Speaker 1: Hello, and welcome to another episode of the Odd Lots podcast.
Speaker 1: I'm Joe Wisenthal and I'm Tracy Halloway. So, Tracy, uh,
Speaker 1: I think we recorded an episode on the recent CPI day,
Speaker 1: But regardless of when it was, I think there is
Speaker 1: this view now that although I don't know like whether
Speaker 1: it's like team persistent or team transitory, or whether teams
Speaker 1: are the right way to be thinking about this, that
Speaker 1: the sort of elevated inflation that we've seen for various
Speaker 1: reasons logistics, commodities, etcetera, it doesn't seem to be going
Speaker 1: away anytime soon. Yeah. We actually spoke about this on
Speaker 1: an All Bots episode. It was with one of the
Speaker 1: FED governors. I think it might have been Caplan, but
Speaker 1: um we asked whether or not transitory was like a
Speaker 1: good way to describe it, or whether they regretted choosing
Speaker 1: that word, and I think, like, you know, fast forward
Speaker 1: a few weeks, it's very very clear that the FED
Speaker 1: probably um regrets using the term transitory and probably would
Speaker 1: have benefited from using something like um, you know, I
Speaker 1: guess broad based inflation versus narrow inflation something like that. Yeah,
Speaker 1: or just maybe like pandemic related inflation, like something super pedestrian,
Speaker 1: because I do think like we were in this situation
Speaker 1: where people have taken transitory to mean like, oh, it's
Speaker 1: gonna be like this very brief spike, like we have
Speaker 1: two months up and then we quickly go down. And
Speaker 1: that hasn't happened yet. That being said, we are still
Speaker 1: in the mix of just like this very weird, tumultuous
Speaker 1: time for the global economy. We talked about it recently
Speaker 1: with Jeff Curry, and just like all the different things
Speaker 1: going Chinese energy rationing and Indian call shortages and weather
Speaker 1: patterns and all kinds of stuff, and so there's just
Speaker 1: a bunch happening, and I think like the question is, well,
Speaker 1: will this normalize? Well, when the pandemic is over and
Speaker 1: policy normalizes, will we have an inflationary environment that more
Speaker 1: or less resembles the pre crisis environment or are we
Speaker 1: going to be at some like new elevated inflationary regime. Yeah,
Speaker 1: I mean with the surge and energy prices, the analogy
Speaker 1: that everyone is reaching for right now is the nineties seventies, right,
Speaker 1: the idea of double digit inflation and slower economic growth.
Speaker 1: So the sort of double punch of stagflation, although I
Speaker 1: gotta say I feel like a lot of people are
Speaker 1: just using stagflation as like a synonym for inflation now, um,
Speaker 1: when they are two very different things. But you're definitely
Speaker 1: seeing more people talking about that, yeah, you know. And
Speaker 1: obviously job creation in the US has been a little
Speaker 1: bit slower than perhaps we would have hoped in the spring,
Speaker 1: so that but on the other hand, like retail sales,
Speaker 1: the consumer seems to be absolutely booming. So the stag
Speaker 1: part of the stag inflation is a little bit hard
Speaker 1: to see at the moment. But you brought up the seventies,
Speaker 1: and I think that's really important because obviously that is
Speaker 1: the decade that people reach for when they look for analogs.
Speaker 1: And not only was it the last time that I
Speaker 1: think the US really had uh sort of sustained elevated inflation,
Speaker 1: but a lot of our policy makers, central bank governors
Speaker 1: and you know, sort of grandees at university is sort
Speaker 1: of like made their chops in the seventies or eighties,
Speaker 1: And so I think it looms very large for how
Speaker 1: they may say the economy now and how they may
Speaker 1: view the proper policy response. So understanding what actually happened yeah,
Speaker 1: and we had that episode with Ulrika Malmondi and she
Speaker 1: was talking about inflation expectations and how how much individual
Speaker 1: experience has actually mattered to perceptions of inflation, and of
Speaker 1: course she did that great paper all about how if
Speaker 1: you look at the age of f OMC members, you
Speaker 1: can basically figure out how they're going to vote on
Speaker 1: interest rates just based on their age and you know
Speaker 1: their own personal experience of inflation. Right. Well, I think
Speaker 1: both of us missed the seventies by a little bit,
Speaker 1: and I think, you know, we talked about the seventies,
Speaker 1: but like what happened in the seventies strikes me as
Speaker 1: then therefore an important question, and then you can think about, like, well,
Speaker 1: can we have these conditions today. So I'm very excited
Speaker 1: about the guest because he has a new report out.
Speaker 1: It's titled Inflation in the twenty one Century, taking down
Speaker 1: the inflationary straw man of the nineteen seventies. We'd be
Speaker 1: speaking with Daniel Alpert. He's a senior fellow at Cornell,
Speaker 1: an adjunct professor at the law school, and he has
Speaker 1: a managing partner at the investment banking firm Westwood Capital. Daniel,
Speaker 1: thank you, so much for coming on, nod lots, thanks
Speaker 1: for having me on. So what prompted you to write this?
Speaker 1: I mean sort of looking at now versus then, what
Speaker 1: really happened in the sies. Well, I think the prime
Speaker 1: anything is coming out of the pandemic. You know, it
Speaker 1: causes you to reflect on what's happened over the last
Speaker 1: twelve years since the global financial crisis, and what you
Speaker 1: know we did right and what we did wrong, and
Speaker 1: what opportunities are ahead of us now that we've demonstrated
Speaker 1: the capacity of the government to step in and do
Speaker 1: things that at the time you know then and certainly
Speaker 1: you know really all right right up to the pandemic.
Speaker 1: We're considered anathema by many people. And given the fact
Speaker 1: that we have a domestic policy agenda that's being put
Speaker 1: forward by the administration and many people in Congress, it's
Speaker 1: worth examining what the real inflationary risks are today, And
Speaker 1: by default you have to go back to looking at
Speaker 1: what those people who exhibit significant concerns over high inflation
Speaker 1: are saying with regard to parallels to the nineteen seventies.
Speaker 1: So the report is far more than just examining the seventies.
Speaker 1: That it actually examines the economy today. But the period
Speaker 1: of the seventies is fascinating because you know, I think
Speaker 1: you correctly pointed out a couple of things. One very
Speaker 1: few people remembered. I happen to remember it because unfortunately
Speaker 1: I'm old enough. But the the this is fifty years
Speaker 1: of debate going on over what caused it and is
Speaker 1: still unresolved. I mean, the profession, the economics profession, has
Speaker 1: no consensus on what caused this very very odd double
Speaker 1: spike in inflation during the nineteen seventies, and I hope
Speaker 1: we can get into that a little bit today. You
Speaker 1: know that that I think is is very important. The
Speaker 1: second thing is you mentioned um stagflation. Well, you know,
Speaker 1: we pretty much have gotten to the point prior to
Speaker 1: the pandemic where you know, there was a there was
Speaker 1: a assumption that the economy was in a form of
Speaker 1: stagnation lirry summer secular stagnation for example, and so the
Speaker 1: idea that you might have that situation accompanied by inflation
Speaker 1: naturally leads everybody to say the word stagflation. Now, I
Speaker 1: think it's completely ridiculous after the research that I've done. Um.
Speaker 1: But having said that, I understand where they're coming from.
Speaker 1: A fairly low growth economy with price inflation, which you know,
Speaker 1: back in the seventies people thought. Before the seventies, people
Speaker 1: thought was an impossibility, and now people are thinking, oh
Speaker 1: my god, that could happen again. But I think the
Speaker 1: important thing here is that the seventies were unique. They
Speaker 1: were sweet generous in terms of the situations that occurred
Speaker 1: during that period, and more importantly, prior to that period,
Speaker 1: or at least just as importantly prior to that crea
Speaker 1: I'd love to talk to you guys about it, right, well,
Speaker 1: why don't we go ahead and get into it? So
Speaker 1: you know, I know a little bit about the nineteen
Speaker 1: seventies inflationary experience. I mean very very little. Mostly I
Speaker 1: know that there was double digit inflation and there was
Speaker 1: a big energy crisis, and people have talked about it for,
Speaker 1: you know, every decade since then. It feels like, so,
Speaker 1: why why don't you go ahead and why don't you
Speaker 1: go ahead and walk us through what exactly happened and
Speaker 1: the different theories around what happened, because as you pointed out,
Speaker 1: there isn't really a consensus about what drove the price
Speaker 1: increases of that time. So they're basically three main theories,
Speaker 1: and then we'll talk about some other things that I'd
Speaker 1: like to introduce that that really accompanied this debate. They
Speaker 1: are somewhat overlapping, but they each have their own economic
Speaker 1: theory and political bent to them. The first one is
Speaker 1: that the government in UH spent enormous amounts of money
Speaker 1: during the Great Society Program of the nineteen seventies UH
Speaker 1: and incurred significant federal deficits during that period. Obviously, the
Speaker 1: Vietnam War increased that as well, um and coupled with
Speaker 1: a period of Fed accommodative monetary policy from one that
Speaker 1: somehow all of this money flowing into the economy. This
Speaker 1: was basically Freedman in his in his theory, you know,
Speaker 1: was what ignited this inflation. So that's sort of the
Speaker 1: monitorist view, I guess you could say. The second is
Speaker 1: the one thing I think that you know, it's probably
Speaker 1: most compelling, is that we had what was called the
Speaker 1: Nixon Shock of nineteen seventy one and then in nineteen
Speaker 1: seventy three where Nixon by Fiat and that's why we
Speaker 1: call it the fiat currency system ended the dollars convertibility
Speaker 1: into gold, and then ultimately in ninety three ended the
Speaker 1: ninety four Bretton Wood system, meaning that all other currencies
Speaker 1: that were packed to the dollar were no longer pegged
Speaker 1: to the dollar, and everybody's currency floated freely. And then
Speaker 1: you have this complicating factor of the oil price shocks.
Speaker 1: There were two of them that followed one after the other, UH,
Speaker 1: and those rippled through the economy obviously adversely, because when
Speaker 1: you increase the price of oil by the percentage that
Speaker 1: it rose, which was far more than anything you see today,
Speaker 1: you know, you you UH create create pressures on the
Speaker 1: entire economy, and that obviously caused inflation as well. Each
Speaker 1: of these, however, were somewhat disconnected. Um. You know that
Speaker 1: the oil price shocks have direct connections, for example, to
Speaker 1: the Nixon shock, right because Nixon Chuck ended up devaluing
Speaker 1: the dollar. Well, oil is denominated in dollars, so clearly
Speaker 1: the oil producers in the Middle East wanted to know,
Speaker 1: maintain their purchasing power and so increase prices to offset
Speaker 1: that devaluation. On top of that, you had you know,
Speaker 1: two massive Mid East wars in Israel, one in sixty
Speaker 1: seven and the other one in seventy three. UH. And
Speaker 1: and so there was political and geo strategic problems that
Speaker 1: were going on with regard to the oil supply. So
Speaker 1: it's not a simple story, but when you step back
Speaker 1: fifty years later and look at it, you start to
Speaker 1: understand a little bit at least about its uniqueness. Well,
Speaker 1: the one thing that I think we can discard as
Speaker 1: an explanation at this point is the whole monitorist deficit argument,
Speaker 1: because what happened obviously since is that the government has
Speaker 1: been occurring incurring massive deficits, and we've had this incredibly
Speaker 1: low inflation. So it's very hard to look at government deficits.
Speaker 1: So basically been in like you know, the term forever
Speaker 1: war gets bandied about, but we've been in some sort
Speaker 1: of like NonStop foreign engagements for seemingly decades and that
Speaker 1: hasn't contributed to inflation. Of examples, sure, sure, and that
Speaker 1: and you know that whether the spending is military or
Speaker 1: whether the spending is domestic, I don't think it really matters,
Speaker 1: but you know, there's certainly a lot of spending. And
Speaker 1: the second thing I think that you know, really sort
Speaker 1: of trash is that argument at the end is when
Speaker 1: Friedman was writing, certainly prior to you know, the whole
Speaker 1: notion of quantity, theory of money was based on one variable,
Speaker 1: which is the velocity of that money through the economy
Speaker 1: being relatively stable and really from the you know, both
Speaker 1: throughout the post war period until the nineteen seventies it
Speaker 1: was stable, and then suddenly velocity started to tumble beginning
Speaker 1: in the mid such that you know, the velocity of
Speaker 1: money was was over two times, the voss of them
Speaker 1: two was over two times in uh in today it's
Speaker 1: about one point one or one point two. That proved
Speaker 1: to be a very non non staple variable. And then
Speaker 1: of course that allows you to increase the money supply
Speaker 1: to whatever you want it to be because money is
Speaker 1: not moving through the economy as quickly as the economy
Speaker 1: becomes sluggish. Obviously, during the pandemic period, you know, the
Speaker 1: the velocity of money dropped like a stone. So this
Speaker 1: this whole issue of money quantity really kind of guys
Speaker 1: shown it to the side. And then you have the
Speaker 1: Nixon shocked Nicks and shock. As I say, it's more
Speaker 1: compelling because suddenly you devalue the dollar, and it affects
Speaker 1: things like oil, it affects things like imports, well imports
Speaker 1: were not as big a factor today. They're a huge
Speaker 1: factor then. Rather they're a huge factor today, But they
Speaker 1: did impact the one thing that we were importing by,
Speaker 1: you know, in huge quantities, but which was oil. I
Speaker 1: mean oil was I know, this is hard to believe,
Speaker 1: you know, four dollars of barrel right before work with
Speaker 1: this all started three and a half four dollars a barrel,
Speaker 1: and it's spiked up in the mid nineteen seventies, nine
Speaker 1: seventy three to ten dollars a barrel. Well, that that's
Speaker 1: a fairly large percentage increase, right And by the time
Speaker 1: we hit nineteen eighty, it was forty dollars a barrel.
Speaker 1: So just you know, you get the you get the
Speaker 1: people looking at at oil on an inflation adjusted basis
Speaker 1: at what is it this morning, eighty two bucks West
Speaker 1: Texas um. You know, you're you can draw any comparisons
Speaker 1: you like. It's nothing like what you saw seventies. You know,
Speaker 1: as you say, there are multiple theories and there's certainly
Speaker 1: no consensus. It was kind of a unique time. We
Speaker 1: have to get further into some of the the factors
Speaker 1: that made it unique or different than the current environment.
Speaker 1: One deep lesson that central bankers have seemed to have
Speaker 1: taken away from that period was this the importance of
Speaker 1: credibility and inflation expectations. And there is this story that
Speaker 1: the central bankers tell themselves, which kind of positioned themselves,
Speaker 1: in my view, is like the heroes of history, where
Speaker 1: Paul Volker stepped up crushed inflation by raising rates dramatically,
Speaker 1: and then ever since then we've never experienced the nineteen
Speaker 1: seventies again, in part or maybe even significant part, because
Speaker 1: central bankers have committed themselves so seriously to fighting inflation
Speaker 1: at its very first sign. And because we've all been
Speaker 1: now convinced that central bankers are so committed to fighting inflation,
Speaker 1: we don't think it's possible that we'll get inflation, and
Speaker 1: that we don't get inflation, and there's this virtuous cycle.
Speaker 1: And I'm curious, when you look at in your study
Speaker 1: of the nineteen seventies, do you see evidence or counter
Speaker 1: evidence to this idea of like the sort of like
Speaker 1: the expectations channel for surgery surgery price levels throughout the decade.
Speaker 1: So you know, it's funny you can look at it
Speaker 1: that way. Uh, And I certainly think what what Paul
Speaker 1: Volker did was was heroic because of the political flak
Speaker 1: that he took in doing so, and he clearly shut
Speaker 1: down the trend of higher inflation. Once that, once inflation
Speaker 1: of prices and services caught up to wage growth, we
Speaker 1: were off to the races in thees. Rather, that was
Speaker 1: the actual story of the of the expansion from the
Speaker 1: eighties to present day, was that we eliminated this drag
Speaker 1: on the economy, and that took a ferocious amount of
Speaker 1: activity on the part of Vulgar and the FED to
Speaker 1: staunch that that situation. But what he did is effectively
Speaker 1: shut down the economy, and that was fairly painful. So
Speaker 1: the idea that you know, this was UH expectations signaling
Speaker 1: was a little bit of a of a reverse history.
Speaker 1: It was not expectations UH signaling. He just went and
Speaker 1: did it and hyped up rates to the point where
Speaker 1: basically he cut off this pigot, you know. So that
Speaker 1: that I think is not an expectations issue. The problem
Speaker 1: I think that we've had really is that we've gone
Speaker 1: through most of the post war, post World War two
Speaker 1: period with two assumptions. One prior to the nineteen seventies
Speaker 1: said inflation was something that happened a little bit, you know,
Speaker 1: it would go up from you know, two to three
Speaker 1: to four percent back down with recessions, and that was
Speaker 1: sort of bad to the period since the nineteen seventies
Speaker 1: or after the nineteen seventies, where we've suddenly, you know,
Speaker 1: we've been carrying this boogeyman on our back that somehow
Speaker 1: says at some point we could end up with hyper inflation,
Speaker 1: this sort of Weimar Republic German fear of inflation. And
Speaker 1: yet that is not when you map out that entire
Speaker 1: period of time. This is an exception, not some thing
Speaker 1: that is a natural state. So I I think I
Speaker 1: agree with guys like Jeremy Rudd, who wrote an incredible
Speaker 1: paper for the FED a couple of weeks ago on
Speaker 1: expectations there. I think I think there's not as much
Speaker 1: to it as people think. People are looking at prices.
Speaker 1: You know, there was an interesting comment made to me
Speaker 1: by somebody talking to a regional central bank president last week,
Speaker 1: and he said that he's been talking to his his
Speaker 1: folks in the district about, you know, what they think
Speaker 1: they're going to be able to do with prices in
Speaker 1: two and basically the feedback he's getting is yeah, sure,
Speaker 1: we hike prices this year and it's great to be
Speaker 1: able to make money. We have absolutely no confidence we're
Speaker 1: going to be able to sustain those prices in two
Speaker 1: And that's very telling, right, So no wonder what the
Speaker 1: expectations signaling is. The reality is that the businessmen know
Speaker 1: that they don't want to sacrifice unit volume, you know,
Speaker 1: to to obtain high unit price, and they don't want
Speaker 1: to sacrifice capacity. And so you know, at the end
Speaker 1: of the day, that's a very highly competitive economy with
Speaker 1: enormous skew in household incomes to top top ten percent
Speaker 1: or whatever you want how everyone put it. And so
Speaker 1: in order to be able to grab agg demand, you
Speaker 1: really do need to calibrate your prices to those that
Speaker 1: they can afford. But the really telling thing, and I
Speaker 1: don't mean change the subject, but I think it's important
Speaker 1: to point out the really telling thing about the nineteen
Speaker 1: seventies is what preceded it, because what happened in the
Speaker 1: nineteen sixties is as worthy of looking at as what
Speaker 1: happened in the nineteen seventies. What happened in the nineteen
Speaker 1: sixties is that wages growth, household income growth, exceeded the
Speaker 1: growth in prices for most of the time, right. It
Speaker 1: actually happened in three swings of five year periods each
Speaker 1: um going back to the nineteen fifties. The reason for
Speaker 1: that is that you don't know whether or not it's
Speaker 1: union contracts that were renegotiated or whatever it was. But
Speaker 1: you had these, you know, enormously long periods which are
Speaker 1: very would never really happened very much since then of
Speaker 1: huge growth in incomes exceeding growth and prices. When you
Speaker 1: look at that from a wealth standpoint, you overlay wealth
Speaker 1: growth rather, you know, and look at the condition of
Speaker 1: households going into the nineteen seventies, you see this huge
Speaker 1: wealth peak. American households made a lot of money and
Speaker 1: went into the nineteen seventies rich, with most of their
Speaker 1: capacity either being domestic, which was subject to exports too.
Speaker 1: That we exported a lot of stuff without access to
Speaker 1: capacity from abroad. Only about ten center or so of
Speaker 1: our consumption was importance, and so you know, we we
Speaker 1: effectively started to consume at a voracious pace after many
Speaker 1: years of being rather parsimonious. UM. At that same time,
Speaker 1: the baby boomb shows up and enters their prime consumption years.
Speaker 1: So you have to look at this not just from
Speaker 1: the standpoint of these unique historical situations that I spoke
Speaker 1: about before, but about the demographics of the era, about
Speaker 1: the wealth of households during that era, things that just
Speaker 1: aren't existing today. So this is exactly what I want
Speaker 1: to ask you about exactly what happened with wages in
Speaker 1: the nineteen seventies, because I think that informs the way
Speaker 1: a lot of people feel about inflation, whether it's good
Speaker 1: or bad. So obviously, if your wages are rising um
Speaker 1: as much or maybe even more an inflation, you might
Speaker 1: not feel that bad about it. But if you think
Speaker 1: that you're purchasing power is being eaten into because your
Speaker 1: wages aren't increasing as fast, then you're probably really going
Speaker 1: to hate the idea of inflation. So can you give
Speaker 1: us a little bit more color on wages in the
Speaker 1: nineteen seventies? And then two to your latter point, do
Speaker 1: you think the conditions that allowed wages to increase in
Speaker 1: the nineteen seventies are in place um today? So clearly
Speaker 1: prices for goods and services rose much higher than wages
Speaker 1: did during the nineteen seventies. All of the gains that
Speaker 1: were obtained by labor in the nineteen sixties, which were significant.
Speaker 1: We're effectively wiped out by nineteen seventy nine because of
Speaker 1: the high level of price growth UM. So that that
Speaker 1: was the pain. And typically, you know, when you look
Speaker 1: at that period, you see about an eighteen month lag.
Speaker 1: It's not that wages didn't grow at all. Of course,
Speaker 1: they grew, and they grew at at a at a
Speaker 1: higher percentage than they had any other time because of
Speaker 1: price and services UH growth, but they were growing less
Speaker 1: and they were more importantly growing with about an eighteen
Speaker 1: month lag. So that's where the pain of that error
Speaker 1: comes from. Right, you have goods and services prices growing,
Speaker 1: wages catching up eighteen months later. It's constant pain going
Speaker 1: on year and year, year after year, which is why
Speaker 1: the Vulcan intervention was so important because he stopped that pain.
Speaker 1: Right every eighteen months later everything caught up and we
Speaker 1: were off. We were off to the races. So that that,
Speaker 1: I think is what people remember when they remember the
Speaker 1: agony of that period. But again they don't remember what
Speaker 1: happened in the decade prior where the opposite was occurring,
Speaker 1: where wages UH and and incomes were actually growing faster
Speaker 1: than prices, which is where that feeling of prosperity came
Speaker 1: from in the fifties and sixties. Today, obviously we don't
Speaker 1: have that. The present state of transmission from GDP growth
Speaker 1: to household income growth is so lacking in force that
Speaker 1: even this you know, massive pandemic era support of household
Speaker 1: incomes where we replaced all lost incomes in and then
Speaker 1: added a full fifteen percent to the nearly recovered household
Speaker 1: incomes in the first months eight months of this year,
Speaker 1: it's going to prove unable to ignite all but a
Speaker 1: temporary surge in demand. Right, that's the let me, I
Speaker 1: want to I want to stop me there, because I mean,
Speaker 1: I think this is really like one of the key
Speaker 1: questions and post grade financial crisis inequality. There's this huge
Speaker 1: thing people talked about. This is like, Okay, there's a
Speaker 1: lot of household wealth, there's a lot of bunch of
Speaker 1: people making money, but by and large, the middle classes
Speaker 1: don't have it. It's skewed. The upper classes don't have
Speaker 1: his high marginal propensity to consume. So even with all
Speaker 1: this money, so get don't get the demand today We've
Speaker 1: seen this big you you mentioned Okay, maybe income growth
Speaker 1: has it won't be sustained. But we have this huge
Speaker 1: housing boom. There's a lot of people feel like they're
Speaker 1: sitting on a lot of wealth related to their housing.
Speaker 1: They've had an incredible rally in the stock market. We
Speaker 1: have had some of the fastest wage growth that we've
Speaker 1: had in a long time, particularly at the low end.
Speaker 1: This sort of the gap between the first quartile and
Speaker 1: the fourth quartile is the largest ever because like five
Speaker 1: point six at the lower end. And and you know,
Speaker 1: it's funny you mentioned the baby boomers. You have millennials
Speaker 1: probably entering their biggest consumption years, and the baby boomers,
Speaker 1: who uh you know now they're on star security, just
Speaker 1: got their biggest cola increase ever. And so you know,
Speaker 1: people used to talk about union wages auto, you know,
Speaker 1: marching and locks up with colat well, and now they're
Speaker 1: on soar security and they just got like a five
Speaker 1: point nine percent increase. Why shouldn't I look at all
Speaker 1: of these factors coming together and say, wait a second,
Speaker 1: that doesn't sound so different Maybe too slightly different degree,
Speaker 1: but that doesn't sound so different to what you just
Speaker 1: described about the well. Not to pour water on it.
Speaker 1: It is um. Baby boomers controlled nearly twenty of the
Speaker 1: nation's wealth by the time they turned thirty. Today they
Speaker 1: control about fift of the nation's wealth. That's me, right,
Speaker 1: that's people my age. At thirty, gen xers controlled just
Speaker 1: under six percent of wealth, and today millennials barely control
Speaker 1: four percent. My son is a millennial turned thirty this
Speaker 1: year and his generation controls barely four percent. That's four
Speaker 1: percent versus gen Z doesn't even rate to mention it.
Speaker 1: So you know this, this is a very different situation
Speaker 1: than occurred in the nineteen seventies. The wealth is much
Speaker 1: more like if you want to create an analogy, is
Speaker 1: much more like Japan, right, where all the old people
Speaker 1: have it and the young people have it. Now we
Speaker 1: might see some internet inter generational wealth transfer, although there's
Speaker 1: many papers and there's a lot of literature out on
Speaker 1: that that runs out that money relative to the extended
Speaker 1: ages that people are living today and says, you know,
Speaker 1: there's not gonna be a lot of that left over
Speaker 1: except at the very very top. Um, So you're gonna
Speaker 1: have a lot of sort of plutocratic families, uh, and
Speaker 1: not a lot of generational wealth transfer among the lower classes.
Speaker 1: So yeah, that that that is not I mean, the
Speaker 1: answer is no, I don't. I don't see that as
Speaker 1: being company. So, you know, you talked about the monetarist
Speaker 1: interpretation of the nineteen seventies, and of course, um, you know,
Speaker 1: the most famous quote related to that has to be
Speaker 1: Milton Milton Friedman talking about how inflation is always an
Speaker 1: everywhere monetary phenomenon. I guess that has lent itself to
Speaker 1: a characterization of inflation as too much money chasing too
Speaker 1: few goods, and so there's always this emphasis where it
Speaker 1: feels like there's always this emphasis on the idea of
Speaker 1: too much money. So central banks should be focused on
Speaker 1: somehow altering the supply of money, but it feels like
Speaker 1: there's never that much focus on the too few goods
Speaker 1: aspect of the equation. So I guess I'm curious, how
Speaker 1: would you apply that framework to our current situation and
Speaker 1: what can central banks or the government actually due to
Speaker 1: boost supply. I'll get to supply in a second, but
Speaker 1: I do want to correct or at least redirect on
Speaker 1: the issue of money. What Freeman was talking about was
Speaker 1: the quantity of money, right, the amount of money out there.
Speaker 1: He was measuring monetary aggregates. The mistake he made is
Speaker 1: assuming that transmission of money into the economy was relatively uniform.
Speaker 1: That's where the whole velocity issue came from. That I
Speaker 1: spoke of earlier now and and and he was living
Speaker 1: during an arrow where a much flatter society, Right, Jenny,
Speaker 1: coefficients were far lower. The the issue of money quantity
Speaker 1: forms of monetarism, I think we're long ago discredited, right,
Speaker 1: So there's you know, counting the amount of we used
Speaker 1: to look at him M one money supply is a
Speaker 1: big indicator in business economics. Somebody looks at that anymore.
Speaker 1: We don't even publish him three anymore. At the federal
Speaker 1: reserve level, the the issue is um you know, the
Speaker 1: quantity of money part of Freeman, I think is on
Speaker 1: by the wayside. The problem is that the transmission of
Speaker 1: money has really really changed substantially, and a lot of
Speaker 1: that has to do with the issues of income polarization.
Speaker 1: Obviously wealth polarization, but income polarization primarily getting money into
Speaker 1: the hands of people who will actually consume with it,
Speaker 1: which is where you get inflation from. Right. So the problem,
Speaker 1: I think at the political level, and to some extent
Speaker 1: at the academic level. As you said, some residual aspect
Speaker 1: of people confusing the two. And I don't mean sometimes
Speaker 1: it's deliberate because it serves their their other agendas. But
Speaker 1: you know, at the end of the day, it's not
Speaker 1: about money. It's about getting the money into the hands
Speaker 1: of people who will spend it, usually traditionally through wage
Speaker 1: income or through you know, total income, including government transfers.
Speaker 1: But you know it, unfortunately during the course of the
Speaker 1: past thirty years, for years, has been progressively getting it
Speaker 1: to them through borrowing. Right, You've created this enormous consumer
Speaker 1: lending apparatus, which has its own enormous downside. So you
Speaker 1: know that that is really the issue when it comes
Speaker 1: to the monitorist argument, is it kind of falls apart
Speaker 1: at that point when you start to say, all right,
Speaker 1: this is just about money chasing too few guys as
Speaker 1: far as the supply side is concerned. What you asked about, Um, yeah,
Speaker 1: that's that's really really important, and I think that where
Speaker 1: that breaks down. I wrote a book in two thousand
Speaker 1: thirteen called The Age of Oversupply, which is really about
Speaker 1: the the issue of having this exogenous source of oversupply
Speaker 1: and we're all looking at China today on a regular basis,
Speaker 1: but it's the whole world, not just China. And we
Speaker 1: all look at at capacity in the US and we
Speaker 1: see capacity utilization very very low on an historical basis.
Speaker 1: Here the supply chain logistical problems that's given rise to this,
Speaker 1: you know, reopening shortages, uh, and therefore the price inflation
Speaker 1: associated with it. It shouldn't be mistaken for sustainable demand
Speaker 1: pull inflation, and the supply push variety of inflation I
Speaker 1: think is very very unlikely. We we have enormous capacity.
Speaker 1: One of the one of the things I did in
Speaker 1: the paper to sort of illustrate the excess global capacity.
Speaker 1: I spent a lot of time on US labor as well,
Speaker 1: but in US passy, but certainly on the on the
Speaker 1: other side, think about this as a thought exercise. You
Speaker 1: have this enormous increase in the price of shipping goods
Speaker 1: because initially ships were in the wrong position, you had
Speaker 1: crews in the wrong place, you have all sort of things,
Speaker 1: and now you have this huge backlog and and the
Speaker 1: cost is dropping. I will say it's dropped significantly over
Speaker 1: the last few weeks, but you know, at one point
Speaker 1: it was five or six times when it was pre pandemic.
Speaker 1: So on a on an average container load, which is
Speaker 1: about two fifty dollars of goods, you saw the cost
Speaker 1: of shipping UH goods increased by three point six, three
Speaker 1: point seven something like that. At the same time, during
Speaker 1: the pandemic, the dollar got a lot weaker. Now it's
Speaker 1: gained some strength in recent weeks, but during the pandemic period,
Speaker 1: the dollar got significantly weaker. If you put all those
Speaker 1: things together, prices should have gone up by of imports
Speaker 1: should have gone up by like, you know, eight to ten.
Speaker 1: That didn't happen. So that meant that someone somewhere was
Speaker 1: eating this price increase. And that's someone somewhere is obviously
Speaker 1: the factories outside the United States that we're producing goods
Speaker 1: in order to maintain or or grow in this case,
Speaker 1: not just maintain production on a unit basis. That's a
Speaker 1: really incredible thought when you think about it, Right, you
Speaker 1: have all of this excess capacity, and they were willing
Speaker 1: to ship, you know, whatever they could net on a
Speaker 1: marginal basis because they could produce it, and why not
Speaker 1: taking the income? You know that that I think is
Speaker 1: something that people really it's gonna take a while to
Speaker 1: study because it's very very recent, but that really jumped
Speaker 1: out of me, and that says nothing about where we
Speaker 1: were pre pandemic in terms of the quality of the
Speaker 1: jobs that we were having our people working, which was
Speaker 1: very much skewed to low wage, lower our surface positions. Yeah,
Speaker 1: something I don't know. It's kind of like that. There's
Speaker 1: something in how you describe that, and it's something I've
Speaker 1: thought about and kind of a crude analogy. It's almost
Speaker 1: like there's like potential and kinetic energy. So it's like
Speaker 1: we might still have this like stock of overcapacity or
Speaker 1: stock of capacity that is not fully maxed out. But
Speaker 1: somehow in the actual the kinetic part, the getting getting
Speaker 1: the goods through the system seems to be where it,
Speaker 1: you know, it's breaking down and maybe at some point
Speaker 1: it hopefully it finds equilibrium. You started this conversation by
Speaker 1: talking about this. We did something unusual during the pandemic,
Speaker 1: which was we replaced people's lost income. We spent a
Speaker 1: lot of money, and we essentially took what could have
Speaker 1: been a massive recession that lasted a long time ago,
Speaker 1: a potential depression, and the and and the actual recession
Speaker 1: ended up being about one and a half months I
Speaker 1: think we were like quickly back to growth because we
Speaker 1: spent so much. But that does raise the question, you know,
Speaker 1: we do have a FED. The FED actually seems a
Speaker 1: little bit more devish than other global central banks. They
Speaker 1: announced this new framework. We'll see if they have the
Speaker 1: degree to which they hue to it. We have an
Speaker 1: administration that at least right now is trying to engage
Speaker 1: in serious investing. Like could the politics change? Like could we?
Speaker 1: I mean, this seems to be sort of like a
Speaker 1: cord of the question. It's like, Okay, we had these
Speaker 1: like forty years of a politics or political economy in
Speaker 1: which wealth and wage income and income in general was
Speaker 1: like very like skewed or very polarized, to use your word.
Speaker 1: Could that Could we be on the cusp of a change,
Speaker 1: because we've certainly had some events in the last year
Speaker 1: that might suggest as such. Well, I certainly hope not,
Speaker 1: but I will say that there are some things going
Speaker 1: on that are you know, fairly interesting. That again kind
Speaker 1: of like the seventies, are exogenous to the larger economic
Speaker 1: question and really pertain to unique circumstances. For example, the
Speaker 1: UK is under greater pressure of inflation simply because of
Speaker 1: the Brexit issue, right, they have created their own problems
Speaker 1: in that regard, in large part by design. They wanted
Speaker 1: to reflate their economy and reflate wage levels by cutting
Speaker 1: themselves off from European market supply of labor and goods.
Speaker 1: So you know that is going to come back. And
Speaker 1: and uh and and whip saw after the pandemic. Pandemic
Speaker 1: effectively masked that effect. So as demand increases, they're going
Speaker 1: to they're going to face that again. Having nothing to
Speaker 1: do with the larger question. The whole issue with with
Speaker 1: OPEC and their reaction, especially ope exclusion with Russia, you know,
Speaker 1: again creates the oil issue that we're seeing right now.
Speaker 1: I don't think anyone believes we have an oil supply issue.
Speaker 1: I mean in the U s alone, we have so
Speaker 1: many wells that were shut down. If you look at
Speaker 1: the rig counts building now that prices have gone into
Speaker 1: the eighties, you know it's massive. So you're gonna have
Speaker 1: a flood of oil a few months down the line. Um,
Speaker 1: there's no there's no capacity shortage of oil. This is
Speaker 1: a question of turning on the wells again. And in
Speaker 1: the in the case of Europe, resolving some of the
Speaker 1: issues with OPEC. Once the price gets high enough, you
Speaker 1: can you can trust me, OPEC will say to the Russians, Okay,
Speaker 1: that's enough and uh and they're gonna they're gonna take
Speaker 1: you make hay while the sunshines in terms of taking
Speaker 1: this higher price. But you know, one of the one
Speaker 1: of the things that I think, you know, without complicating
Speaker 1: the issue too much and taking it back to the US,
Speaker 1: what we experienced as a result of this pandemic is
Speaker 1: still you know, the story is not fully told. We're
Speaker 1: kind of still in the middle innings. We saw this
Speaker 1: huge injection uh into the economy, seven billion dollars in
Speaker 1: Q one this year. Right, we increase, we increase personally
Speaker 1: income by sevent in the three months of the first
Speaker 1: personal Muslin this year compared to the three months immediately
Speaker 1: preceding lockdown. And that's incredible. Right, for the first eight
Speaker 1: months of this year, we increase personal income with government transfers.
Speaker 1: All of these supplied bottlenecks, you know, we're made worst.
Speaker 1: They were obviously pandemic related. You first had shutdowns in
Speaker 1: China and other manufacturers. And keep in mind that when
Speaker 1: you take out food and energy imports now are about
Speaker 1: fort of our total total consumption. Right, so you put it,
Speaker 1: put aside the trade balance and capital count deficit and
Speaker 1: all the other stuff. Just look at imports, non patroleum,
Speaker 1: non food imports, and you're talking about what we consume.
Speaker 1: It's just a huge amount. So so when you when
Speaker 1: you look at it that way and you say, okay,
Speaker 1: you shut down the factories in China, and I am
Speaker 1: using China as a proxy, it's everywhere and uh, and
Speaker 1: you you then have problems with shipping and getting the
Speaker 1: goods here, and now we have problems with unloading them.
Speaker 1: And actually, if you actually really look under the under
Speaker 1: the hood and see where the problems are. Now, the
Speaker 1: problems are literally moving what's been unloaded and stacked up
Speaker 1: at the ports out of the ports and across the country.
Speaker 1: People are saying, we have a truck or shortage. Well,
Speaker 1: we don't really have a trucker shortage. We have a
Speaker 1: system that was able to see surges in deliveries during
Speaker 1: September and October relating to the Christmas season that's when
Speaker 1: shipping peaks in this country. But now you have the
Speaker 1: perfect storm. You have that crashing in to this pandemic
Speaker 1: reopening demand. Right, So you now have have just so
Speaker 1: exceeded the capacity of the system to actually absorb that
Speaker 1: flow that of course you're going to end up with
Speaker 1: these bottlenecks and they will clear. Uh. And and when
Speaker 1: that happens will be in the later earnings and we'll
Speaker 1: be able to earnings and we'll really be able to
Speaker 1: to write the story. But as far it's it's way
Speaker 1: too early to look at this period with all of
Speaker 1: these unique circumstances and write a story about it, you know,
Speaker 1: other than to say, you know, when you were at
Speaker 1: the top of this where you talked about the use
Speaker 1: of the word transitory, you know, first defined transitory. Are
Speaker 1: you talking about months or or you know, a year.
Speaker 1: So we've done a bunch of supply shortage episodes at
Speaker 1: this point, so we've talked at length about them. But
Speaker 1: I wanted to sort of get back to inflation. And
Speaker 1: I have a slightly I have a slightly weird question. Um,
Speaker 1: actually a two part question, and the first half it
Speaker 1: is weird. But why are we why are we aiming
Speaker 1: or why is the FED aiming for two inflation? Anyway?
Speaker 1: Like why is that a desirable outcome for the economy
Speaker 1: and for society when it seems like everyone is up
Speaker 1: in arms at the moment about the mirror possibility of
Speaker 1: inflation going you know, slightly above two, Whereas you know,
Speaker 1: back after the financial crisis, when we had um deflation,
Speaker 1: it felt like people weren't necessarily as angry or as
Speaker 1: focused on this topic. And then, secondly, how do you
Speaker 1: actually change the public narrative around inflation, Like how do
Speaker 1: you get people to start thinking about whether or not
Speaker 1: this is a good phenomenon or whether or not it's
Speaker 1: something that might be desirable from a total economy standpoint. Well,
Speaker 1: that that's a good question. I think the two percent target,
Speaker 1: which is now not a lot two percent target, right,
Speaker 1: we have the new of formula of two percent over
Speaker 1: time length long period of time, and that you know
Speaker 1: that that's interesting that this is basically what the Fed
Speaker 1: has thought for decades they needed to hand the financial
Speaker 1: sector and the corporate sector as a way of ensuring
Speaker 1: them from an expectation standpoint of stability, right, because that
Speaker 1: enables you to see investment. But here's the tricky part.
Speaker 1: What have what has happened during that period? Have we
Speaker 1: seen a surgeon investment because people were comforted with the
Speaker 1: stable you know, investment target and a fairly low investment target. Dancers. No,
Speaker 1: we've seen investment declimb massively. So clearly, either expectations aren't
Speaker 1: a big deal, or we really shouldn't be focused on
Speaker 1: the two percent target. Maybe we should be focused on
Speaker 1: something else. So the Fed made some corrections in their assumptions,
Speaker 1: and maybe that's enough for maybe it's not. But my
Speaker 1: look is a little bit different. My take is that
Speaker 1: the U s economy did at one time and does
Speaker 1: best when it's run hot enough such that household incomes
Speaker 1: rise at a sustainable pace that's slightly in excess of
Speaker 1: prices for goods and services. That's when Americans feel best, right,
Speaker 1: and and that that's that's what really is a definition
Speaker 1: of the improvement in the standard of living. If you're
Speaker 1: making if you're getting a little bit more wealthier each year,
Speaker 1: you don't want it to get out of hand because
Speaker 1: you don't want to create any kind of spiral up
Speaker 1: or down. Right, But certainly it's better to have a
Speaker 1: situation where you're you're creating actual incomes, not not consumption.
Speaker 1: People focus on consumption. They say, oh, retail sales are great,
Speaker 1: consumption is great. It's not about consumption. It's about incomes
Speaker 1: because you know, if you force people to borrow in
Speaker 1: order to maintain their standard of living, you're eventually going
Speaker 1: to have a collapse. So that's really where the issue is,
Speaker 1: and I think the FED needs to really start thinking
Speaker 1: about that. We saw that condition for the last time
Speaker 1: in arguably the nineteen nineties, and served for an extended
Speaker 1: period of time the nineteen sixties. It's in a it's
Speaker 1: a condition that is totally within our power to reproduce.
Speaker 1: In my opinion, the look inflation adjusted median incomes in
Speaker 1: the United States, by contrast, were flat or down from
Speaker 1: thousand sixteen, and in the aggregate from they're only up
Speaker 1: three tenths of one Brandon, I mean, this is not great.
Speaker 1: And and so what we've been doing, whether it's because
Speaker 1: of inflation targeting or all of the fiscal handwringing that's
Speaker 1: been going on, it hasn't been working. You know, one
Speaker 1: of the we frequently have guests, and you know, I
Speaker 1: think Paul McCulley wrote the intro to your new paper,
Speaker 1: but we frequently have guessed in the school of thought
Speaker 1: that you know, basically, over the last several decades, the
Speaker 1: ft has tapped the brakes every time it looks like
Speaker 1: things are going to get vaguely hot. And so you
Speaker 1: mentioned that this sort of like the ideal economy is
Speaker 1: one where it's just like we're just persistently running this
Speaker 1: sort of like high pressure, somewhat hot economy with the
Speaker 1: wages outpacing price growth a little bit, and we seem
Speaker 1: to have this sort of like policy regime in which
Speaker 1: we don't even let it get there. It's like just
Speaker 1: the whiff of just the mention of warmth seems to
Speaker 1: be enough, and policy say have a slightly different view,
Speaker 1: and pre crisis even you know, things were not bad.
Speaker 1: Pre crisis things are it seemed pretty good, and even
Speaker 1: he was like, yeah, this isn't really hot. Though, what
Speaker 1: should the FED be doing such that we can and
Speaker 1: how much is it the Feder? Maybe it should have
Speaker 1: been more physical on the phisical side to get back
Speaker 1: to some of those sixties or nineties conditions so that
Speaker 1: we just have some decent years in a row of
Speaker 1: income growth outpacing prices. I don't think you know, like
Speaker 1: the answer to my question, because at the end of
Speaker 1: the day, the FED is out of tools, right. The
Speaker 1: FED has tried for uh, you know the better part
Speaker 1: of twelve years two use the monetary toolbox. They hiked
Speaker 1: in what like when I mean? I mean this gets
Speaker 1: to the question of like, okay, the fit maybe out
Speaker 1: of tools. But again, like they the argument is in retrospect,
Speaker 1: they hiked prematurely. That was arguably what jackson Hole last
Speaker 1: year was about, was about correcting this impulse that they
Speaker 1: have to hike before necessary, and that seemed to be
Speaker 1: the case that there are the multiple rate hikes in
Speaker 1: which in retrospect probably were not necessary. There seems to
Speaker 1: be this this this thing that they do, and how
Speaker 1: much could they improve outcomes if they just sat on
Speaker 1: their hands longer, which seems to be a flexible average
Speaker 1: inflation targeting is about Yeah, well I think that that's
Speaker 1: that's precisely what they need to but it is it
Speaker 1: looks at the end of the day, it runs counter
Speaker 1: to one who is including myself, who is who is
Speaker 1: schooled in in the importance of central banking, which is,
Speaker 1: you know, running this at zero, at a zero policy
Speaker 1: rate is effectively depriving not only the FED of tools,
Speaker 1: but also savers of any sort of return. And one
Speaker 1: of the one of the difficulties and all of this,
Speaker 1: and not to get too wonky on you, is that,
Speaker 1: you know, the classical economic expression of saving equal investment,
Speaker 1: which is what drives all economic policy making right, is
Speaker 1: to say, wow, we've got all this huge pool of savings,
Speaker 1: so it will be used for investment. Is something that
Speaker 1: Cain's realized a long time ago. Is uh, you know,
Speaker 1: only only valid over the very long run, and we've
Speaker 1: created that long run has now become forever as far
Speaker 1: as I am concerned, and that that equation really needs
Speaker 1: to be ignored from the standpoint of policy making, just
Speaker 1: simply stuffing savings that then go out, you know, looking
Speaker 1: for returns in secondary investment trading bitcoin or real estate
Speaker 1: or you know, you name any of this stuff that
Speaker 1: has grown in price to levels that are not justifiable
Speaker 1: by the utility the asset that they're investing in. That
Speaker 1: that creates such massive distortions in the economy. Uh, and
Speaker 1: of course deprived savers of any kind of meaningful return.
Speaker 1: So you know you've got you've got real complications there
Speaker 1: if you keep looking for that money to be invested
Speaker 1: in capacity increasing and job increasing production. And you know,
Speaker 1: you stand around for for decades waiting for that to happen,
Speaker 1: and it doesn't happen, You've got to ask yourself a
Speaker 1: question why, and and the answer is that, you know,
Speaker 1: when you have this massive exogenous pool of labor and
Speaker 1: capital that is able to produce at a lower price, um, you,
Speaker 1: the private sector is going to go after that. And
Speaker 1: that's what it's done. Not to not to bring back
Speaker 1: an old argument, but and it is an old argument
Speaker 1: I've been arguing for a dozen years. You know, the
Speaker 1: the only thing that we can do, given that we
Speaker 1: still live within the borders of nation states and you know,
Speaker 1: our individual nation states. You know, most Americans don't have
Speaker 1: the legal or practical ability to pick up stakes and
Speaker 1: work wherever else in the world may offer a better
Speaker 1: crackic prosperity. The fact is that the only other agent
Speaker 1: that's able to do that in our economy is the
Speaker 1: fiscal agent of the collective agent of government. And so
Speaker 1: that's what the FED is looking at me. Bernanky was
Speaker 1: was unabashed, and mean, you know, the whole the whole
Speaker 1: notion of saying to the fiscal agent, look, you gotta
Speaker 1: you gotta go do something is critical. And that's why
Speaker 1: what's in front of Congress right now and is absolutely
Speaker 1: essential because that is what's going to enable if you
Speaker 1: look at it from a holistic standpoint, the fiscal agent
Speaker 1: will enable the FED to get off zero. And that's
Speaker 1: probably the most direct way of putting it to everybody.
Speaker 1: The fiscal agent, if they spend money, if the govern
Speaker 1: it spends this money and injects it into the economy,
Speaker 1: will enable the FED to get off zero and resume
Speaker 1: refill its toolbox. So I just have one last question, Dan,
Speaker 1: and this has been very helpful, but you know, the
Speaker 1: way you set up the paper, and the paper isn't
Speaker 1: just about the seventies, but comparing this to the seventies,
Speaker 1: is that the only model? Though, like could we get
Speaker 1: runaway inflation from some other things? So it's like, okay,
Speaker 1: this economy, even with everything we've seen, it's still just
Speaker 1: does not really resemble the seventies was still extreme incompilarity.
Speaker 1: We still do not the millennials do not have much
Speaker 1: economic buying power. There's still a lot of excess capacity,
Speaker 1: both on the energy side and on the international manufacturing side,
Speaker 1: once we sort out the supply chain issues. But is
Speaker 1: that the only way. Don't forget that, don't forget the
Speaker 1: domestic manufacturers. Could there be another model or is it like,
Speaker 1: is it enough to shoot down the seventies and feel like, Okay,
Speaker 1: we're not we don't have to worry, Like, is that
Speaker 1: the only way to get sustained inflation? Well, I mean
Speaker 1: war works, right, Um, but you know, God willing, that's
Speaker 1: not where we're going. Uh. You know, there are other
Speaker 1: ways of creating inflationary situations. Um, but the one that
Speaker 1: is that is out there the sort of boogeyman that's
Speaker 1: being waved around by even you know, even Senator Mansion,
Speaker 1: who's supposed to be on the Democratic side. He's talking
Speaker 1: about all of this spending because it involves money, you know,
Speaker 1: resulting in in future inflation. And the irony, of course,
Speaker 1: is that this very unique price fight that's occurring in
Speaker 1: the post pandemic period, which I believe is in fact
Speaker 1: going to prove quite transitory, is is giving him and others,
Speaker 1: certainly on the Republican side, a great deal of ammunition.
Speaker 1: And that's unfortunate because if you look at the volume
Speaker 1: of spending involved both in the infrastructure bill and the
Speaker 1: Reconciliation package, Um, it's really not a lot of money.
Speaker 1: I mean, it's spread out over an incredibly long period
Speaker 1: of time, and having that money flow into the economy
Speaker 1: on a sustained basis over that period of time does
Speaker 1: in fact create the ability to transmit it through incomes
Speaker 1: to households that are more likely to spend it and
Speaker 1: hopefully reflate not only their incomes, but reflate the economy
Speaker 1: on a sustained basis and do what I said before
Speaker 1: is the important thing, which is to run it hot
Speaker 1: enough such that household incomes rise at a sustainable pace,
Speaker 1: slightly in excess of the prices for goods and services.
Speaker 1: Having said that, if we don't do that, I think
Speaker 1: we're right back to the same secular stagnation, the same
Speaker 1: oversupply conditions, the same underemployment of US labor that we
Speaker 1: were at prior to the pandemic. All of these dislocations
Speaker 1: that we're seeing right now, we'll pass through the system.
Speaker 1: Just look at the one thing that's sort of glaring
Speaker 1: right now is the number of people who have yet
Speaker 1: to resume employment. Now you've got all sorts of people
Speaker 1: out there, you know, giving reasons for it, viral concerns,
Speaker 1: And until the schools reopened, everybody was saying Oh, it's
Speaker 1: people will not able to send their kids back to school. Well,
Speaker 1: they're all back to school and nothing's changed, so you
Speaker 1: have you know, on September six, you had ten million
Speaker 1: people receiving six hundred dollars a week in benefits. It's
Speaker 1: a lot of money, and and they weren't working. Now
Speaker 1: they're not receiving those benefits anymore, and slowly, as they
Speaker 1: erode their savings and their other capacity, they will come
Speaker 1: back to work. People expected it to occur overnight, that's ridiculous.
Speaker 1: But they will be forced to find incomes. And when
Speaker 1: they when they are forced to find incomes, they will
Speaker 1: have to take up these jobs that are on off
Speaker 1: for most of which are low wage, low our jobs.
Speaker 1: Um and in my mind, my view, we will be
Speaker 1: back to the same position we were before, with maybe
Speaker 1: some increase in hourly wages, which is a good thing.
Speaker 1: There was a podcast that was on on Bloomberg that
Speaker 1: John Authors was was hosting, and he made a big
Speaker 1: deal of the Atlanta Fed hourly wage tracker numbers that
Speaker 1: came out right after that podcast, and I went on
Speaker 1: to look at it and it was fascinating to me
Speaker 1: because you know, the headline number showed this huge boost
Speaker 1: in hourly wages. But when you actually look at the
Speaker 1: system and go down into it, you find that all
Speaker 1: of it was led by sixteen to twenty four year olds,
Speaker 1: by people with low skills and people at the low
Speaker 1: end of the wage scale. When you see sixteen and
Speaker 1: the gap between the sixteen and twenty four and was astronomical.
Speaker 1: And so when you look at something like that, you realize,
Speaker 1: you know, Okay, so a bunch of kids called in
Speaker 1: for summer jobs, right, had had an enormous wage spike.
Speaker 1: Who that's great, right, But you know that's going to
Speaker 1: fade immediately. And the problem is that we all get
Speaker 1: caught up in the what I call the paralysis of aggregates.
Speaker 1: But we all get caught up in these headlines looking
Speaker 1: at the aggregate data, and nobody looks under the hood
Speaker 1: to see what it was composed of. It's really important
Speaker 1: in this period to look at the composition of this
Speaker 1: aggregate data. It tells you a lot. And I think
Speaker 1: if you really want to understand what's going to happen
Speaker 1: over the next few months, that's where we're getting the
Speaker 1: information from. Dan Alpert. Thank you so much for coming
Speaker 1: out on odline. Oh, it's my pleasure, but to talk
Speaker 1: to you guys. That was great, Dan, Thank you so much.
Speaker 1: Thanks Dan. So something that I kept thinking about, um
Speaker 1: actually during that episode was actually a comment that Jeff
Speaker 1: Curry said on a recent episode where he point did
Speaker 1: out because I was just reading back to the transcript
Speaker 1: of that one, that every commodities boom that we've ever seen,
Speaker 1: like every sort of like has been associated in some
Speaker 1: level with a big sort of downward redistribution of wealth
Speaker 1: and income. And so obviously, you know, Dan there was
Speaker 1: talking about the sixties leading to the seventies, the pre
Speaker 1: Great Financial Crisis boom associated with the huge expansion of
Speaker 1: wealth of the sort of like Chinese middle class, and
Speaker 1: so thinking about like Dan's point it um it dovetails
Speaker 1: very nicely with it that the only real way to
Speaker 1: like get a sort of sustained shift in a broader
Speaker 1: inflationary regime, whether we're talking about commodities or elsewhere otherwise,
Speaker 1: really would have to be something that like shifts buying
Speaker 1: power meaningfully to the sort of lower and middle classes
Speaker 1: on a sustained basis. Yeah, well, Jeff's thesis was like
Speaker 1: very much focused on the idea of volumetric increase, which
Speaker 1: is something that like you're only ever going to get
Speaker 1: the scale if the purchasing is being done by like
Speaker 1: as large a group as possible, and that's generally going
Speaker 1: to be load to middle income um. The other thing
Speaker 1: that that I was thinking about as Dan was talking was,
Speaker 1: you know, his characterization of the monetary policy transmission mechanism.
Speaker 1: And this is something that like kind of annoys me
Speaker 1: and I see it a lot, but there seems to
Speaker 1: be this you know, the people who are calling for
Speaker 1: massive inflation and blaming it on the FED are the
Speaker 1: same ones who are kind of saying that, like the
Speaker 1: FED hasn't done much for many years, like the FED
Speaker 1: has failed to improve the economy or boost economic growth.
Speaker 1: But at the same time they argue that there's going
Speaker 1: to be this massive inflationary spiral, which I don't know,
Speaker 1: it just feels like you can't really have both no
Speaker 1: totally agree. You know. The other thing that I thought
Speaker 1: was super interesting is this his argument that there is
Speaker 1: lots of spare capacity right now, and it's a little
Speaker 1: bit different than some of the other arguments, which is
Speaker 1: that you know, his like there's spare capacity of China
Speaker 1: still according to him, there's a spare capacity in the US,
Speaker 1: which is interesting and it does make me wonder, like, Okay,
Speaker 1: if the logistics system ever like normalizes or finds a
Speaker 1: way to like run smoothly at a sort of predictable pace,
Speaker 1: are we going to get like this big like sort
Speaker 1: of bust, which I guess is kind of what he's
Speaker 1: predicting in some way, that we get this sort of
Speaker 1: like quick resumption of the old the old trend. But
Speaker 1: you know, we're like sort of if we sort of
Speaker 1: have all these like al these dealers or like restocking inventory, etcetera,
Speaker 1: and eventually are we going to get to this point
Speaker 1: where actually there's plenty of spare capacity, we finally have
Speaker 1: the system worked out to move it all. Are we
Speaker 1: gonna you know, be right back there like two percent
Speaker 1: inflation before? I know? It seems plausible? Yeah, it does.
Speaker 1: And I mean this is also sort of the bull
Speaker 1: width effect idea that we've been talking about supply chain episodes, um,
Speaker 1: the you that you know, people will order a bunch
Speaker 1: of stuff um to make up for supply shortages and
Speaker 1: then they end up with too much inventory and prices
Speaker 1: could collapse very very quickly. So yeah, it feels like
Speaker 1: the risk is probably like volatility on either side of
Speaker 1: the equation at the moment. No, I mean, I think
Speaker 1: you're exactly right, like at some point, like you buy enough. Right.
Speaker 1: So I saw a tweet this weekend where someone was like, oh,
Speaker 1: I watched the bull whip effect happened right before my
Speaker 1: eyes because I saw someone order a whole case of
Speaker 1: New Zealand wine when they were told that there's not
Speaker 1: much of it available Zealand. Well, exactly right. It's like,
Speaker 1: but eventually you don't need to keep buying New Zealand wine,
Speaker 1: so you're like, go to the wine store and you
Speaker 1: buy a case, but then you're not going to be
Speaker 1: buying a case for a long time and maybe ever again.
Speaker 1: So I do think that, like, you know, it is
Speaker 1: a very interesting possibility that like, okay, we really are
Speaker 1: experiencing this effect, and there really is this capacity, maybe
Speaker 1: we would get this sort of really unexpected or underappreciated
Speaker 1: possibility of a sharp downward move again in prices, in
Speaker 1: a resumption of the old trent to um. All right,
Speaker 1: shall we leave with that. Let's leave it there. Okay.
Speaker 1: This has been another episode of the All Thoughts podcast.
Speaker 1: I'm Tracy Alloway. You can follow me on Twitter at
Speaker 1: Tracy Halloway. And I'm Joe wiesn Thal. You can follow
Speaker 1: me on Twitter at The Stalwart. Follow our guests on Twitter.
Speaker 1: Dan Elpert, managing partner of Westwood Capital. He is at
Speaker 1: Daniel Albert. Follow our producer Laura Carlson. She's at Laura M. Carlson.
Speaker 1: Followed the Bloomberg head of podcast Francesca Levie at Francesca Today.
Speaker 1: And check out all of our podcasts at Bloomberg under
Speaker 1: the handle at podcasts. Thanks for listening to