WEBVTT - What’s Really Behind the Great 2021 Inflation Debate 0:00:00.160 --> 0:00:03.040 Well, John, this is the inflation that you're looking for, 0:00:03.120 --> 0:00:07.520 and it comes in harder than anticipated. CPI up eight 0:00:07.520 --> 0:00:10.360 tenths of eight percent. That pushes the year over year 0:00:10.440 --> 0:00:13.520 CPI to four point two percent. Let's take a look 0:00:13.520 --> 0:00:16.880 at the core rate up nine tenths of a percent. 0:00:17.280 --> 0:00:19.840 There's the one that's gonna worry Wall Street. It's three 0:00:19.840 --> 0:00:22.239 times the amount in March, and on a year over 0:00:22.280 --> 0:00:29.480 your basis, we're up to Hello, and welcome to Stephanomics, 0:00:29.480 --> 0:00:32.120 the podcast that brings the global economy to you. If 0:00:32.120 --> 0:00:35.199 you're under forty five listening to this in America, Europe 0:00:35.280 --> 0:00:38.000 or Japan, it's a fair bet you've never given much 0:00:38.000 --> 0:00:41.040 thought to inflation. The price of some things like a 0:00:41.080 --> 0:00:44.120 college education, has gone up a lot in your lifetime, 0:00:44.600 --> 0:00:46.479 but by and large, the price of things we buy 0:00:46.520 --> 0:00:50.480 every day has been fairly stable, even gone down. In fact, 0:00:50.640 --> 0:00:54.720 it is deflation falling prices that's more often kept policymakers 0:00:54.800 --> 0:00:58.040 up at night, not the kind of double digit inflation 0:00:58.120 --> 0:01:00.920 rates we saw in the nineteen seventies. But is that 0:01:01.120 --> 0:01:04.640 all about to change? Well that's the fear that started 0:01:04.640 --> 0:01:08.920 to rattle financial markets this week, especially after that unexpectedly 0:01:09.000 --> 0:01:12.319 high April inflation number came through in the US. That 0:01:12.440 --> 0:01:15.200 headline annual rate of four point two percent that you 0:01:15.319 --> 0:01:18.479 just heard about is the highest since two thousand and nine. 0:01:19.440 --> 0:01:22.880 It's also been seized on by Joe Biden's political opponents, 0:01:22.920 --> 0:01:26.679 who put it together with recent disappointingly weak jobs growth 0:01:27.000 --> 0:01:29.880 and say his spending plans are going to bring on 0:01:30.080 --> 0:01:35.080 seventies style stag inflation. Doesn't help that drivers in parts 0:01:35.080 --> 0:01:37.800 of the US have been reminded of that era this 0:01:37.840 --> 0:01:40.800 week waiting in long lines for a tank of gas 0:01:41.080 --> 0:01:44.280 thanks to a cyber attack on a big fuel pipeline. 0:01:44.520 --> 0:01:46.640 Now we'll get the full story on that in a 0:01:46.680 --> 0:01:51.080 minute from Bloomberg Energy supremo Javier Blasts. I'm also going 0:01:51.120 --> 0:01:53.240 to talk to a Wall Street economist with his own 0:01:53.280 --> 0:01:57.040 take on the great inflation debate. But first we go 0:01:57.120 --> 0:02:01.000 to Chief Asia Economy correspondent and occurrent in Hong Kong 0:02:01.480 --> 0:02:04.240 to find out where at least some of this inflation 0:02:04.280 --> 0:02:18.760 pressure has been coming from. US Exporters are crying foul 0:02:18.919 --> 0:02:23.040 as the price of shipping containers spikes are Semiconductors are 0:02:23.080 --> 0:02:26.000 the brains that power technology, and right now there is 0:02:26.040 --> 0:02:29.480 a message shortage of those brains. This is now day four, 0:02:29.680 --> 0:02:33.520 one of the world's largest container ships, completely bringing traffic 0:02:33.560 --> 0:02:36.640 in the Suez Canal to a standstill. It's hard to 0:02:36.680 --> 0:02:40.480 imagine China's factories have spent months absorbing shocks from soaring 0:02:40.520 --> 0:02:44.720 prices for shipping containers under raw materials, a scramble for 0:02:44.760 --> 0:02:49.760 semi conductors, and even the blockage of the Suez Canal. Now, 0:02:50.120 --> 0:02:54.200 manufacturers in the world's biggest trading nation are under pressure 0:02:54.280 --> 0:02:58.400 to pass on these charges to their overseas customers, potentially 0:02:58.440 --> 0:03:02.600 adding to global inflation pressu years Briant Chan is president 0:03:02.760 --> 0:03:06.959 of Windward Corporation Limited and among the manufacturers grappling with 0:03:07.200 --> 0:03:10.200 the price surge. I went to visit his officers in 0:03:10.280 --> 0:03:15.440 Hong Kong to hear what's happening. One has been very 0:03:15.520 --> 0:03:18.320 challenging year and this time around. You know, we are 0:03:18.360 --> 0:03:22.280 seeing increases in pretty much everything that we we we 0:03:22.440 --> 0:03:29.800 purchase the plastic resin, We're seeing increases in electronic components, packaging, 0:03:30.520 --> 0:03:34.839 metal parts, so pretty much, you know, everything that it's 0:03:34.880 --> 0:03:37.440 needed to to you know, go into the manufacturing of 0:03:37.440 --> 0:03:41.760 a product. Manufacturers in China are well used to volatile 0:03:41.800 --> 0:03:45.000 price wings, but this time, they say the breath of 0:03:45.120 --> 0:03:48.680 cost increases is unusual, So I'm just going to use 0:03:48.720 --> 0:03:52.160 sort of a random product. It's more like a consumer product. 0:03:52.200 --> 0:03:55.480 This is a camera that a hunter will will typically 0:03:55.600 --> 0:03:59.600 use to track the motions of animals in the wild, 0:03:59.680 --> 0:04:01.960 so you know, to help them when they go hunting. 0:04:02.280 --> 0:04:07.120 The electronics components make up about the cameras costs and 0:04:07.200 --> 0:04:11.400 have risen roughly ten Other components, such as the packaging, 0:04:11.800 --> 0:04:14.640 make up over tenth of total costs, and those have 0:04:14.760 --> 0:04:17.760 also risen about ten percent in price. So when we 0:04:17.880 --> 0:04:21.960 factor in all the different categories of material and the 0:04:22.279 --> 0:04:26.840 respective increases, this comes in out of US increasing costs 0:04:26.880 --> 0:04:32.760 for US. The big unknown is how long these higher 0:04:32.800 --> 0:04:36.680 costs will last. The optimistic view is that the supply 0:04:36.800 --> 0:04:41.080 chain blockages caused by COVID nineteen disruption might just smooth out. 0:04:41.520 --> 0:04:45.000 Manufacturers say they're looking for workarounds and cost savings to 0:04:45.120 --> 0:04:48.200 limit the need to pass on costs. Christopher Say is 0:04:48.279 --> 0:04:52.479 chief executive officer of Musical Electronics Limited, which makes products 0:04:52.520 --> 0:04:55.560 such as Bluetooth speakers and high powered home stereos for 0:04:55.600 --> 0:04:58.120 the US market. We have two ways to do it. 0:04:58.640 --> 0:05:01.080 First of all, you used to do the re engineering 0:05:01.720 --> 0:05:04.960 trying to save some courses from the re engineering. And 0:05:05.000 --> 0:05:08.520 the second is how to do it in a better way. 0:05:08.839 --> 0:05:12.720 That means how it can be more efficiency in production, 0:05:13.160 --> 0:05:15.679 so that may save some money. But he also says 0:05:15.720 --> 0:05:18.760 the pressures are real. He cites, for example, a shortage 0:05:18.800 --> 0:05:22.840 of integrated circuits, which are crucial components for electronics. It 0:05:23.040 --> 0:05:27.080 can be raised up from a year ago, let's say 0:05:27.200 --> 0:05:31.640 ten dara to twenty dollars to even fairly or folly dollars, 0:05:32.440 --> 0:05:36.159 so the difference could be very big and healed. Not 0:05:36.279 --> 0:05:39.840 only that, also the delivery the time is much longer 0:05:39.880 --> 0:05:44.200 than what we are expecting. Uh, it's very difficult. We 0:05:44.360 --> 0:05:48.080 have to inform the customer that for the current business 0:05:48.200 --> 0:05:50.719 that we have taken the orders, we have no choice. 0:05:50.760 --> 0:05:55.760 Will uh just manufacturing according to the price that we 0:05:55.839 --> 0:05:59.480 have come, that we have a creed. But a year later, 0:05:59.640 --> 0:06:02.640 on nine months later, a sthority that we have to 0:06:02.839 --> 0:06:08.760 increase our past all our increase the courses to our customers. 0:06:09.400 --> 0:06:13.880 Chang Chu, Bloomberg Economics Chief Asia Economists, says the soaring 0:06:13.920 --> 0:06:17.120 producer price index in China is only one part of 0:06:17.160 --> 0:06:22.000 a global jigsaw. My sense is at this point China's 0:06:22.120 --> 0:06:26.200 PPR development is part of the global story rather than 0:06:26.279 --> 0:06:29.800 being the single factor driving it, and that several things 0:06:29.880 --> 0:06:34.159 going on for the global producer prices um Clearly there's 0:06:34.200 --> 0:06:38.720 a search in demand. Economies are coming back, they are 0:06:38.760 --> 0:06:44.919 opening up, the global manufacturing sector is booming. I also 0:06:44.920 --> 0:06:48.120 spoke to Ding Chuang, he's chief economist for Greater China 0:06:48.160 --> 0:06:51.800 and North Asia at Standard Chartered. His research shows a 0:06:51.839 --> 0:06:56.279 correlation between China's producer prices and the US consumer inflation, 0:06:56.760 --> 0:07:00.400 so we may see PPR inflation at seven percent handle 0:07:00.839 --> 0:07:04.320 around in the middle of the year. We cannot conclude 0:07:04.480 --> 0:07:09.880 for sure that China's PPI increase causes higher CPI inflation 0:07:09.880 --> 0:07:12.360 in the US and the rest of the rest of 0:07:12.360 --> 0:07:16.320 the world, but there is anecdotal evidence that the Chinese 0:07:16.520 --> 0:07:21.120 exporters have gained pricing power recently. And he says where 0:07:21.200 --> 0:07:24.880 China goes, the world follows because the fact that China 0:07:24.960 --> 0:07:28.880 recovered faster than the rest of the world inflation indicating 0:07:29.240 --> 0:07:34.160 in China may have a leading role in predicting inflation 0:07:34.280 --> 0:07:37.880 in the rest of the world. However it plays out, 0:07:38.160 --> 0:07:40.960 the last few months have been pretty volatile for China's 0:07:41.000 --> 0:07:45.680 manufacturers and few expect a circuit breaker anytime soon. When 0:07:45.760 --> 0:07:48.840 woods chance, he's higher prices as inevitable. But in the 0:07:48.920 --> 0:07:53.680 situation where increases are across a range of different categories 0:07:53.800 --> 0:07:57.120 and at a very steep rate, it's certainly not something 0:07:57.160 --> 0:08:06.960 that a manufacturer is able to bear. You know a well, 0:08:07.120 --> 0:08:10.400 talking of supply bottlenecks and the potential for inflation, you 0:08:10.480 --> 0:08:14.200 might remember I spoke to Bloomberg's chief energy correspondent, Heavier Blasts, 0:08:14.240 --> 0:08:17.200 earlier in the year when that big ship got stuck 0:08:17.240 --> 0:08:20.920 in the Panama Canal. We talked then about the key 0:08:20.960 --> 0:08:24.480 bits of US infrastructure which could really hurt if they 0:08:24.520 --> 0:08:28.360 got interrupted. Somewhat unnervingly, one of them, the country's biggest 0:08:28.360 --> 0:08:32.440 petroleum pipeline, has just been hit by a massive cyber attack, 0:08:32.920 --> 0:08:35.920 raising fears that gas stations all over the US could 0:08:35.960 --> 0:08:39.480 start to run dry. Have you just tell us quickly? 0:08:39.480 --> 0:08:41.880 I guess you know what happened and why is this 0:08:41.960 --> 0:08:46.400 pipeline so important? The Colonial Pipeline is the most important 0:08:46.800 --> 0:08:49.599 oil products by a line in the United States. It 0:08:49.720 --> 0:08:54.640 transports gasoline, diesel, and get fuel from the US Gulf 0:08:54.640 --> 0:08:57.080 of Mexico Coast, where most of the refiners in the 0:08:57.200 --> 0:09:02.840 US are located into the cities and big suburbs of 0:09:03.080 --> 0:09:06.520 the East cause of the United States. So everything from 0:09:06.679 --> 0:09:10.000 think about Atlanta all the way up to New York 0:09:10.080 --> 0:09:13.040 and and be John and and it transport about two 0:09:13.120 --> 0:09:16.480 point five million barrels a day of refined products. Used 0:09:16.520 --> 0:09:19.800 to put that in context, that's more than the old 0:09:19.800 --> 0:09:23.720 the oil demand of Germany, just in one single pipeline. 0:09:24.080 --> 0:09:27.199 And what happened is that the pipeline company called Colonial 0:09:27.320 --> 0:09:31.560 got hacked on a cyber attack on Friday, and since 0:09:31.600 --> 0:09:36.000 then the pipeline has been shut down and UM refined 0:09:36.040 --> 0:09:38.680 products are beginning to run quite shortly in the United States. 0:09:39.120 --> 0:09:41.959 So that means that that means gas stations, petrol stations 0:09:42.000 --> 0:09:44.560 up and down the country actually finding they're running out 0:09:44.600 --> 0:09:48.640 of petrol. Yes, and and there are two concerns here. 0:09:48.800 --> 0:09:53.040 One is that obviously those gasoline UM those fuel stations 0:09:53.080 --> 0:09:56.720 are not getting the supply as regularly as they used 0:09:56.720 --> 0:10:00.160 to uh, and they're draining down their stocks. But all so, 0:10:00.240 --> 0:10:03.000 because many citizens are hearing the news about the hack, 0:10:03.520 --> 0:10:06.920 the first thing that they're they're they're doing is well, 0:10:07.080 --> 0:10:09.800 I should just put more gasoline on my car. They're 0:10:09.880 --> 0:10:12.120 going into the gas stations, and there's a bit of 0:10:12.200 --> 0:10:15.400 panic buying and that is accelerating the demands. Who is 0:10:15.400 --> 0:10:17.560 making the things a bit worse? So when's it going 0:10:17.600 --> 0:10:21.320 to be fixed? While Colonial has said that they're hoping 0:10:21.400 --> 0:10:27.240 to restore substantially all services by the end of the week, 0:10:27.679 --> 0:10:30.439 but they're not telling much to their customers, the big 0:10:30.480 --> 0:10:34.480 oil companies, the big gas station companies and um and 0:10:34.640 --> 0:10:38.200 and the consign is that this maybe go a bit longer. 0:10:38.480 --> 0:10:42.680 It's also not very clear whether Colonial really have a 0:10:42.760 --> 0:10:45.840 plan to restore everything. At the moment, they have been 0:10:45.880 --> 0:10:48.520 able to restore service on a very small portion of 0:10:48.559 --> 0:10:51.839 the pipeline, and they're doing it manually rather than using 0:10:51.880 --> 0:10:55.679 any technology and anything automatic. And then when people listening 0:10:55.720 --> 0:10:57.080 to this, it could be that it will have been 0:10:57.240 --> 0:10:59.320 it will have been resolved, but of course it's still 0:10:59.400 --> 0:11:04.400 raise questions. Is about longer term how well prepared this 0:11:04.600 --> 0:11:08.600 pipeline other key bits of infrastructure are against this kind 0:11:08.640 --> 0:11:12.959 of attack. Yes, and and Colonial is not unique. I mean, 0:11:12.960 --> 0:11:15.760 it's a very large pipeline, but around the world there 0:11:15.760 --> 0:11:20.360 are similar key pieces of infrastructure that we take for 0:11:20.440 --> 0:11:25.880 granted to transport crude oil, refined products, sometimes natural gas, 0:11:26.080 --> 0:11:29.679 or the electricity in network agreed, and the fact that 0:11:29.920 --> 0:11:34.840 Colonial was suffered this cyber attack and it was in 0:11:34.840 --> 0:11:39.000 a way easy to shut down completely. The whole pipeline 0:11:39.240 --> 0:11:41.080 is really getting a lot of people in the oil 0:11:41.120 --> 0:11:44.839 industry and the wider energy industry very consigned because they 0:11:44.880 --> 0:11:47.920 think that it is possible that happened to Colonial, it 0:11:47.960 --> 0:11:51.080 may be possible in other pieces of key infrastructure. Do 0:11:51.120 --> 0:11:53.240 we think they've paid ransom? Is that going to be 0:11:53.320 --> 0:11:57.240 part of the solution. Well, certainly they have been attacked 0:11:57.240 --> 0:11:59.960 by a ransomware that they are being asked to pay. 0:12:00.040 --> 0:12:04.000 It's on some money, um. And interestingly, the United States 0:12:04.040 --> 0:12:07.760 government is saying publicly that they are not advising one 0:12:07.840 --> 0:12:10.840 way or the other to the company, which I suppose 0:12:10.920 --> 0:12:14.160 that it means that at some point perhaps Colonial will pay, 0:12:14.360 --> 0:12:16.360 so they're not. So it is interesting they're not saying 0:12:16.520 --> 0:12:18.880 what they would normally do when people, when people get 0:12:19.600 --> 0:12:22.320 taking hostage, that you that you mustn't given. Is this 0:12:22.400 --> 0:12:24.840 by far the biggest attack on this kind of critical 0:12:24.840 --> 0:12:27.880 infrastructure that we've seen? Has there been Have there been 0:12:27.920 --> 0:12:31.680 other attacks in other countries. It's certainly the biggest attack 0:12:31.760 --> 0:12:34.040 of this kind that we have seen in the United States. 0:12:34.080 --> 0:12:39.080 We have seen attacks to the electricity network and developing countries, 0:12:39.440 --> 0:12:42.040 and we saw a couple of very big and prominent 0:12:42.040 --> 0:12:47.479 attacks in Saudi Arabia against Saudia Arangko and another petrochemical company, 0:12:47.520 --> 0:12:51.040 but that they didn't affect production, but they really affected 0:12:51.400 --> 0:12:55.560 lots of computers in in in offices and and and 0:12:55.679 --> 0:12:58.079 more kind of the back and and and middle office 0:12:58.120 --> 0:13:01.000 of those companies. So certainly the this is UH, this 0:13:01.080 --> 0:13:04.560 is an escalation, but this is not the first time 0:13:04.600 --> 0:13:08.920 that we have seen UH cyber criminals targetting the energy infrastructure. 0:13:09.240 --> 0:13:14.400 I guess finally, we're obviously thinking in this program about inflation, 0:13:15.080 --> 0:13:20.480 long term risk of or possibility that inflation is really 0:13:20.480 --> 0:13:24.840 coming back. Should we expect gas prices to rise as 0:13:24.840 --> 0:13:26.320 a result of this? You think there's gonna be any 0:13:26.400 --> 0:13:31.640 lasting effect. We have seen already UM an increasing casual 0:13:31.720 --> 0:13:35.600 in prices, retail prices in the United States on average 0:13:35.600 --> 0:13:39.240 in the country heat on Tuesday at six and a 0:13:39.240 --> 0:13:43.160 half year high of almost three dollar per gallon, and 0:13:43.240 --> 0:13:46.320 we probably we're going to see sustain sustained prices for 0:13:46.360 --> 0:13:50.240 the next few days until the situation is resolved. Beyond that, 0:13:50.800 --> 0:13:53.000 it's a bit of a question mark. But with with 0:13:53.080 --> 0:13:56.280 the U S economy opening up and more people hitting 0:13:56.320 --> 0:13:59.280 the roads, probably we're going to continue to see pressure 0:13:59.320 --> 0:14:02.599 on on gasual prices, and I will not be surprising 0:14:02.679 --> 0:14:06.760 we see three aspergallon um for most of the of 0:14:06.880 --> 0:14:09.240 the of the salmony in the US that that will 0:14:09.320 --> 0:14:12.679 be the highest prices that US drivers have phase since 0:14:12.720 --> 0:14:15.760 two thousand and fourteen, and in many other parts of 0:14:15.800 --> 0:14:18.320 the world, certainly in Europe, that would be such a bargain. 0:14:19.000 --> 0:14:22.400 Have your blast, Thank you very much, as ever my pleasure. 0:14:30.080 --> 0:14:33.640 Now on Stephanomics, we tend to talk often to academic 0:14:33.680 --> 0:14:38.240 economists and policy makers about the trends shaping the global economy, 0:14:38.480 --> 0:14:42.040 but of course anyone investing long term in businesses in 0:14:42.080 --> 0:14:44.600 the US and around the world also has to have 0:14:44.600 --> 0:14:46.480 a view on much of that, which is why I 0:14:46.480 --> 0:14:49.280 thought we'd check in with Jason Thomas, the head of 0:14:49.320 --> 0:14:54.000 global research at the Carlisle Group, the US based investment company, 0:14:54.400 --> 0:14:58.000 and Jason, we're going to talk about the very long term. 0:14:58.000 --> 0:15:00.440 But what's your what's your response to the this week's 0:15:00.440 --> 0:15:04.600 inflation news was it? Was it as dramatic as all that? Well, 0:15:04.800 --> 0:15:07.320 I think this is something that that we anticipated there 0:15:07.440 --> 0:15:11.320 there's two effects at work. Number one, base effects, when 0:15:11.320 --> 0:15:15.400 when you look at April one, you're measured relative to 0:15:15.960 --> 0:15:19.120 a lockdown economy twelve months ago, So so you over 0:15:19.160 --> 0:15:21.600 your inflation is going to be higher as a consequence 0:15:21.640 --> 0:15:26.280 of that. Secondly, there is genuine inflationary pressure, and it's 0:15:26.280 --> 0:15:31.120 related to shortages and under production of durable goods in 0:15:32.320 --> 0:15:35.800 relative to demand for for many of those products, and 0:15:35.840 --> 0:15:39.600 so this is ongoing. I think that the shortages persist, 0:15:39.720 --> 0:15:42.640 the price pressures persist, and I think that we're going 0:15:42.680 --> 0:15:46.880 to see in months ahead inflation somewhat above the FEDS 0:15:46.880 --> 0:15:50.320 two percent target. But if there's if there's a relative 0:15:50.360 --> 0:15:53.240 shortage of things that people want to buy, shouldn't we 0:15:53.280 --> 0:15:56.520 worry about that getting a lot worse when the economy 0:15:56.520 --> 0:16:01.440 starts to reopens. No, you know it really interestingly, reopening 0:16:01.680 --> 0:16:04.640 it is not the problem. In fact, it's the solution. 0:16:05.640 --> 0:16:08.280 So I think the more that one studies the origin 0:16:08.520 --> 0:16:12.400 of this inflationary pressure, the more comfortable here she is 0:16:12.960 --> 0:16:16.760 that it's ultimately transitory in nature. And the reason I 0:16:16.800 --> 0:16:19.880 say that is when we look back at you had 0:16:19.920 --> 0:16:24.840 a very big decline in the production of durable goods 0:16:24.840 --> 0:16:29.560 and manufacturing and essentially manufacturers they locked down initially for 0:16:29.560 --> 0:16:32.960 for public health reasons, of course, but we're very slow 0:16:33.080 --> 0:16:36.680 to scale back production because many of them feared that 0:16:37.760 --> 0:16:40.880 the pandemic was going to be essentially a replay of 0:16:40.920 --> 0:16:44.040 the global financial crisis, where there was a sudden stop 0:16:44.120 --> 0:16:48.520 of economic activity, huge plunge in sales of durable goods. 0:16:49.040 --> 0:16:52.000 But interestingly, as it turned out, it was almost the 0:16:52.000 --> 0:16:57.360 exact opposite, because after that initial decline in demand in 0:16:57.560 --> 0:17:02.680 March April into May, we found that households actually because 0:17:02.920 --> 0:17:08.840 they they're spending on travel, tourism, live of events, was 0:17:09.119 --> 0:17:12.440 so depressed and in fact so pressed by by social 0:17:12.520 --> 0:17:18.159 distancing and public health regulations that they actually that that 0:17:18.320 --> 0:17:22.200 savings really financed the boom endurable goods. So you had 0:17:22.200 --> 0:17:25.000 a new and used car sales that were up seventeen percent. 0:17:25.640 --> 0:17:29.240 You have things like motorcycle sales up thirty eight percent 0:17:29.359 --> 0:17:32.199 relative to the pandemic. We had hot tub sales up 0:17:32.200 --> 0:17:37.000 by a comparable magnitude, appliances, furniture, So so it's really 0:17:37.000 --> 0:17:40.240 this interaction where you had a big decline in the 0:17:40.280 --> 0:17:44.880 output and capacity. Because business managers manufacturers are really risk 0:17:44.960 --> 0:17:49.480 averse concerned about the outlook at the same time that 0:17:49.480 --> 0:17:53.400 that you had a boom in the household sector, so reopening. 0:17:54.000 --> 0:17:57.640 What that means is that household spending is going to normalize. 0:17:58.200 --> 0:18:01.240 So you're you're very likely to see on declines in 0:18:01.680 --> 0:18:05.240 purchases of things like hot tubs or or home renovations 0:18:05.440 --> 0:18:12.320 or motorcycle sales. There's more money goes towards theater tickets, airfares, 0:18:12.920 --> 0:18:15.639 hotel stays, etcetera. So so I think that you're going 0:18:15.680 --> 0:18:17.800 to have a moderation and spending at the same time 0:18:18.160 --> 0:18:22.920 that capacity and output rises back to two pre pandemic levels, 0:18:23.000 --> 0:18:26.159 and by the fall of this year, perhaps into the winter, 0:18:26.600 --> 0:18:29.280 you'll have a moderation and some of these price trends. 0:18:29.600 --> 0:18:31.880 E certainly sympathize with that as someone who spent much 0:18:31.920 --> 0:18:35.720 more on on tents and outdoor fire pits in the 0:18:35.760 --> 0:18:39.640 last few months than I might have anticipated spending. One 0:18:39.680 --> 0:18:44.800 thing that clearly has some of President Biden's opponents quite 0:18:44.800 --> 0:18:47.720 fired up is the idea that you know, you've got 0:18:47.760 --> 0:18:52.680 this potential for for inflation and then several trillion dollars 0:18:52.680 --> 0:18:55.760 of additional spending coming down the track. Kind of fiscal 0:18:55.920 --> 0:18:59.720 spending that we've not seen in a long time. Um, 0:18:59.840 --> 0:19:02.359 is is that something that we should worry about as 0:19:02.400 --> 0:19:06.000 something that will give us inflation? Well, I think that 0:19:06.320 --> 0:19:09.520 what's been passed so far, uh, there was one point 0:19:09.600 --> 0:19:13.119 nine trillion dollar stimulus, uh, and that the the estimates 0:19:13.119 --> 0:19:15.640 suggests that about one point one trillion of that, about 0:19:16.040 --> 0:19:18.159 five almost five and a half percent of g d 0:19:18.280 --> 0:19:21.600 p H is going to be injected into the economy 0:19:21.760 --> 0:19:24.960 in this year one. But really the bulk of it 0:19:25.040 --> 0:19:27.600 has already come and gone. In that it was the 0:19:29.240 --> 0:19:33.520 stimulus payments that hit bank accounts starting in March fourteen 0:19:33.760 --> 0:19:36.800 into into April with some of the physical checks and 0:19:36.840 --> 0:19:41.199 then the ongoing unemployment insurance benefits. But but that's not 0:19:41.280 --> 0:19:43.680 something that I expect to be sustained, you know. I 0:19:43.720 --> 0:19:46.040 think it's a it's a one time that the money arrives, 0:19:46.160 --> 0:19:49.320 it's it's spent. So so I'm not not terribly worried 0:19:49.359 --> 0:19:52.600 there now. If there's ongoing spending, If if we have 0:19:53.400 --> 0:19:56.480 additional programs that are that are enacted where whether the 0:19:56.560 --> 0:19:59.639 spending you know, can can reach very high levels at 0:19:59.680 --> 0:20:03.080 some point, there is there's reason to suspect that that 0:20:03.160 --> 0:20:07.680 we could have sustained aggregate demand at outstrips that have 0:20:08.080 --> 0:20:11.200 the ability to supply to to adjust. But but we're 0:20:11.240 --> 0:20:15.040 certainly not close to mean there yet, and I suspect 0:20:15.119 --> 0:20:18.360 that that most of the spending that's contemplated going forward 0:20:19.080 --> 0:20:23.119 is going to be very unlike in that it's going 0:20:23.160 --> 0:20:25.720 to be phased over a tenure window so as to 0:20:26.400 --> 0:20:29.720 make that risk less likely. We have been mainly talking 0:20:29.720 --> 0:20:32.680 about the next year or two, but when you think 0:20:32.720 --> 0:20:37.040 about the next sort of five, ten, twenty years, are 0:20:37.080 --> 0:20:40.080 you thinking that this is going to going to continue 0:20:40.160 --> 0:20:44.040 to be like the last ten or twenty years, and 0:20:44.080 --> 0:20:47.399 that inflation has just not really been the issue that 0:20:47.480 --> 0:20:51.280 we've been mainly worried more about. If anything, deflation, falling prices, 0:20:51.280 --> 0:20:53.840 and rising prices are used when you look ahead, do 0:20:53.880 --> 0:20:57.040 you think that the future is gonna look fairly like 0:20:57.160 --> 0:20:59.360 that or do you think there is potentially a more 0:20:59.480 --> 0:21:04.000 long term change underway. You know that I would say 0:21:04.000 --> 0:21:07.320 the biggest change, or one of the biggest changes in 0:21:07.359 --> 0:21:11.240 global macroeconomics over the past twenty years, has been the 0:21:11.280 --> 0:21:16.760 way that we interpret the Japanese situation. Twenty years ago, 0:21:17.080 --> 0:21:20.400 Japan was viewed as sui generous, that this was a 0:21:20.480 --> 0:21:26.240 specific context and it was very specific to two Japanese institutions, cultures, 0:21:26.440 --> 0:21:29.240 some of some of the frictions that exist, the fact 0:21:29.240 --> 0:21:31.520 that they had, the fact they had falling prices. It 0:21:31.600 --> 0:21:34.480 was like a Japan and an inability the central bank 0:21:34.560 --> 0:21:38.760 to stimulate demand. Uh, it just seemed that they were 0:21:38.840 --> 0:21:42.359 they had this this conundrum that that seemed again to 0:21:42.480 --> 0:21:46.240 be very specific to Japan, that the effect of a 0:21:46.320 --> 0:21:49.359 negative demand shock would would be too following wages in 0:21:49.400 --> 0:21:53.080 the way that that created a very specific psychology that 0:21:53.080 --> 0:21:58.240 that is ultimately disinflationary and in fact deflationary. But today 0:21:58.320 --> 0:22:02.280 I think that lobal macroeconomics is now open to the 0:22:02.320 --> 0:22:06.640 possibility and in fact many people believe that that rather 0:22:06.720 --> 0:22:10.240 than specific to Japan, Japan was really just the vanguard, 0:22:11.400 --> 0:22:16.400 the first economy to experience what other advanced economies are 0:22:16.400 --> 0:22:19.160 are now getting a taste of in differing degrees, certainly 0:22:19.160 --> 0:22:22.640 the Eurozone far more than than the United States thus far. 0:22:23.560 --> 0:22:27.560 You also have technology, and technology has a very profound 0:22:27.600 --> 0:22:33.880 disinflationary effect in two ways. First, the data transmission, data storage, 0:22:34.040 --> 0:22:39.919 communications technology prices really declined very steadily each year, and 0:22:39.960 --> 0:22:43.440 as that accounts for a larger share of the capital inputs. 0:22:44.000 --> 0:22:46.560 You essentially have a situation where a hundred dollars of 0:22:46.600 --> 0:22:50.280 current cash flow buys you a hundred and twelve dollars 0:22:50.280 --> 0:22:54.639 of capital equipment. So so that increases businesses cash flow 0:22:55.119 --> 0:23:00.000 and and also business savings while also having the disinflationary 0:23:00.480 --> 0:23:05.400 on the price of their goods and services. Secondly, technology 0:23:05.480 --> 0:23:09.119 is allowed for the emergence of digital platforms. Businesses that 0:23:09.160 --> 0:23:12.160 are in many ways infinitely scalable. That is to say 0:23:12.160 --> 0:23:17.439 that they can increase revenues with little to know in 0:23:17.440 --> 0:23:22.840 incremental investment, little to know incremental hiring, and and those 0:23:22.880 --> 0:23:26.639 sorts of businesses really are now the largest businesses in 0:23:26.680 --> 0:23:31.399 the US economy by market capitalization, and they're quite different today. 0:23:31.400 --> 0:23:35.440 They generate cash from operations that make cases is for 0:23:35.720 --> 0:23:38.760 to six times the amount of money that they reinvest 0:23:38.920 --> 0:23:41.119 in the business after accounting for for R and B 0:23:41.240 --> 0:23:45.560 and other current expenditures. That that's quite different than the 0:23:45.640 --> 0:23:50.399 largest from the largest businesses in our economy UH forty 0:23:50.520 --> 0:23:54.400 years ago, which are largely industrial conglomerates that when they 0:23:54.480 --> 0:23:59.840 reached pathy, they had to go to financial moral UH 0:24:00.119 --> 0:24:03.880 to get the the money necessary to build new plants 0:24:03.920 --> 0:24:07.280 by new equipment scale up capacity, when when they reach capacity, 0:24:07.520 --> 0:24:10.399 they had to raise wages so as to bid labor 0:24:10.480 --> 0:24:15.560 away from competitors or actually businesses and other industries. These 0:24:15.600 --> 0:24:20.120 are profound structural changes to the economy that I think 0:24:20.119 --> 0:24:23.320 are overwhelmingly disinflationary, and I don't see any reason to 0:24:23.400 --> 0:24:27.440 suspect that that they're going to reverse anytime soon. It's 0:24:27.480 --> 0:24:29.760 interesting that you say that, and elviously, it chimes with 0:24:29.920 --> 0:24:33.879 some of the discussion we had in UM last week's podcast, 0:24:33.920 --> 0:24:35.960 because we were looking at this sort of changing global 0:24:36.040 --> 0:24:40.200 corporate landscape and what the the biggest fifty companies in 0:24:40.240 --> 0:24:45.440 the world now relative to UH and how much less 0:24:45.480 --> 0:24:47.520 capital intensive they were, and many of the things that 0:24:47.560 --> 0:24:50.800 you've just been been saying. There are those though, who 0:24:50.800 --> 0:24:54.199 would point to some of those trends, but also the 0:24:54.359 --> 0:24:57.840 very the disinflationary impact that China, for example, has had 0:24:57.880 --> 0:25:00.640 over the last twenty or thirty years and say, actually, 0:25:00.680 --> 0:25:03.320 those things are going into reverse. We've heard about it 0:25:03.359 --> 0:25:06.439 in Asia on this program, but you know, not just 0:25:06.520 --> 0:25:09.200 short term, but wages going up in some of these 0:25:09.240 --> 0:25:14.600 low cost production company countries, UM labor shortages appearing in 0:25:14.680 --> 0:25:18.520 the US, but also at at a global level, just 0:25:18.560 --> 0:25:20.960 to push back a bit. You know, you underestimating that. 0:25:21.040 --> 0:25:22.600 I mean, yes, all the things that you said have 0:25:22.760 --> 0:25:24.240 been true, but are they going to be a bit 0:25:24.320 --> 0:25:29.960 less true in the future. China was a major contributor 0:25:30.240 --> 0:25:34.200