass through and hurt stocks
Speaker 1: because still interest rates affects stocks. And when that starts
Speaker 1: to affect stocks, that's one thing. Maybe the stock market
Speaker 1: can correct, Tenner and the federal reserve can tolerated. When
Speaker 1: it goes beyond that and starts to affect the economy,
Speaker 1: that's when you see the real tradeoff have to search
Speaker 1: uh surface. So that's what that looks like. Okay, so
Speaker 1: let's play a little dickens here and ask about the
Speaker 1: ghost of Christmas future. At the very end, they say,
Speaker 1: is this what has to be? Or can I still
Speaker 1: change it somewhat? Can we change it somewhat? And could
Speaker 1: J Pale specifically change and change it, or for that matter,
Speaker 1: the administrative government. Our basic situation is that we're spending
Speaker 1: a lot more money than we're earning, and so are
Speaker 1: that that gap exists, and a balance sheet means that
Speaker 1: we owe a lot more money, and that owing that
Speaker 1: money is somebody's financial assets, that bonds that they might sell.
Speaker 1: So you can't It's not an easy thing to change
Speaker 1: because what do you do? Spend less money? And if
Speaker 1: you spend less money, you give less checks out, or
Speaker 1: you can't get people to easily earn more money and
Speaker 1: change that. So it's a difficult dilemma. And it's a
Speaker 1: particularly difficult dilemma that I think that you're going to see.
Speaker 1: Particularly the part is late this year and beyond that,
Speaker 1: because late this year you're probably gonna see, um everything
Speaker 1: be a problem. Um you're gonna probably see higher interest
Speaker 1: rates because growth will be stronger, inflation will be stronger,
Speaker 1: and that you'll see probably there won't be enough demand
Speaker 1: on it. So the thing to watch out for is
Speaker 1: a signal if this happens, is that you see the
Speaker 1: need to buy bonds when the economy is strong and
Speaker 1: when inflation. If you take um, there's this year, and
Speaker 1: then there's beyond this year, there's um, and there's the
Speaker 1: next few years. Um. It's a problem because how we're
Speaker 1: going to spend money as a political issue a big
Speaker 1: political issue, and we're gonna have to spend There's gonna
Speaker 1: be too much spending, and so that will affect the
Speaker 1: value of the dollar and or interest rates. Ray. As
Speaker 1: we speak, the Federal Reserve is buying something like billion
Speaker 1: dollars both in treasuries and mortgage bonds right now. How
Speaker 1: can you justify that When they came out and said
Speaker 1: we're gonna have six and a half GDP growth this year, well, um,
Speaker 1: there their position would be, um, that we are having
Speaker 1: a rebound from a depressed level and that we need
Speaker 1: to have that rebound. And that also averages don't tell
Speaker 1: convey the condition of all people, and so the issues
Speaker 1: the stimulation is many times five to seven times the
Speaker 1: amount of income lost through COVID, So that there's a distribution. Now,
Speaker 1: if you were to say, what's that distribution for, which
Speaker 1: is more of a political question, It is for um
Speaker 1: UH child enablement, it is for schools, it is for hospitals,
Speaker 1: it iss for UH for that so UM, the Federal
Speaker 1: Reserve would say, we're just going above their inflation targets,
Speaker 1: not by much. If you look at indicators like the
Speaker 1: break even inflation rate, it's about two and a half percent,
Speaker 1: and they would say not yet. But the important thing
Speaker 1: to convey here on inflation is that there are two
Speaker 1: types of inflation. Okay, I just want to make this clear.
Speaker 1: We're used to one type of inflation, which is when
Speaker 1: the economy is too hot, um, there's a capacity constraint,
Speaker 1: and when demand presses up against existing capacity, prices rise,
Speaker 1: unemployment rates a loow, and so forth. There is a
Speaker 1: thing called a monetary inflation. That's when you can have
Speaker 1: stag inflation. And that monetary inflation means that even when
Speaker 1: the economy weakens, inflation rates rise because there's too much inflation,
Speaker 1: and there's the move out of that thanks to rate
Speaker 1: vario Co chairman and co c i O of Bridgewater Associates.
Speaker 1: Coming up what one point nine trillion dollars and vaccinations
Speaker 1: mean for the real economy. We hear from Brian moynihan,
Speaker 1: chairman and CEO of Bank of America about what all
Speaker 1: this growth means for his customers and the prospect of inflation.
Speaker 1: That's next on Wall Street Read on Bloomberg. This is
Speaker 1: Bloomberg Wall Street Weeks Inflation special. We've David weinsted from
Speaker 1: Bloomberg Radio. Everybody pretty much agrees that the vaccine is
Speaker 1: going into people's arms, and the one point nine trillion
Speaker 1: dollars going into the economy are going to trigger remarkable
Speaker 1: growth this year. The question is how much and how
Speaker 1: we can handle that much growth without triggering inflation, which
Speaker 1: is what we asked Bank of America Chairman and CEO
Speaker 1: Ryan Wynihan. Our team has the US growth predicted Canadas
Speaker 1: Browning plat and the number one research platform for many
Speaker 1: of the last decade, In years since I've been CEO,
Speaker 1: they do a terrific job. They have the US growing
Speaker 1: at six and a half percent for one and around five,
Speaker 1: five and a half or twenty two. Now you have
Speaker 1: to step back and think about that. That's an economy
Speaker 1: basically the same size that was coming into the middle
Speaker 1: to the end of eighteen, which was pretty good times
Speaker 1: in the US predicted to go three times a rate
Speaker 1: with an interest rate environment that is probably half or
Speaker 1: lower than it was. And I there's all the angst
Speaker 1: about the ten year moving to one sixty, but at
Speaker 1: that point it was two and a half moving towards three.
Speaker 1: I think in a FED funds rate was much higher
Speaker 1: than is now. So think about the amount of accommodation,
Speaker 1: and then you add to one point nine trillion dollars
Speaker 1: stimulus on top of it, plus the stimulus is still
Speaker 1: on spent. So when you put that all together and
Speaker 1: then the stimulus frankly from people going back to work
Speaker 1: as economy opens, you know, the team is a six
Speaker 1: and a half percent and a huge economy. You know
Speaker 1: in the US growing faster in the world economies predicted
Speaker 1: they've got five for the world. If you think about that,
Speaker 1: that is a pretty powerful engine that has already recovered
Speaker 1: about seven percent of where it was and now is
Speaker 1: growing at three times or eight. That's a pretty powerful prediction.
Speaker 1: And our team is quite convinced it's all there well,
Speaker 1: and that raises the question a lot of people are asking,
Speaker 1: is is it possible we may be overheating the economy
Speaker 1: because we also have been increasing the money supply. I
Speaker 1: think it's up year over year the m two it's
Speaker 1: been held down the inflation because there hasn't been much
Speaker 1: reloscity because people are at home. What happens when they
Speaker 1: come out of home. In fact, some of those deposits
Speaker 1: you talked about that didn't spend all those stimulus texts,
Speaker 1: they haven't sitting there in their bank account. Are you
Speaker 1: worried we could get inflation That would be troubling. Well,
Speaker 1: that's part of the discussion to see in the market.
Speaker 1: But let me just tell you what we're seeing our customer,
Speaker 1: very Stavid. It will help you think about that. If
Speaker 1: you think about last year up till March ninth or tenth,
Speaker 1: that was before any activities had taken the shutdown and
Speaker 1: we're all hearing about this virus and learning about it.
Speaker 1: It was really the March fifteenth and out where people
Speaker 1: started taking at the government level and in the employee
Speaker 1: level of significant actions. If you look at that period
Speaker 1: of time twenty two thousand, twenty over nineteen grew you know,
Speaker 1: double digit, say ten percent. When you look at it one,
Speaker 1: we're now growing at six percent. And if you look
Speaker 1: at it for the month of March, for the first
Speaker 1: part of March here, it's actually growing above that's pretty unbelievable.
Speaker 1: And what you're frankly seeing now is the chart the
Speaker 1: credit card charges, which had been depressed because there's a
Speaker 1: lot of travel entertainment, are back and actually growing year
Speaker 1: every year, growing year every year of time pre pandemic shutdown.
Speaker 1: And so you're gonna see massive your your comparisons as
Speaker 1: you moved into April when everything was shut down. So
Speaker 1: the raity is the consumers at Bank of America, which
Speaker 1: is you know, fifty million people spending three trillion dollars
Speaker 1: plus a year, and all these different forms are spending
Speaker 1: more money than they did last year in growing at
Speaker 1: ten percent, and that was before the pandemic. That bodes well.
Speaker 1: And then if you look at the charges, you can
Speaker 1: see like on a credit card, the seniors and boomers
Speaker 1: are getting vaccinated. We're up fifty in charges over the
Speaker 1: last few weeks. In terms of travel and related things.
Speaker 1: You're seeing the TSA statistics, so the types of things
Speaker 1: are happy now. By the way, grocery stores are down
Speaker 1: a little bit. Why because people shifted more to restaurants
Speaker 1: and that's all bodes well for normalization economy. So we
Speaker 1: see that very good. Does that overheat the economy? I
Speaker 1: think you've heard it from Chair Pow. In many cases
Speaker 1: they're willing to take the risk to get the you know,
Speaker 1: the average inflation rate above two percent. There are people
Speaker 1: concerned in the market. We all have that concern because inflation.
Speaker 1: Inflation is tough to fight if it gets embedded in there.
Speaker 1: But our economists or have raised or projections from four
Speaker 1: percent to six percent really ninety days, and I think
Speaker 1: likewise other people will do so. And Brian, that's part
Speaker 1: of what I want to ask. You refer to the
Speaker 1: tenure yield of being over one point six now and historically,
Speaker 1: as you point out, that's not that high. Goodness knows,
Speaker 1: but it went up very fast, and some people think
Speaker 1: it's on its way to go higher than that. Are
Speaker 1: you concerned about the rapidity with which it's going up?
Speaker 1: And by the way, where do you think it ends up?
Speaker 1: You know, our team basically thinks that it's gonna potentially
Speaker 1: go through two percent um, and we'll see, we'll see it,
Speaker 1: but it's it's the reason that's going up is because
Speaker 1: people are seeing the economy recovery. In the end of
Speaker 1: the day, this is the healthcare crisis, and we had
Speaker 1: to win the war on the healthcare crisis. It's the
Speaker 1: first way I thought about it, and I thought about
Speaker 1: it ever since. If we have to win the war
Speaker 1: against the fires, and they have done that, and they
Speaker 1: haven't completed it yet, but we have the pieces in place.
Speaker 1: The vaccines are game changer and being deployed a hundred
Speaker 1: million shots and arms, which is unbelievable, thirty million sitting
Speaker 1: on shelves that need to be deployed, and then many
Speaker 1: coming after it. So I think there's concern about that.
Speaker 1: I think it will play out a little bit, David,
Speaker 1: and I think we have to watch it. But it
Speaker 1: went up, but it's still back to where it was,
Speaker 1: you know, only a few months before when it fell
Speaker 1: down into the sixty eight range, And so I think
Speaker 1: people have to be careful about these movements are just
Speaker 1: to get it back in line where it was, even
Speaker 1: at a very low level. If you don't look in
Speaker 1: the last decade and then go back from two thousand
Speaker 1: and seven backwards and try to count the number of
Speaker 1: days a tenure trade of below three percent, you won't
Speaker 1: find a lot. And so as economy normalizes and growth
Speaker 1: rate comes up and we get above two percent, I think,
Speaker 1: you know, you'll see a little higher rate, but it's
Speaker 1: still be in a great grand scheme of things, one
Speaker 1: of the lowest rates we've seen in a long long time.
Speaker 1: What does it mean for Bank of America's business specifically?
Speaker 1: You and I have talked in the past. You are
Speaker 1: a traditional bank, You take deposits. The shape of yield
Speaker 1: curve matters to you. It was flat for a long time,
Speaker 1: even inverted for a minute or two, and now it
Speaker 1: is really steepening quite a bit. What does that mean,
Speaker 1: for example, for net insterest margin? Your chief financial officer
Speaker 1: said he's pretty confident about that. Is it looking good
Speaker 1: for Bank of America. Yeah. We we saw the trough
Speaker 1: in the third quarter of twenty and we still see
Speaker 1: that as a trought, and we see it coming back,
Speaker 1: and by the end of the year it's back to
Speaker 1: where sort it was pre pandemic, but it's much different.
Speaker 1: It's driven more by the sheer volume of deposits. Our
Speaker 1: team has done a great job and driving our deposit
Speaker 1: franchise across the rover trillion eight and deposits. So the
Speaker 1: loans are still down and what we're finally seeing as
Speaker 1: the loans are stabilizing. This is one of the good
Speaker 1: pieces of news. We expected a month of March we
Speaker 1: will cross over to where we're producing more small business
Speaker 1: credit in that month than we did before the pandemic
Speaker 1: and that that's been a long haul. So that's you know,
Speaker 1: thirteen twelve, thirteen months, and so we're seeing some loan
Speaker 1: demand coming in. With capital markets demand has been outstanding
Speaker 1: and huge as you've seen, but in terms of core
Speaker 1: middle market borrowers, they they're starting to it's flattened out
Speaker 1: and that's good. So R and I is affected buyer deposits,
Speaker 1: which are growing very strongly. Again, we'll grow because of
Speaker 1: all the stimulus coming in, but importantly is to get
Speaker 1: loan growth, and we're starting to see that stabilize and
Speaker 1: that looks good for us going forward. The shape the
Speaker 1: O curve, you know, with short rates come up, that
Speaker 1: actually helps us a lot because we have a huge
Speaker 1: amount of non intersparing deposits that don't reprice but but
Speaker 1: that's life of being a great bank and being the
Speaker 1: ability to top deposit gathering bank in the United States
Speaker 1: thanks to Brian moynihan, Chairman and CEO of Back of America.
Speaker 1: Coming up the great Krugman Summers debate over the risk
Speaker 1: of inflation, we hear the doubbish side from Nobel Laureate
Speaker 1: Paul Krugmann. That's next on Wall Street Week on Bloomberg
Speaker 1: z is Bloomberg Wall Street Weeks Inflation Special with David
Speaker 1: Weston from Bloomberg Radio. The question of what the one
Speaker 1: point nine trillion dollar fiscal injection will meet for VIEUS
Speaker 1: economy has generated something of a debate between two of
Speaker 1: our most respected economists, former Treasury Secretary Larry Summers of
Speaker 1: Harvard and Nobel Laureate Paul Krugman. Each recognizes that the
Speaker 1: other has a point, but they have a decided difference
Speaker 1: in emphasis, with Larry concerned were underestimating the risk of
Speaker 1: inflation and Paul saying it's not as big a risk
Speaker 1: as Larry suggests. So we went to the sources themselves,
Speaker 1: and first, as Paul whether in part the problem is
Speaker 1: that we are very much an uncharted territory Okay, this
Speaker 1: is a it's it's a lot of money. I mean
Speaker 1: even um, you know, uh, even for an economy the
Speaker 1: sives the US at one point n actually in here,
Speaker 1: at one point actually in there, and soon you're talking
Speaker 1: about real money, and it's a. UM. If it was
Speaker 1: designed as a fiscal stimulus, it would be a very
Speaker 1: very big fiscal stimulus. Now it's actually not really designed
Speaker 1: that way. Large parts of it are probably not going
Speaker 1: to have a very big, certainly short term multiplier effect
Speaker 1: on the economy. So it is going to boost the economy.
Speaker 1: It's uh, we're going to you know, the consensus forecasts
Speaker 1: are for five and a half six percent growth over
Speaker 1: the course of this year. Some estimates are running higher
Speaker 1: than that. Um. Most of those estimates suggest that we're
Speaker 1: going to be pretty much at full employment by early
Speaker 1: next year, which is uh, which is a good thing.
Speaker 1: Does mean that it's not silly to think that there
Speaker 1: might be some inflationary pressure. But it does not look
Speaker 1: at least as I read it, and I said, I
Speaker 1: think as the consensus of the Wall Street economists read
Speaker 1: it like it's a major inflationary threat. Well, and shared
Speaker 1: pou has said, yes, there will be some uptickings and prices,
Speaker 1: but it will be as he says, transitory. Yeah, how
Speaker 1: will you, as an economist look at the data decide
Speaker 1: whether it's transitory or more than transitory. Well, first of all,
Speaker 1: we're gonna look at things. One of the concepts that
Speaker 1: has really really worked over the past fifteen years is
Speaker 1: core inflation. Uh. It's it's not the only thing to
Speaker 1: look at, but taking out food and energy and maybe
Speaker 1: some other things. Look at look at stuff that's obviously
Speaker 1: just supply bottlenecks. Um, the you know, wood prices are
Speaker 1: way up. That's not a sustained inflationary issue. That's because
Speaker 1: we've had a surge in demand. And uh, and we'll
Speaker 1: deal with It's we want to look at underlying measures
Speaker 1: of inflation. You want to look at wages. Um. You
Speaker 1: want to just generally say, is this is this looking
Speaker 1: like the build up to the seventies? And um, you know,
Speaker 1: my guess is it's very unlikely to look like that.
Speaker 1: It's our kind of worst case scenario. The closest I
Speaker 1: can come to this and is something like the Korean War,
Speaker 1: which actually did lead to a one year spiking inflation,
Speaker 1: but then inflation quickly subsided back to uh to an
Speaker 1: underlying reative around two percent, and that's that's the worst case.
Speaker 1: I don't think this is going to be nearly as
Speaker 1: inflationary as that the similars to the economy will come
Speaker 1: not just from one but also it looks like from
Speaker 1: the vaccines really kicking in a big way. I mean,
Speaker 1: we've had I think a suppression of demand, not just supply,
Speaker 1: because people have been getting checks and haven't been able
Speaker 1: to spend it the way they would have otherwise because
Speaker 1: they're locked up at home, the restaurants aren't open, they
Speaker 1: can't go on flights. Does that give you some pause
Speaker 1: here that we could have a rapid uptake but real
Speaker 1: demand a lot of dollars searching the same number of
Speaker 1: services and goods really quickly. Yeah. So though the it's
Speaker 1: two sided. I mean, the pandemic has prevented people from
Speaker 1: spending in the way they uh, they would have normally,
Speaker 1: but it's also preventing some goods and services from being
Speaker 1: supplied in the way they would have. So on the
Speaker 1: one hand, uh, yeah, people will start eating in restaurants again.
Speaker 1: On the other hand, restaurants will be able to start
Speaker 1: serving meals again. So there's a there's both the demand
Speaker 1: and the supply effect from the vaccines and on. On
Speaker 1: balance is probably somewhat inflationary because some of that increased
Speaker 1: spending will spill over to other stuff. But it's not
Speaker 1: nearly as much as just looking at the growth numbers
Speaker 1: is is not getting the whole story. We we are
Speaker 1: right now have an economy that that is depressed in
Speaker 1: part because of supply constraints that will go away as
Speaker 1: the as facts ation spreads. So you've been in a
Speaker 1: fairly famous now debate with Larry Summers over the risk
Speaker 1: of inflation. And in the fairness to Larry, he's not
Speaker 1: saying it's a certain thing, it's just something he thinks
Speaker 1: it's a serious problem. We have. One of the issues,
Speaker 1: as I understand it, is how you look at it,
Speaker 1: what the model is you apply. As you said, this
Speaker 1: is not a typical situation of a downturn. This is special.
Speaker 1: It's more like a natural disaster or even a war.
Speaker 1: I guess my question really is do we have a
Speaker 1: model that covers this? Do we know what the likely
Speaker 1: effect on inflation would be? Given that it is Sue generous, Well, no,
Speaker 1: this is it's very hard to come up with a
Speaker 1: historical parallel. Actually, one of the funny things I just
Speaker 1: want to say about the debate between me and Larry
Speaker 1: is that we conceptually have very similar views of the economy.
Speaker 1: We're just making some different judgments about the numbers. Uh
Speaker 1: it really, I don't. I don't think you can take
Speaker 1: a look at at the way he's talking about it
Speaker 1: in the way I'm talking about and say that there's
Speaker 1: a fundamental difference in economic philosophy. There is really a
Speaker 1: judgment about the numbers and think that if I was
Speaker 1: going to make my case, I would say I would
Speaker 1: say I would look at the form of this one
Speaker 1: point nine trillion dollars and say that a lot of
Speaker 1: it is, in fact, although useful in important ways, is
Speaker 1: not going to be uh, pushing up demand all that
Speaker 1: much in the short run. That was Paul Krugman, author
Speaker 1: of Arguing with Zombies. Coming up, we'll hear the other
Speaker 1: side of the debate from our special contributor Larry Summers
Speaker 1: of Harvard. That's next on Wall Street Week on Bloomberg.
Speaker 1: This is Bloomberg Well Street Weeks Inflation Special with David
Speaker 1: Weston from Bloomberg Radio. I don't think the right question
Speaker 1: is whether this package would overheat the economy. I think
Speaker 1: if we were passed as written, it would overheat the economy.
Speaker 1: But will this shift the debate towards our doing more?
Speaker 1: Will this shift the debate UH to words doing more
Speaker 1: for those who have been left behind? And I think
Speaker 1: they're on the answers yes, But we are going to
Speaker 1: have to watch this economy very carefully. And I do
Speaker 1: think the conventional wisdom is underestimating the risks of hitting capacity.
Speaker 1: That was special contributor to Larry Summers here on Wall
Speaker 1: Street week back in January. Now two months later, the
Speaker 1: question is what has changed and whether the risk of
Speaker 1: inflation is less or more than what Larry saw back then. David,
Speaker 1: I'm I'm much more concerned. UH markets have had their
Speaker 1: biggest increase in the ten year in a century, with
Speaker 1: only one UH exception showing that they've got a real concern.
Speaker 1: The fiscal policy outlook has dimmed from where it was
Speaker 1: as the full stimulus that was contemplated then has passed.
Speaker 1: People have declared that it's a new era in ways
Speaker 1: that suggests that large fiscal policy will continue for a
Speaker 1: long time UH to come. The COVID recovery has accelerated,
Speaker 1: which is a very good thing but means more demand pressure.
Speaker 1: And the FED has stuck to its guns on no
Speaker 1: rate hikes for for years and years and continuing to
Speaker 1: grow its balance sheet. So it seems to me that
Speaker 1: what was kindling is now igniting, and I am much
Speaker 1: more worried that we will have either inflation or we
Speaker 1: will have a pretty dramatic fiscal monetary collision. Are we
Speaker 1: mishandling macroock and policy right now in the United States?
Speaker 1: I think this is the least responsible macro economic policies
Speaker 1: we've had in the last forty years. I think fundamentally
Speaker 1: it's driven by in try insigence on the Democratic left
Speaker 1: and in transigence and completely unreasonable behavior in the whole
Speaker 1: of the Republican Party. It's driven us to the kind
Speaker 1: of political deals, uh that we're seeing, and their understandable,
Speaker 1: and I understand why reasonable people, given the tragic choices
Speaker 1: they have, might make these kinds of macro economic choices.
Speaker 1: But I think we are running enormous risks. I would
Speaker 1: put the risks this way, David. I think there's about
Speaker 1: one third chance that inflation will significantly accelerate over the
Speaker 1: next several years and will be in a stagflationary situation
Speaker 1: like the one that materialized between nineteen sixty six and
Speaker 1: nineteen sixty nine, where inflation went from the range of
Speaker 1: ones to the range of UH sixes. I think there's
Speaker 1: a one third chance that we won't see inflation, but
Speaker 1: that the reason we won't see it is that the
Speaker 1: Fed hits the brakes, hard markets get very unstable, the
Speaker 1: economy skids downwards close to recession. I think there's about
Speaker 1: a one third chance that the Fed and the Treasury
Speaker 1: will get what they're hoping for and will get rapid growth,
Speaker 1: which will moderate in a non inflationary way. But there
Speaker 1: are more risks in this moment that macro economic policy
Speaker 1: itself will cause grave consequences. Then. I can remember there
Speaker 1: have been terribly serious moments in the past, but then
Speaker 1: macro economic policy was trying to stabilize things. Now there's
Speaker 1: the real risk that macro economic policy will be very
Speaker 1: much destabilizing things. You and Paul Krugman have had an
Speaker 1: extended debate, a constructive debate. I would say you agree
Speaker 1: on a fair amount of things, although you disagree on
Speaker 1: the edges. One of the things that Paul Krugman says,
Speaker 1: is we don't have to worry about this inflation risk
Speaker 1: quite so much because it takes a long time. If
Speaker 1: you go back to the seventies, it took ten years
Speaker 1: to really have it developed, and therefore there's plenty of
Speaker 1: time for the FED to react. What's your response, He's
Speaker 1: just wrong. Look at the nineteen sixty six to nineteen
Speaker 1: sixty nine period before there were any supply shocks, when
Speaker 1: William Machesney Martin was exuding much more concern about inflation
Speaker 1: than J. Powell is today, when the Guns and Butter
Speaker 1: of Lyndon Johnson was a very small fiscal expansion compared
Speaker 1: to what we're seeing today, and when inflation went up
Speaker 1: about four percentage points in uh A three three plus
Speaker 1: year period. It's just wrong to say that, and this idea.
Speaker 1: I don't understand how people say that expectations are anchored,
Speaker 1: and they also say that we're an entirely new era
Speaker 1: of policy where the neoliberal era is over and a
Speaker 1: new progressive tide is behind us. If we're in an
Speaker 1: entirely new era of policy, that I'd expect people to
Speaker 1: reorient their expectations. So I don't really understand, Uh, the
Speaker 1: logic of those who are serene right now. And to remind,
Speaker 1: markets have had as dramatic a first quarter as any
Speaker 1: time in the last century, except for night which was
Speaker 1: of course presaged um all the chaos of the end
Speaker 1: of the Carter years and then the terrible recession. So
Speaker 1: I don't know how sanguine Chair J. Pale is, but
Speaker 1: he has been saying. We heard from him yet again
Speaker 1: this week. We don't have to worry about this risk
Speaker 1: of inflation so much because there is slack in the
Speaker 1: labor market. There is something like nine million people who
Speaker 1: don't have a job today who did have one before
Speaker 1: the pandemic. Does that give us a cushion against some
Speaker 1: of the downside here? I don't. I don't think so,
Speaker 1: and I don't understand why he finds that argument persuasive. Uh.
Speaker 1: The nine ten eleven, whatever it is million people that
Speaker 1: he estimates represents about six of the workforce. They have
Speaker 1: lower wages than others, so they contribute less in just
Speaker 1: productivity terms, So it corresponds to a gap of about
Speaker 1: four percent in uh G d P. According to the
Speaker 1: Fed Zone forecast, that gap will be closed by the
Speaker 1: end of this year. And we're gonna still have zero
Speaker 1: interest rates, We're still gonna have big budget deficits, We're
Speaker 1: gonna have all the savings that he thinks in Paul
Speaker 1: Krugman thing are going to be generated by this stimulus
Speaker 1: that's gonna get spent at some point, likely two and
Speaker 1: likely uh to overheat the economy. So look, nobody can
Speaker 1: predict these things with great confidence. But I'm very concerned
Speaker 1: that the inflation risks are high. And frankly, I'm concerned
Speaker 1: that there are gonna be hundreds of PhD economists at
Speaker 1: the BED who are going to be devoting their efforts
Speaker 1: to explaining how any bad statistics are transient or distorted
Speaker 1: in uh the statistics. And so I'm very worried, given
Speaker 1: this new approach, that we're gonna be very slow in
Speaker 1: any necessary responses to inflation. Um, if it comes. How
Speaker 1: will the consequence of inflation express themselves to ordinary Americans.
Speaker 1: I'm old enough to remember the eighties, and I remember
Speaker 1: the real concerned, funny concerned. I remember mortgage rates at
Speaker 1: eighteen and a half percent. I remember retiring is being
Speaker 1: really concerned about living on a fixed income. How will
Speaker 1: express itself this time? David look, we're not going to
Speaker 1: have eighteen percent mortgage rates. We're not going to go
Speaker 1: all the way back to the nineties seventies. I think
Speaker 1: it's important to be concerned, but it's also important to
Speaker 1: keep concerns in perspective. That's said, here's one aspect that
Speaker 1: I'm struck by in the discussions of the statistics. The
Speaker 1: rental um, the owner occupied housing part of the index
Speaker 1: is something that's holding it way down and holding measured
Speaker 1: inflation down. And yet across America, house prices are going
Speaker 1: up faster than they have in a long time. And
Speaker 1: given what's happened to treasury yields, mortgage yields are on
Speaker 1: their way up, and refinancing opportunities are on their way
Speaker 1: uh down. So I think for families thinking about the
Speaker 1: cost of owning a home in all the ways they
Speaker 1: would think about it, it's gonna be going up pretty
Speaker 1: fast over the next year. And so if somehow policymakers
Speaker 1: are taking consolation from some index that's showing some construction
Speaker 1: of owner housing is holding down inflation, I don't think
Speaker 1: that's gonna be a very comfortable thing. Thanks to a a
Speaker 1: special contributor, Larry Summers of Harvard. Finally, one more thought,
Speaker 1: and the winner is Hungary. There's an awful lot of
Speaker 1: talk these days about inflation, about whether it's coming, about
Speaker 1: whether it will last, about whether we'll get out of control.
Speaker 1: For those of us old enough to remember the nineteen eighties,
Speaker 1: it's not surprising that we get nervous about our money
Speaker 1: growing less and less valuable. After all, some of us
Speaker 1: actually had mortgages at over eight interest, and the burden
Speaker 1: inflation places on savers and those unfixed incomes, and there
Speaker 1: are more and more of us is very real. But
Speaker 1: when it comes to serious inflation hyper inflation, the United
Speaker 1: States has never been in the same league as some others.
Speaker 1: Think about the French Revolution when inflation reached one and
Speaker 1: forty three percent and that is a month, not a year,
Speaker 1: or the Weimar Republic when it got up to twenty
Speaker 1: thousand five a month, And note that just about every
Speaker 1: instance of hyper inflation came tied to a war or
Speaker 1: other armed conflict. But the top prize goes to Hungary when,
Speaker 1: in the aftermath at World War Two, the Pengo fell
Speaker 1: by thirteen point six quadrillion percent every month. Not surprisingly,
Speaker 1: Hungry decided to ditch that currency altogether and moved to
Speaker 1: the floor end. So even as we and the Fed
Speaker 1: keep an eagle eye on those inflation expectations and the
Speaker 1: break evens, we can take some comfort and just how
Speaker 1: stable our currency really has been, at least so far.
Speaker 1: That does it for this episode of Wall Street Week.
Speaker 1: I'm David Weston. This is Bloomberg. See you next week,
Speaker 1: m hm.