WEBVTT - Dan Alpert on the Big Difference Between Now and the 1970s 0:00:10.720 --> 0:00:15.240 Hello, and welcome to another episode of the Odd Lots podcast. 0:00:15.320 --> 0:00:20.400 I'm Joe Wisenthal and I'm Tracy Halloway. So, Tracy, uh, 0:00:20.720 --> 0:00:24.880 I think we recorded an episode on the recent CPI day, 0:00:25.280 --> 0:00:28.639 But regardless of when it was, I think there is 0:00:28.680 --> 0:00:32.000 this view now that although I don't know like whether 0:00:32.000 --> 0:00:35.839 it's like team persistent or team transitory, or whether teams 0:00:35.880 --> 0:00:38.280 are the right way to be thinking about this, that 0:00:38.720 --> 0:00:42.040 the sort of elevated inflation that we've seen for various 0:00:42.080 --> 0:00:46.600 reasons logistics, commodities, etcetera, it doesn't seem to be going 0:00:46.640 --> 0:00:51.240 away anytime soon. Yeah. We actually spoke about this on 0:00:51.600 --> 0:00:53.720 an All Bots episode. It was with one of the 0:00:53.760 --> 0:00:56.200 FED governors. I think it might have been Caplan, but 0:00:56.480 --> 0:01:00.320 um we asked whether or not transitory was like a 0:01:00.360 --> 0:01:03.320 good way to describe it, or whether they regretted choosing 0:01:03.360 --> 0:01:06.640 that word, and I think, like, you know, fast forward 0:01:06.640 --> 0:01:09.119 a few weeks, it's very very clear that the FED 0:01:09.240 --> 0:01:13.760 probably um regrets using the term transitory and probably would 0:01:13.760 --> 0:01:16.880 have benefited from using something like um, you know, I 0:01:16.920 --> 0:01:21.640 guess broad based inflation versus narrow inflation something like that. Yeah, 0:01:21.760 --> 0:01:26.199 or just maybe like pandemic related inflation, like something super pedestrian, 0:01:26.480 --> 0:01:28.720 because I do think like we were in this situation 0:01:28.800 --> 0:01:32.119 where people have taken transitory to mean like, oh, it's 0:01:32.120 --> 0:01:34.440 gonna be like this very brief spike, like we have 0:01:34.480 --> 0:01:36.399 two months up and then we quickly go down. And 0:01:36.480 --> 0:01:40.080 that hasn't happened yet. That being said, we are still 0:01:40.120 --> 0:01:43.160 in the mix of just like this very weird, tumultuous 0:01:43.200 --> 0:01:46.679 time for the global economy. We talked about it recently 0:01:46.720 --> 0:01:49.200 with Jeff Curry, and just like all the different things 0:01:49.200 --> 0:01:53.640 going Chinese energy rationing and Indian call shortages and weather 0:01:53.680 --> 0:01:56.560 patterns and all kinds of stuff, and so there's just 0:01:56.600 --> 0:02:01.080 a bunch happening, and I think like the question is, well, 0:02:01.080 --> 0:02:04.760 will this normalize? Well, when the pandemic is over and 0:02:04.800 --> 0:02:08.600 policy normalizes, will we have an inflationary environment that more 0:02:08.720 --> 0:02:13.760 or less resembles the pre crisis environment or are we 0:02:13.800 --> 0:02:18.760 going to be at some like new elevated inflationary regime. Yeah, 0:02:18.880 --> 0:02:22.600 I mean with the surge and energy prices, the analogy 0:02:22.680 --> 0:02:25.919 that everyone is reaching for right now is the nineties seventies, right, 0:02:26.120 --> 0:02:30.200 the idea of double digit inflation and slower economic growth. 0:02:30.240 --> 0:02:33.519 So the sort of double punch of stagflation, although I 0:02:33.560 --> 0:02:35.280 gotta say I feel like a lot of people are 0:02:35.360 --> 0:02:39.280 just using stagflation as like a synonym for inflation now, um, 0:02:40.040 --> 0:02:43.200 when they are two very different things. But you're definitely 0:02:43.240 --> 0:02:46.079 seeing more people talking about that, yeah, you know. And 0:02:46.160 --> 0:02:48.640 obviously job creation in the US has been a little 0:02:48.639 --> 0:02:51.040 bit slower than perhaps we would have hoped in the spring, 0:02:51.240 --> 0:02:54.240 so that but on the other hand, like retail sales, 0:02:54.480 --> 0:02:58.640 the consumer seems to be absolutely booming. So the stag 0:02:58.680 --> 0:03:01.119 part of the stag inflation is a little bit hard 0:03:01.160 --> 0:03:03.839 to see at the moment. But you brought up the seventies, 0:03:04.200 --> 0:03:07.360 and I think that's really important because obviously that is 0:03:07.480 --> 0:03:10.760 the decade that people reach for when they look for analogs. 0:03:10.880 --> 0:03:13.320 And not only was it the last time that I 0:03:13.360 --> 0:03:17.080 think the US really had uh sort of sustained elevated inflation, 0:03:17.680 --> 0:03:21.160 but a lot of our policy makers, central bank governors 0:03:21.200 --> 0:03:24.720 and you know, sort of grandees at university is sort 0:03:24.760 --> 0:03:27.760 of like made their chops in the seventies or eighties, 0:03:27.880 --> 0:03:29.760 And so I think it looms very large for how 0:03:29.800 --> 0:03:32.560 they may say the economy now and how they may 0:03:32.639 --> 0:03:36.520 view the proper policy response. So understanding what actually happened yeah, 0:03:36.560 --> 0:03:40.640 and we had that episode with Ulrika Malmondi and she 0:03:40.760 --> 0:03:46.240 was talking about inflation expectations and how how much individual 0:03:46.280 --> 0:03:49.800 experience has actually mattered to perceptions of inflation, and of 0:03:49.840 --> 0:03:53.280 course she did that great paper all about how if 0:03:53.320 --> 0:03:56.960 you look at the age of f OMC members, you 0:03:57.000 --> 0:04:01.480 can basically figure out how they're going to vote on 0:04:01.640 --> 0:04:05.280 interest rates just based on their age and you know 0:04:05.440 --> 0:04:09.040 their own personal experience of inflation. Right. Well, I think 0:04:09.080 --> 0:04:11.480 both of us missed the seventies by a little bit, 0:04:12.200 --> 0:04:15.280 and I think, you know, we talked about the seventies, 0:04:15.880 --> 0:04:18.520 but like what happened in the seventies strikes me as 0:04:18.640 --> 0:04:21.640 then therefore an important question, and then you can think about, like, well, 0:04:21.680 --> 0:04:24.440 can we have these conditions today. So I'm very excited 0:04:24.560 --> 0:04:27.000 about the guest because he has a new report out. 0:04:27.480 --> 0:04:31.039 It's titled Inflation in the twenty one Century, taking down 0:04:31.160 --> 0:04:34.839 the inflationary straw man of the nineteen seventies. We'd be 0:04:34.880 --> 0:04:37.680 speaking with Daniel Alpert. He's a senior fellow at Cornell, 0:04:37.839 --> 0:04:40.640 an adjunct professor at the law school, and he has 0:04:40.680 --> 0:04:45.680 a managing partner at the investment banking firm Westwood Capital. Daniel, 0:04:45.800 --> 0:04:49.280 thank you, so much for coming on, nod lots, thanks 0:04:49.279 --> 0:04:52.840 for having me on. So what prompted you to write this? 0:04:53.000 --> 0:04:56.479 I mean sort of looking at now versus then, what 0:04:56.560 --> 0:04:59.880 really happened in the sies. Well, I think the prime 0:05:00.000 --> 0:05:02.080 anything is coming out of the pandemic. You know, it 0:05:02.200 --> 0:05:04.559 causes you to reflect on what's happened over the last 0:05:05.120 --> 0:05:08.200 twelve years since the global financial crisis, and what you 0:05:08.200 --> 0:05:10.400 know we did right and what we did wrong, and 0:05:10.400 --> 0:05:13.599 what opportunities are ahead of us now that we've demonstrated 0:05:13.640 --> 0:05:16.000 the capacity of the government to step in and do 0:05:16.160 --> 0:05:19.800 things that at the time you know then and certainly 0:05:20.000 --> 0:05:21.920 you know really all right right up to the pandemic. 0:05:21.960 --> 0:05:25.560 We're considered anathema by many people. And given the fact 0:05:25.600 --> 0:05:28.680 that we have a domestic policy agenda that's being put 0:05:28.720 --> 0:05:33.960 forward by the administration and many people in Congress, it's 0:05:33.960 --> 0:05:38.400 worth examining what the real inflationary risks are today, And 0:05:38.480 --> 0:05:41.800 by default you have to go back to looking at 0:05:41.839 --> 0:05:46.040 what those people who exhibit significant concerns over high inflation 0:05:46.440 --> 0:05:49.160 are saying with regard to parallels to the nineteen seventies. 0:05:49.160 --> 0:05:52.600 So the report is far more than just examining the seventies. 0:05:52.640 --> 0:05:55.839 That it actually examines the economy today. But the period 0:05:55.839 --> 0:05:59.320 of the seventies is fascinating because you know, I think 0:05:59.320 --> 0:06:02.440 you correctly pointed out a couple of things. One very 0:06:02.480 --> 0:06:05.680 few people remembered. I happen to remember it because unfortunately 0:06:05.720 --> 0:06:09.600 I'm old enough. But the the this is fifty years 0:06:09.600 --> 0:06:12.440 of debate going on over what caused it and is 0:06:12.480 --> 0:06:15.800 still unresolved. I mean, the profession, the economics profession, has 0:06:15.839 --> 0:06:19.239 no consensus on what caused this very very odd double 0:06:19.320 --> 0:06:21.960 spike in inflation during the nineteen seventies, and I hope 0:06:21.960 --> 0:06:24.320 we can get into that a little bit today. You 0:06:24.320 --> 0:06:26.200 know that that I think is is very important. The 0:06:26.200 --> 0:06:30.479 second thing is you mentioned um stagflation. Well, you know, 0:06:30.720 --> 0:06:32.960 we pretty much have gotten to the point prior to 0:06:32.960 --> 0:06:35.400 the pandemic where you know, there was a there was 0:06:35.440 --> 0:06:38.680 a assumption that the economy was in a form of 0:06:38.720 --> 0:06:43.000 stagnation lirry summer secular stagnation for example, and so the 0:06:43.080 --> 0:06:47.480 idea that you might have that situation accompanied by inflation 0:06:47.640 --> 0:06:50.360 naturally leads everybody to say the word stagflation. Now, I 0:06:50.400 --> 0:06:54.440 think it's completely ridiculous after the research that I've done. Um. 0:06:54.520 --> 0:06:57.440 But having said that, I understand where they're coming from. 0:06:57.839 --> 0:07:01.599 A fairly low growth economy with price inflation, which you know, 0:07:01.920 --> 0:07:04.880 back in the seventies people thought. Before the seventies, people 0:07:04.880 --> 0:07:07.840 thought was an impossibility, and now people are thinking, oh 0:07:07.839 --> 0:07:10.360 my god, that could happen again. But I think the 0:07:10.480 --> 0:07:14.360 important thing here is that the seventies were unique. They 0:07:14.360 --> 0:07:17.680 were sweet generous in terms of the situations that occurred 0:07:17.800 --> 0:07:21.800 during that period, and more importantly, prior to that period, 0:07:21.880 --> 0:07:23.760 or at least just as importantly prior to that crea 0:07:23.880 --> 0:07:26.520 I'd love to talk to you guys about it, right, well, 0:07:26.560 --> 0:07:28.800 why don't we go ahead and get into it? So 0:07:29.000 --> 0:07:32.320 you know, I know a little bit about the nineteen 0:07:32.360 --> 0:07:36.320 seventies inflationary experience. I mean very very little. Mostly I 0:07:36.360 --> 0:07:39.440 know that there was double digit inflation and there was 0:07:39.480 --> 0:07:43.600 a big energy crisis, and people have talked about it for, 0:07:44.040 --> 0:07:47.440 you know, every decade since then. It feels like, so, 0:07:47.560 --> 0:07:49.800 why why don't you go ahead and why don't you 0:07:49.800 --> 0:07:53.320 go ahead and walk us through what exactly happened and 0:07:53.520 --> 0:07:56.920 the different theories around what happened, because as you pointed out, 0:07:57.000 --> 0:07:59.880 there isn't really a consensus about what drove the price 0:08:00.000 --> 0:08:05.480 increases of that time. So they're basically three main theories, 0:08:05.600 --> 0:08:08.200 and then we'll talk about some other things that I'd 0:08:08.200 --> 0:08:11.720 like to introduce that that really accompanied this debate. They 0:08:11.760 --> 0:08:15.480 are somewhat overlapping, but they each have their own economic 0:08:15.760 --> 0:08:18.480 theory and political bent to them. The first one is 0:08:19.040 --> 0:08:23.200 that the government in UH spent enormous amounts of money 0:08:23.280 --> 0:08:26.920 during the Great Society Program of the nineteen seventies UH 0:08:26.960 --> 0:08:31.120 and incurred significant federal deficits during that period. Obviously, the 0:08:31.160 --> 0:08:36.040 Vietnam War increased that as well, um and coupled with 0:08:36.120 --> 0:08:42.440 a period of Fed accommodative monetary policy from one that 0:08:42.600 --> 0:08:45.600 somehow all of this money flowing into the economy. This 0:08:45.720 --> 0:08:49.080 was basically Freedman in his in his theory, you know, 0:08:49.240 --> 0:08:51.760 was what ignited this inflation. So that's sort of the 0:08:51.880 --> 0:08:55.760 monitorist view, I guess you could say. The second is 0:08:55.800 --> 0:08:57.720 the one thing I think that you know, it's probably 0:08:57.760 --> 0:09:00.240 most compelling, is that we had what was called the 0:09:00.360 --> 0:09:03.360 Nixon Shock of nineteen seventy one and then in nineteen 0:09:03.400 --> 0:09:07.000 seventy three where Nixon by Fiat and that's why we 0:09:07.080 --> 0:09:11.480 call it the fiat currency system ended the dollars convertibility 0:09:11.559 --> 0:09:15.440 into gold, and then ultimately in ninety three ended the 0:09:15.520 --> 0:09:18.840 ninety four Bretton Wood system, meaning that all other currencies 0:09:18.840 --> 0:09:20.839 that were packed to the dollar were no longer pegged 0:09:20.840 --> 0:09:24.720 to the dollar, and everybody's currency floated freely. And then 0:09:24.760 --> 0:09:29.000 you have this complicating factor of the oil price shocks. 0:09:29.040 --> 0:09:33.040 There were two of them that followed one after the other, UH, 0:09:33.080 --> 0:09:36.680 and those rippled through the economy obviously adversely, because when 0:09:36.720 --> 0:09:39.600 you increase the price of oil by the percentage that 0:09:39.679 --> 0:09:42.720 it rose, which was far more than anything you see today, 0:09:43.040 --> 0:09:46.880 you know, you you UH create create pressures on the 0:09:47.000 --> 0:09:51.240 entire economy, and that obviously caused inflation as well. Each 0:09:51.280 --> 0:09:54.360 of these, however, were somewhat disconnected. Um. You know that 0:09:54.520 --> 0:09:57.839 the oil price shocks have direct connections, for example, to 0:09:58.559 --> 0:10:01.800 the Nixon shock, right because Nixon Chuck ended up devaluing 0:10:01.800 --> 0:10:05.280 the dollar. Well, oil is denominated in dollars, so clearly 0:10:05.920 --> 0:10:08.800 the oil producers in the Middle East wanted to know, 0:10:08.880 --> 0:10:13.320 maintain their purchasing power and so increase prices to offset 0:10:13.360 --> 0:10:16.440 that devaluation. On top of that, you had you know, 0:10:17.040 --> 0:10:20.560 two massive Mid East wars in Israel, one in sixty 0:10:20.600 --> 0:10:23.640 seven and the other one in seventy three. UH. And 0:10:23.640 --> 0:10:26.720 and so there was political and geo strategic problems that 0:10:26.760 --> 0:10:30.280 were going on with regard to the oil supply. So 0:10:31.240 --> 0:10:34.280 it's not a simple story, but when you step back 0:10:34.400 --> 0:10:37.120 fifty years later and look at it, you start to 0:10:37.200 --> 0:10:40.439 understand a little bit at least about its uniqueness. Well, 0:10:40.679 --> 0:10:42.720 the one thing that I think we can discard as 0:10:42.720 --> 0:10:46.880 an explanation at this point is the whole monitorist deficit argument, 0:10:47.040 --> 0:10:52.720 because what happened obviously since is that the government has 0:10:52.760 --> 0:10:56.120 been occurring incurring massive deficits, and we've had this incredibly 0:10:56.160 --> 0:11:00.600 low inflation. So it's very hard to look at government deficits. 0:11:00.840 --> 0:11:04.200 So basically been in like you know, the term forever 0:11:04.280 --> 0:11:07.440 war gets bandied about, but we've been in some sort 0:11:07.480 --> 0:11:12.240 of like NonStop foreign engagements for seemingly decades and that 0:11:12.360 --> 0:11:16.280 hasn't contributed to inflation. Of examples, sure, sure, and that 0:11:16.440 --> 0:11:19.920 and you know that whether the spending is military or 0:11:19.920 --> 0:11:22.559 whether the spending is domestic, I don't think it really matters, 0:11:22.600 --> 0:11:24.880 but you know, there's certainly a lot of spending. And 0:11:24.920 --> 0:11:27.040 the second thing I think that you know, really sort 0:11:27.080 --> 0:11:29.640 of trash is that argument at the end is when 0:11:29.679 --> 0:11:35.559 Friedman was writing, certainly prior to you know, the whole 0:11:35.600 --> 0:11:39.840 notion of quantity, theory of money was based on one variable, 0:11:39.880 --> 0:11:42.359 which is the velocity of that money through the economy 0:11:42.440 --> 0:11:46.240 being relatively stable and really from the you know, both 0:11:46.320 --> 0:11:49.160 throughout the post war period until the nineteen seventies it 0:11:49.280 --> 0:11:53.880 was stable, and then suddenly velocity started to tumble beginning 0:11:54.320 --> 0:11:57.920 in the mid such that you know, the velocity of 0:11:58.040 --> 0:12:01.400 money was was over two times, the voss of them 0:12:01.440 --> 0:12:05.959 two was over two times in uh in today it's 0:12:05.960 --> 0:12:09.600 about one point one or one point two. That proved 0:12:09.600 --> 0:12:13.600 to be a very non non staple variable. And then 0:12:13.600 --> 0:12:16.000 of course that allows you to increase the money supply 0:12:16.080 --> 0:12:17.719 to whatever you want it to be because money is 0:12:17.760 --> 0:12:20.800 not moving through the economy as quickly as the economy 0:12:20.840 --> 0:12:24.360 becomes sluggish. Obviously, during the pandemic period, you know, the 0:12:24.360 --> 0:12:28.160 the velocity of money dropped like a stone. So this 0:12:28.160 --> 0:12:31.680 this whole issue of money quantity really kind of guys 0:12:31.679 --> 0:12:34.000 shown it to the side. And then you have the 0:12:34.080 --> 0:12:35.920 Nixon shocked Nicks and shock. As I say, it's more 0:12:35.960 --> 0:12:39.160 compelling because suddenly you devalue the dollar, and it affects 0:12:39.160 --> 0:12:42.440 things like oil, it affects things like imports, well imports 0:12:42.440 --> 0:12:44.920 were not as big a factor today. They're a huge 0:12:44.920 --> 0:12:48.480 factor then. Rather they're a huge factor today, But they 0:12:48.520 --> 0:12:51.720 did impact the one thing that we were importing by, 0:12:51.880 --> 0:12:55.480 you know, in huge quantities, but which was oil. I 0:12:55.480 --> 0:12:57.680 mean oil was I know, this is hard to believe, 0:12:57.760 --> 0:13:00.280 you know, four dollars of barrel right before work with 0:13:00.280 --> 0:13:02.400 this all started three and a half four dollars a barrel, 0:13:02.880 --> 0:13:06.480 and it's spiked up in the mid nineteen seventies, nine 0:13:06.640 --> 0:13:10.040 seventy three to ten dollars a barrel. Well, that that's 0:13:10.040 --> 0:13:14.240 a fairly large percentage increase, right And by the time 0:13:14.320 --> 0:13:16.840 we hit nineteen eighty, it was forty dollars a barrel. 0:13:16.880 --> 0:13:19.280 So just you know, you get the you get the 0:13:19.480 --> 0:13:23.400 people looking at at oil on an inflation adjusted basis 0:13:24.040 --> 0:13:26.959 at what is it this morning, eighty two bucks West 0:13:27.000 --> 0:13:31.319 Texas um. You know, you're you can draw any comparisons 0:13:31.320 --> 0:13:50.440 you like. It's nothing like what you saw seventies. You know, 0:13:50.679 --> 0:13:54.240 as you say, there are multiple theories and there's certainly 0:13:54.280 --> 0:13:56.920 no consensus. It was kind of a unique time. We 0:13:56.960 --> 0:14:00.400 have to get further into some of the the factors 0:14:00.400 --> 0:14:02.760 that made it unique or different than the current environment. 0:14:03.160 --> 0:14:06.720 One deep lesson that central bankers have seemed to have 0:14:06.760 --> 0:14:10.640 taken away from that period was this the importance of 0:14:10.679 --> 0:14:14.520 credibility and inflation expectations. And there is this story that 0:14:14.640 --> 0:14:18.280 the central bankers tell themselves, which kind of positioned themselves, 0:14:18.360 --> 0:14:22.080 in my view, is like the heroes of history, where 0:14:22.240 --> 0:14:28.080 Paul Volker stepped up crushed inflation by raising rates dramatically, 0:14:28.200 --> 0:14:31.560 and then ever since then we've never experienced the nineteen 0:14:31.640 --> 0:14:36.160 seventies again, in part or maybe even significant part, because 0:14:36.240 --> 0:14:40.840 central bankers have committed themselves so seriously to fighting inflation 0:14:40.960 --> 0:14:44.640 at its very first sign. And because we've all been 0:14:44.680 --> 0:14:47.800 now convinced that central bankers are so committed to fighting inflation, 0:14:48.040 --> 0:14:50.520 we don't think it's possible that we'll get inflation, and 0:14:50.520 --> 0:14:53.960 that we don't get inflation, and there's this virtuous cycle. 0:14:54.600 --> 0:14:57.880 And I'm curious, when you look at in your study 0:14:57.920 --> 0:15:01.760 of the nineteen seventies, do you see evidence or counter 0:15:01.880 --> 0:15:03.760 evidence to this idea of like the sort of like 0:15:03.960 --> 0:15:10.000 the expectations channel for surgery surgery price levels throughout the decade. 0:15:11.080 --> 0:15:12.960 So you know, it's funny you can look at it 0:15:13.000 --> 0:15:17.000 that way. Uh, And I certainly think what what Paul 0:15:17.040 --> 0:15:20.000 Volker did was was heroic because of the political flak 0:15:20.120 --> 0:15:23.600 that he took in doing so, and he clearly shut 0:15:23.640 --> 0:15:29.200 down the trend of higher inflation. Once that, once inflation 0:15:29.480 --> 0:15:33.840 of prices and services caught up to wage growth, we 0:15:33.840 --> 0:15:37.240 were off to the races in thees. Rather, that was 0:15:37.280 --> 0:15:41.320 the actual story of the of the expansion from the 0:15:41.360 --> 0:15:45.000 eighties to present day, was that we eliminated this drag 0:15:45.080 --> 0:15:48.280 on the economy, and that took a ferocious amount of 0:15:48.360 --> 0:15:51.200 activity on the part of Vulgar and the FED to 0:15:51.360 --> 0:15:54.280 staunch that that situation. But what he did is effectively 0:15:54.280 --> 0:15:57.760 shut down the economy, and that was fairly painful. So 0:15:57.880 --> 0:16:01.800 the idea that you know, this was UH expectations signaling 0:16:02.080 --> 0:16:05.880 was a little bit of a of a reverse history. 0:16:06.040 --> 0:16:09.000 It was not expectations UH signaling. He just went and 0:16:09.040 --> 0:16:12.200 did it and hyped up rates to the point where 0:16:12.200 --> 0:16:14.920 basically he cut off this pigot, you know. So that 0:16:14.920 --> 0:16:18.280 that I think is not an expectations issue. The problem 0:16:18.280 --> 0:16:21.920 I think that we've had really is that we've gone 0:16:22.040 --> 0:16:24.800 through most of the post war, post World War two 0:16:24.880 --> 0:16:29.360 period with two assumptions. One prior to the nineteen seventies 0:16:29.360 --> 0:16:32.440 said inflation was something that happened a little bit, you know, 0:16:32.440 --> 0:16:35.200 it would go up from you know, two to three 0:16:35.240 --> 0:16:38.040 to four percent back down with recessions, and that was 0:16:38.080 --> 0:16:42.200 sort of bad to the period since the nineteen seventies 0:16:42.280 --> 0:16:44.320 or after the nineteen seventies, where we've suddenly, you know, 0:16:44.400 --> 0:16:46.800 we've been carrying this boogeyman on our back that somehow 0:16:46.880 --> 0:16:50.160 says at some point we could end up with hyper inflation, 0:16:50.560 --> 0:16:54.240 this sort of Weimar Republic German fear of inflation. And 0:16:54.320 --> 0:16:57.000 yet that is not when you map out that entire 0:16:57.080 --> 0:17:00.240 period of time. This is an exception, not some thing 0:17:00.360 --> 0:17:03.520 that is a natural state. So I I think I 0:17:03.600 --> 0:17:06.600 agree with guys like Jeremy Rudd, who wrote an incredible 0:17:06.640 --> 0:17:09.760 paper for the FED a couple of weeks ago on 0:17:09.960 --> 0:17:12.920 expectations there. I think I think there's not as much 0:17:12.960 --> 0:17:16.520 to it as people think. People are looking at prices. 0:17:16.560 --> 0:17:18.760 You know, there was an interesting comment made to me 0:17:19.600 --> 0:17:23.760 by somebody talking to a regional central bank president last week, 0:17:24.440 --> 0:17:29.800 and he said that he's been talking to his his 0:17:30.160 --> 0:17:33.280 folks in the district about, you know, what they think 0:17:33.320 --> 0:17:35.000 they're going to be able to do with prices in 0:17:35.080 --> 0:17:40.040 two and basically the feedback he's getting is yeah, sure, 0:17:40.040 --> 0:17:42.119 we hike prices this year and it's great to be 0:17:42.160 --> 0:17:44.640 able to make money. We have absolutely no confidence we're 0:17:44.640 --> 0:17:47.520 going to be able to sustain those prices in two 0:17:48.000 --> 0:17:50.320 And that's very telling, right, So no wonder what the 0:17:50.359 --> 0:17:54.439 expectations signaling is. The reality is that the businessmen know 0:17:54.560 --> 0:17:57.959 that they don't want to sacrifice unit volume, you know, 0:17:58.040 --> 0:18:00.639 to to obtain high unit price, and they don't want 0:18:00.640 --> 0:18:03.080 to sacrifice capacity. And so you know, at the end 0:18:03.119 --> 0:18:05.560 of the day, that's a very highly competitive economy with 0:18:06.160 --> 0:18:11.879 enormous skew in household incomes to top top ten percent 0:18:11.960 --> 0:18:14.600 or whatever you want how everyone put it. And so 0:18:14.640 --> 0:18:17.760 in order to be able to grab agg demand, you 0:18:17.800 --> 0:18:20.600 really do need to calibrate your prices to those that 0:18:20.640 --> 0:18:25.040 they can afford. But the really telling thing, and I 0:18:25.040 --> 0:18:26.879 don't mean change the subject, but I think it's important 0:18:26.920 --> 0:18:29.639 to point out the really telling thing about the nineteen 0:18:29.680 --> 0:18:33.200 seventies is what preceded it, because what happened in the 0:18:33.320 --> 0:18:36.800 nineteen sixties is as worthy of looking at as what 0:18:36.880 --> 0:18:39.040 happened in the nineteen seventies. What happened in the nineteen 0:18:39.119 --> 0:18:44.879 sixties is that wages growth, household income growth, exceeded the 0:18:44.960 --> 0:18:48.439 growth in prices for most of the time, right. It 0:18:48.440 --> 0:18:51.880 actually happened in three swings of five year periods each 0:18:52.480 --> 0:18:55.240 um going back to the nineteen fifties. The reason for 0:18:55.440 --> 0:18:57.600 that is that you don't know whether or not it's 0:18:57.840 --> 0:19:00.639 union contracts that were renegotiated or whatever it was. But 0:19:01.280 --> 0:19:04.119 you had these, you know, enormously long periods which are 0:19:04.280 --> 0:19:07.760 very would never really happened very much since then of 0:19:08.000 --> 0:19:12.639 huge growth in incomes exceeding growth and prices. When you 0:19:12.680 --> 0:19:15.879 look at that from a wealth standpoint, you overlay wealth 0:19:15.920 --> 0:19:18.199 growth rather, you know, and look at the condition of 0:19:18.240 --> 0:19:22.560 households going into the nineteen seventies, you see this huge 0:19:22.600 --> 0:19:26.040 wealth peak. American households made a lot of money and 0:19:26.080 --> 0:19:29.720 went into the nineteen seventies rich, with most of their 0:19:29.760 --> 0:19:34.280 capacity either being domestic, which was subject to exports too. 0:19:34.480 --> 0:19:37.560 That we exported a lot of stuff without access to 0:19:37.640 --> 0:19:41.119 capacity from abroad. Only about ten center or so of 0:19:41.160 --> 0:19:44.879 our consumption was importance, and so you know, we we 0:19:45.000 --> 0:19:49.359 effectively started to consume at a voracious pace after many 0:19:49.440 --> 0:19:53.800 years of being rather parsimonious. UM. At that same time, 0:19:54.280 --> 0:19:58.520 the baby boomb shows up and enters their prime consumption years. 0:19:58.560 --> 0:20:00.600 So you have to look at this not just from 0:20:00.600 --> 0:20:04.240 the standpoint of these unique historical situations that I spoke 0:20:04.280 --> 0:20:08.440 about before, but about the demographics of the era, about 0:20:08.480 --> 0:20:11.480 the wealth of households during that era, things that just 0:20:11.720 --> 0:20:15.880 aren't existing today. So this is exactly what I want 0:20:15.920 --> 0:20:19.600 to ask you about exactly what happened with wages in 0:20:19.640 --> 0:20:22.800 the nineteen seventies, because I think that informs the way 0:20:22.840 --> 0:20:25.520 a lot of people feel about inflation, whether it's good 0:20:25.600 --> 0:20:30.280 or bad. So obviously, if your wages are rising um 0:20:30.320 --> 0:20:34.480 as much or maybe even more an inflation, you might 0:20:34.520 --> 0:20:36.560 not feel that bad about it. But if you think 0:20:36.560 --> 0:20:39.840 that you're purchasing power is being eaten into because your 0:20:39.840 --> 0:20:43.240 wages aren't increasing as fast, then you're probably really going 0:20:43.280 --> 0:20:46.080 to hate the idea of inflation. So can you give 0:20:46.119 --> 0:20:48.280 us a little bit more color on wages in the 0:20:48.320 --> 0:20:51.879 nineteen seventies? And then two to your latter point, do 0:20:51.960 --> 0:20:55.240 you think the conditions that allowed wages to increase in 0:20:55.240 --> 0:21:02.680 the nineteen seventies are in place um today? So clearly 0:21:03.320 --> 0:21:08.200 prices for goods and services rose much higher than wages 0:21:08.240 --> 0:21:11.600 did during the nineteen seventies. All of the gains that 0:21:11.760 --> 0:21:16.400 were obtained by labor in the nineteen sixties, which were significant. 0:21:16.800 --> 0:21:20.119 We're effectively wiped out by nineteen seventy nine because of 0:21:20.119 --> 0:21:23.440 the high level of price growth UM. So that that 0:21:23.640 --> 0:21:26.200 was the pain. And typically, you know, when you look 0:21:26.240 --> 0:21:29.679 at that period, you see about an eighteen month lag. 0:21:30.400 --> 0:21:32.359 It's not that wages didn't grow at all. Of course, 0:21:32.400 --> 0:21:34.520 they grew, and they grew at at a at a 0:21:34.600 --> 0:21:37.800 higher percentage than they had any other time because of 0:21:38.320 --> 0:21:43.600 price and services UH growth, but they were growing less 0:21:43.760 --> 0:21:46.280 and they were more importantly growing with about an eighteen 0:21:46.320 --> 0:21:49.400 month lag. So that's where the pain of that error 0:21:49.400 --> 0:21:52.560 comes from. Right, you have goods and services prices growing, 0:21:52.680 --> 0:21:56.400 wages catching up eighteen months later. It's constant pain going 0:21:56.520 --> 0:21:58.480 on year and year, year after year, which is why 0:21:58.480 --> 0:22:02.320 the Vulcan intervention was so important because he stopped that pain. 0:22:02.480 --> 0:22:05.239 Right every eighteen months later everything caught up and we 0:22:05.240 --> 0:22:08.560 were off. We were off to the races. So that that, 0:22:08.640 --> 0:22:11.600 I think is what people remember when they remember the 0:22:11.640 --> 0:22:14.560 agony of that period. But again they don't remember what 0:22:14.680 --> 0:22:18.360 happened in the decade prior where the opposite was occurring, 0:22:18.440 --> 0:22:21.840 where wages UH and and incomes were actually growing faster 0:22:21.960 --> 0:22:25.360 than prices, which is where that feeling of prosperity came 0:22:25.400 --> 0:22:29.760 from in the fifties and sixties. Today, obviously we don't 0:22:29.800 --> 0:22:34.840 have that. The present state of transmission from GDP growth 0:22:34.920 --> 0:22:38.760 to household income growth is so lacking in force that 0:22:38.920 --> 0:22:43.920 even this you know, massive pandemic era support of household 0:22:43.960 --> 0:22:48.600 incomes where we replaced all lost incomes in and then 0:22:48.680 --> 0:22:51.920 added a full fifteen percent to the nearly recovered household 0:22:51.960 --> 0:22:54.520 incomes in the first months eight months of this year, 0:22:55.040 --> 0:22:57.280 it's going to prove unable to ignite all but a 0:22:57.359 --> 0:23:00.639 temporary surge in demand. Right, that's the let me, I 0:23:00.680 --> 0:23:02.840 want to I want to stop me there, because I mean, 0:23:02.840 --> 0:23:06.399 I think this is really like one of the key 0:23:06.520 --> 0:23:11.920 questions and post grade financial crisis inequality. There's this huge 0:23:11.960 --> 0:23:14.520 thing people talked about. This is like, Okay, there's a 0:23:14.520 --> 0:23:17.080 lot of household wealth, there's a lot of bunch of 0:23:17.080 --> 0:23:20.040 people making money, but by and large, the middle classes 0:23:20.080 --> 0:23:22.760 don't have it. It's skewed. The upper classes don't have 0:23:22.840 --> 0:23:26.280 his high marginal propensity to consume. So even with all 0:23:26.320 --> 0:23:30.680 this money, so get don't get the demand today We've 0:23:30.720 --> 0:23:33.800 seen this big you you mentioned Okay, maybe income growth 0:23:34.000 --> 0:23:36.240 has it won't be sustained. But we have this huge 0:23:36.240 --> 0:23:39.000 housing boom. There's a lot of people feel like they're 0:23:39.000 --> 0:23:41.159 sitting on a lot of wealth related to their housing. 0:23:41.560 --> 0:23:46.120