Speaker 1: Welcome to Stuff you Should Know, a production of I
Speaker 1: Heart Radio. Hey, and welcome to the podcast. I'm Josh Clark,
Speaker 1: and there's Charles W. Chuck Bryant seated directly across me,
Speaker 1: within almost arms reaches, Jerry Rowland seeded to my right,
Speaker 1: and I'm seated right here in my access in the
Speaker 1: center of my own being. And this is stuff you
Speaker 1: should know. Yeah, in person a dish, first time since uh,
Speaker 1: the the one time three D audio experience experiment. Well,
Speaker 1: I forgot about that. I marked it out of my head.
Speaker 1: That's the only time we've been in the same room
Speaker 1: to record since COVID was that that those two episode?
Speaker 1: I remember the second one. I remember the first one.
Speaker 1: It was the Ivy League hobbit thing. Yeah, because Ivy
Speaker 1: League and three D audio or just like it's such
Speaker 1: low hanging fruit, you know. Yeah. But we're back because uh,
Speaker 1: you know, I put it on my Instagram. The studio
Speaker 1: is going away. We're moving house. And surprisingly to me,
Speaker 1: at least, you said, hey, guys, I would really like
Speaker 1: to record in there together one more time. Why is
Speaker 1: that so surprised? I don't know. You don't seem overly
Speaker 1: sentimental about stuff like this, that's not true. I weep
Speaker 1: a lot, yeah, but not about studio rooms though. No,
Speaker 1: I mean I'll miss this particular room. Okay, me too.
Speaker 1: I mean this has been I mean, I think like
Speaker 1: seven of the most solid years we've ever had been
Speaker 1: right here. Pretty solid. Although the the corner office with
Speaker 1: moving blankets his sound bafflers was a pretty solid couple
Speaker 1: of years to the quaint early days. I drove by
Speaker 1: that building the other day too, and for the first
Speaker 1: time in forever, yeah, in Buckhead, and I was just like,
Speaker 1: do you remember there was like, for some reason, every
Speaker 1: time we recorded at like one thirty, when we had
Speaker 1: just started to get going, a fire truck with go
Speaker 1: right outside every day at the same time. It's like
Speaker 1: they knew, oh the memories. So that's enough fun for now.
Speaker 1: Because we're talking about interest rates, all right. I don't
Speaker 1: know why I picked this. I mean, I do know why,
Speaker 1: but I just I'm so not good at this stuff.
Speaker 1: So I can imagine an ap economics like teacher picking
Speaker 1: this for for their high school class. So I think
Speaker 1: that's kind of like a public service you've done here. Well,
Speaker 1: I picked it because you know, the FED just raised
Speaker 1: the rate by it was half of a point, right, Yeah,
Speaker 1: biggest hikes in nineteen uh no, two thou Yeah, So
Speaker 1: I saw that biggest hike and I was like, oh
Speaker 1: my gosh, what was it? It was a half a point,
Speaker 1: And I was like, I don't understand this, so I
Speaker 1: might as well learn enough to tell other people a
Speaker 1: little bit about it. Do you understand now, Yeah, like
Speaker 1: that half of a percent is actually a pretty big deal.
Speaker 1: It is, and I understand now more than ever. There's
Speaker 1: like nine people that just controlled the economy of the
Speaker 1: United States, right exactly. Yeah, it's true. Yeah, that half
Speaker 1: of a percentage point is you'll see by the time
Speaker 1: we're done with this, everybody is basically the FED goingh yeah,
Speaker 1: they're really kind of nervous right now. And what they're
Speaker 1: going for by raised in the interest rate is to
Speaker 1: cool off the economy. We have inflation rates that haven't
Speaker 1: been since not a good time for inflation, um, And
Speaker 1: I mean we're talking the Great Recession was in there too, right, Like,
Speaker 1: this is a big deal, the inflation that we're seeing
Speaker 1: right now. So the FED is saying, Okay, we have
Speaker 1: an economy that is overheating, like you want some inflation
Speaker 1: as we'll see. But this is way too much inflation.
Speaker 1: The prices of like everything is going through the roof.
Speaker 1: People are getting really mad. We better do something about it.
Speaker 1: But what they're trying to do by raising the interest
Speaker 1: rates is to create a soft landing so that prices
Speaker 1: come down, but they don't affect productivity and employment. That's
Speaker 1: the big thing. And Ben ber Nankee put it once
Speaker 1: back when he was still just affect governor rather than
Speaker 1: the chair. Um. He said basically that what they were
Speaker 1: doing was like driving a car and paraphrasing here, well, um, yes, probably,
Speaker 1: he said the FED. Basically, what the FED does is
Speaker 1: is like driving a car with fogged up windshield, a
Speaker 1: faulty spedometer, and a brake, pedal and accelerator that when
Speaker 1: you press it, the car has a very significant delay
Speaker 1: before it responds. Oh, I thought you were going to say,
Speaker 1: a break in an accelerator that just switched positions without
Speaker 1: letting you know, which is with gender's on fire and
Speaker 1: there's monkeys everywhere and they're angry. Yeah. The delay, sure,
Speaker 1: because none of these uh you know, none of these moves.
Speaker 1: It's an immediate impact and it's sort of a fingers
Speaker 1: crossed behind your back kind of move. Yeah, almost always. Yeah.
Speaker 1: And so most people who are watching this are saying
Speaker 1: the Fed waited too long because they kept the economy
Speaker 1: juiced for years and years and years. It just kept
Speaker 1: getting hotter and hotter, and everybody's very happy until prices
Speaker 1: started going on, right, So they waited too long. So
Speaker 1: most most I shouldn't say most. A lot of people
Speaker 1: who know what they're talking about, say there's a recession
Speaker 1: coming pretty soon. So battened down the hat key indicators,
Speaker 1: as they say. Right, So, what does all this have
Speaker 1: to do with interest rates? Chuck, let's wrap well, I
Speaker 1: mean this is we'll get to the Fed, but this
Speaker 1: is generally about interest rates. The good news is everything
Speaker 1: else about interest rates is pretty basic. Uh. We are
Speaker 1: a nation and and and and a lot of ways
Speaker 1: a world that operates on loans and interest in barring money,
Speaker 1: and then banks borrow money from each other, and then
Speaker 1: the Fed lends money to banks, and it's just it's
Speaker 1: a it's a weird thing. It's a weird world economy
Speaker 1: that has been created over the past several hundred years.
Speaker 1: In this country, there's a lot of shiny shoot suits.
Speaker 1: People break your arms. Yeah, it's basically what it's all
Speaker 1: based on, sure, But it's all based on the fact
Speaker 1: that if you want to buy something as a person,
Speaker 1: uh and you know we're focusing on the United States here, uh,
Speaker 1: and you don't have the money, it's no big deal
Speaker 1: because you can get credit cards. If you want to
Speaker 1: pay large interest rates, you can get home loan or
Speaker 1: a car loan, because not everyone can shell out, you know,
Speaker 1: twenty two fifty grand for a car over my ch
Speaker 1: house's costs now eight eight million dollars. And you know
Speaker 1: there's risk get involved anytime you lend money and depending
Speaker 1: all of it really comes down to the risk of
Speaker 1: the loan as according to what the interest rates gonna
Speaker 1: end up being. Right. So what we're talking about now
Speaker 1: our interest rates on the micro level, like the you
Speaker 1: and me level, Like you're saying, how buying car, buying
Speaker 1: credit cards, all that stuff, and it's it is it's
Speaker 1: really basic, like you were saying, where um with it?
Speaker 1: With interest rates. If you go to get a loan, say,
Speaker 1: they're gonna look at a few things like what are
Speaker 1: you gonna buy? I'm gonna buy a really cool vintage
Speaker 1: poison T shirt on eBay ok Okay, it's like fifteen
Speaker 1: grand easily, I want to borrow some money to get
Speaker 1: that T shirt, that's right. Um, So they're gonna look
Speaker 1: at my whoever I borrow from is going to look
Speaker 1: at my um my credit score. Um, especially if it's
Speaker 1: an unsecured debt, right Yeah. Unsecure debt is basically any
Speaker 1: kind of credit card debt because they can't come and
Speaker 1: take away anything. Basically, they're not going to take my
Speaker 1: poison shirt if I default on the loan. The way
Speaker 1: that they get you is they affect your credit, but
Speaker 1: I still get to keep the poison shirt. So who's
Speaker 1: the sucker here, right? As opposed to a secured UH debt,
Speaker 1: which is you've got like a home mortgage, because they
Speaker 1: can come and take that right. So getting back to
Speaker 1: interest rates, then that would mean that since the bank
Speaker 1: that lent you the money to buy your home can
Speaker 1: legally seize your home because it's a secured debt, they're
Speaker 1: going to charge you less because at the end of
Speaker 1: the day, if you default, they can take your house.
Speaker 1: The credit card is going to charge you a higher
Speaker 1: interest rate because at the end of the day, if
Speaker 1: you default, they can't take that poison shirt. So they're
Speaker 1: going to charge more. And the reason that there's a
Speaker 1: difference in charging more or less is because the entire
Speaker 1: point of interest is that's the price you're paying for
Speaker 1: somebody to loan you money in exchange for them taking
Speaker 1: a risk, because there's always a risk that you're going
Speaker 1: to not pay it back, even if you have great credit.
Speaker 1: Something could happen. Um, you could break bad or something
Speaker 1: like that. Who knows, but there's always a risk. And
Speaker 1: then that's what interest is. It's it's you're it's the
Speaker 1: money they make for loaning you that money and taking
Speaker 1: that risk. That's right. Uh, And it's a little it's
Speaker 1: not counterintuitive, but it kind of works both ways because
Speaker 1: if you had the collateral of like let's say a
Speaker 1: home mortgage and they can take that house, that's gonna
Speaker 1: be a much lower interest rate, like you said, than
Speaker 1: the credit card, but it's also gonna be higher in
Speaker 1: some ways because it's a long term loan. Uh. If
Speaker 1: it's you know, it's kind of a negative outlook. But
Speaker 1: I think that banks look at people and say, well,
Speaker 1: if you have a thirty year home mortgage, like, I
Speaker 1: don't know what you're gonna be doing in twenty seven years,
Speaker 1: Like you may be broke, maybe destitute, you may be
Speaker 1: in the hospital and have no money anymore, So that's
Speaker 1: gonna be a little higher. Which is why if you can,
Speaker 1: like people always I mean financial people, I'm not one
Speaker 1: of those, but they always recommend you, like refire your
Speaker 1: house and bring it down to a fifteen year loan
Speaker 1: because it's risky and it'll be a little bit less
Speaker 1: of an annual percentage rate. Right. And then one of
Speaker 1: the other reasons if you've ever looked at a house
Speaker 1: or gotten a a mortgage, um, there's a big difference
Speaker 1: between the rate your charge for a fifteen year and
Speaker 1: a thirty year not just because there's a longer chance
Speaker 1: for you to default on the loan, but also because
Speaker 1: over the course of thirty years, inflation is going to
Speaker 1: actually eat into the amount of money you pay that
Speaker 1: bank back because it's going to depress the value of
Speaker 1: the dollar over time. Right, So when that bank is
Speaker 1: getting your hundred what's left on your hundred grand years
Speaker 1: from now, it's not gonna be the same as the
Speaker 1: value of that dollar now. Right. So there's actually two
Speaker 1: types of interest that you pay on say like a
Speaker 1: thirty year mortgage, or even a fifteen year mortgage, and
Speaker 1: that is the nominal rate, which is the rate you
Speaker 1: agree to, say ten percent, which is astronomical. It don't
Speaker 1: ever take a homeland out with a ten percent mortgage
Speaker 1: interest on it, right, Okay, Um, that's just a that's
Speaker 1: just a tip from me. Um. But over time, as
Speaker 1: inflation grows, um, let's say over that that fifteen years,
Speaker 1: inflation grows a total like four percent, you're actually paying
Speaker 1: the bank bank back, or they're actually getting back the
Speaker 1: value equal to about six percent of what they lent you.
Speaker 1: And what's that called? That is the real interest rate? Right,
Speaker 1: that's right, okay, I remember wake up everybody. By the way,
Speaker 1: all right, and by the way, Jerry's eating over there,
Speaker 1: and that's there's just nothing more normal and relaxing than
Speaker 1: us sitting in a room and Jerry chomping down next
Speaker 1: to us. I just want to acknowledge that it's kind
Speaker 1: of nice. It is nice. She's not eating me, so
Speaker 1: though this time it's the only thing missing from this.
Speaker 1: You know, most people fall asleep to like white noise
Speaker 1: or the sound the ocean. I have wanted just Jerry chewing.
Speaker 1: Let's be right to bed. All right, So I guess
Speaker 1: that's like just the basic over view of how regular
Speaker 1: interest rates work. It's really easy. It's very basic. It's
Speaker 1: the price you pay to borrow money rather than saving
Speaker 1: up to spend. Yeah, but no one cares about that
Speaker 1: stuff because you you know, you try and get your
Speaker 1: credit card rates down, you try and have good credit,
Speaker 1: and you buy a house, you try and get the
Speaker 1: best rate you can, and then it's all kind of
Speaker 1: said and done. But what everyone sits up and takes
Speaker 1: attention is when the Federal Reserve. And by the way,
Speaker 1: if you ever want to just send me into traffic,
Speaker 1: we should just do a whole podcast on the FED.
Speaker 1: I don't understand why they talk the way they do,
Speaker 1: like they're purposefully obtuse. I think like it's probably hard,
Speaker 1: like you can just read their game in the whole system,
Speaker 1: so they just want everyone to be even nice and sleepy.
Speaker 1: I guess, so when they're talking, it's just nuts. So
Speaker 1: when the chairperson of the Federal Reserve sits up and says,
Speaker 1: all right, we think we're gonna raise some interest rates. Uh.
Speaker 1: And by the way, banks they try to know before
Speaker 1: they even make that announcement because they're always watching the
Speaker 1: chairperson of the Fed and like, what they have a
Speaker 1: breakfast this morning, right, how are they feeling today? Um.
Speaker 1: Then that's why the recent point five percent adjustment was
Speaker 1: just such a big deal because it can have a
Speaker 1: really immediate and long term effect, which is kind of
Speaker 1: weird because immediately like stocks are going to do all
Speaker 1: kinds of crazy things, and then it's got this long
Speaker 1: term effect that they hope is going to work out,
Speaker 1: but it doesn't always because it's not an exact science. Yeah,
Speaker 1: really good example. That goes back to um bank mortgages. Right,
Speaker 1: So banks, I'm sure they carry out their own research
Speaker 1: as well to predict what's going to happen in the future,
Speaker 1: because they want to set their mortgage rates, their thirty
Speaker 1: year mortgage rates today with this close a forecast of
Speaker 1: what's going to happen with inflation over the next thirty
Speaker 1: years as they possibly can, because they wanted to squeeze
Speaker 1: out every real penny that they can from you from
Speaker 1: your loan. Right. That's like crystal ball stuff though you
Speaker 1: know it is, but I mean it's I think they've
Speaker 1: gotten kind of good at it, but it's still the
Speaker 1: end of the day, just an educated guess one of
Speaker 1: the things they do is watch what the FEDS doing.
Speaker 1: Is the Fed raising interest rates? Are the raising interest rates?
Speaker 1: Does that mean that they think inflation is going up?
Speaker 1: And the inflation is going up, then we need to
Speaker 1: adjust our mortgage loans. Right, that's pretty simple. But it
Speaker 1: just keeps going from there. So if mortgage rates increase,
Speaker 1: home buying slows, housing prices drop, that means new houses
Speaker 1: are being built less frequently, which means there's fewer carpenters
Speaker 1: being put to work. That means there's fewer lumber mills
Speaker 1: creating lumber for those houses. So those people are out
Speaker 1: of work. Those people are out of work, they're starting
Speaker 1: to default on their um their rent or their mortgages,
Speaker 1: and foreclosures start to go up, which further depresses the
Speaker 1: housing value or the housing market because a flood of
Speaker 1: houses start to come on the market because of foreclosures
Speaker 1: because banks want to offload them. Just from the FED
Speaker 1: saying we might increase by a quarter of a percent
Speaker 1: our interest rate. Yeah, yeah, that's the kind that's what's
Speaker 1: at stake when they're speaking out in public or even
Speaker 1: like making moves, yeah, like with without speaking at all. Yeah,
Speaker 1: it's it's pretty scary and precarious. Um, the FED itself,
Speaker 1: and like I said, maybe we'll do if I guess
Speaker 1: we have to at some point on the FED. But
Speaker 1: just as a broad overview of the Federal Reserve is
Speaker 1: the central bank of the US. There twelve regional Federal
Speaker 1: Reserve banks and a seven member board I talked about.
Speaker 1: I don't know if I said seven people, but a
Speaker 1: seven member board of governors in d c UH. And
Speaker 1: it was created in nineteen thirteen too, you know, ideally
Speaker 1: stabilize and secure our economy because at the time it
Speaker 1: was sort of the wild West when it comes to banking. Yeah,
Speaker 1: there are a lot of bank panics actually, where people
Speaker 1: would no good make a run on a bank and
Speaker 1: the bank would be like, we don't have any more money,
Speaker 1: and they would go under and like people would lose
Speaker 1: their entire savings. Yeah, I mean, it was a pretty
Speaker 1: brilliant creation. Uh. And one of the things the FED
Speaker 1: does a lot, But one of the things the Federal
Speaker 1: Reserve does is it has a lot of cash and
Speaker 1: it helps supply the banks that you and I bank
Speaker 1: at with cash reserves. And um, maybe let's take a break.
Speaker 1: That's a good Cliffhanger, and we'll talk about the fact
Speaker 1: that banks, by law I have to keep certain amounts
Speaker 1: of money, and it gets even more boring. I can't
Speaker 1: believe that Cliffhanger. Okay, Chuck. Before we get into um
Speaker 1: the reserve requirements of banks, I have a pretty neat
Speaker 1: little story. Actually, we're talking about banking panics, and there
Speaker 1: was one in two or at least there was one
Speaker 1: bank that went under UM and they had a branch
Speaker 1: in Sacramento that a guy named Louis Remy I'm gonna
Speaker 1: say UM went to go get his twelve thousand dollars
Speaker 1: that he'd saved up. It's about like three hundred and
Speaker 1: fifty thousand dollars in today's money. It was like his
Speaker 1: nest dagg right. He went to go get it out
Speaker 1: and was told that the bank had failed and they
Speaker 1: didn't have his money. So you know what Louis or
Speaker 1: Louis Remy did. He got on a horse and he
Speaker 1: rode from Sacramento to Portland, Oregon, six hundred and sixty
Speaker 1: five miles in six days. He rode for a hundred
Speaker 1: and forty three hours. Ten of those was to stop
Speaker 1: to sleep. I thought I was going to say, to
Speaker 1: get a new horse, because he had to do that.
Speaker 1: He did that like in an instant, right, So for
Speaker 1: for six days he slept ten hours to ride to
Speaker 1: Portland's got there before the steamership that was carrying news
Speaker 1: of the bank collapsed Sacramento. So he was racing the steamer,
Speaker 1: got there an hour or two before the steamer got
Speaker 1: his twelve tho dollars out of the Portlands brand to
Speaker 1: the bank, and like within an hour or two of
Speaker 1: that bank collapsing, finding out that there was no more
Speaker 1: bank anymore. Isn't that amazing? I'm glad his flex capacitor
Speaker 1: was working. Basically, that's basically what he did. But the
Speaker 1: horse version of that man, yeah, he said, oh I
Speaker 1: should give myself an hour. That should be plenty of time.
Speaker 1: I never understand that in time travel movies. I don't either.
Speaker 1: It's like, go back the week before time. Just take
Speaker 1: it easy, maybe get like a snack. You have time,
Speaker 1: all right, So we promise the scintillating details of the
Speaker 1: fact that banks have to keep a certain amount of
Speaker 1: money in their reserves. And that is because you know,
Speaker 1: if every I mean it's not the eighteen hundreds, not
Speaker 1: everyone's gonna say I gotta go to that Chase bank
Speaker 1: and withdraw every penny all at the same time. But
Speaker 1: they got to be protected against that. Oh, it could happen, though,
Speaker 1: there's still sure. But the problem is once a panic starts,
Speaker 1: it spreads like wildfire, because that means, well, if these
Speaker 1: people are panninging, even though I'm not panninging, I better
Speaker 1: go to the bank anyway to get my money out
Speaker 1: before it collapses, before more of these idiots panic and
Speaker 1: take their money out. Right, So, whether you're panicked or not,
Speaker 1: it actually makes sense if there's a panic and a
Speaker 1: run going on in your bank to go withdraw, and
Speaker 1: it's just this chain reaction that starts. So the FED
Speaker 1: protects against that by by requiring that these banks have
Speaker 1: these reserves. Right, yes, so it's known as the reserve requirement.
Speaker 1: It's based on a percentage of all the deposits in
Speaker 1: that bank. It's very simple calculation. And then they they
Speaker 1: these banks have to have non intersparing accounts at the
Speaker 1: Federal Reserve to make sure the Federal Reserve can cover everything, right,
Speaker 1: to make sure that it's like, okay, you have to
Speaker 1: have this much, we're going to hang onto it. For you.
Speaker 1: That's right. So they're they're taking this average every day,
Speaker 1: but it's over it's an average over two weeks basically
Speaker 1: to determine whether or not it's meeting that reserve requirement.
Speaker 1: And here's the thing that I don't know. I guess
Speaker 1: it's sort of surprised me. Is banks, depending on what's
Speaker 1: going on on a day to day basis, are borrowing
Speaker 1: and lending money to each other well to cover themselves. Yes,
Speaker 1: so that sounds frightening, but it makes sense. But so
Speaker 1: they've got like a pile of money, and whatever money
Speaker 1: they have, they can make more money if they lend
Speaker 1: that money out, if they put it to work, right, Yeah,
Speaker 1: I mean that's what they want to do, is just
Speaker 1: to get more interest. So if on one day they're like, oh,
Speaker 1: we've len out more than we we have in reserve,
Speaker 1: we go to another bank that has an excess and
Speaker 1: borrow it from them and then we put it in
Speaker 1: our FED account and everything's fine. We're within the legal
Speaker 1: limits for those reserve requirements. Right. But if they run
Speaker 1: out of you know, banks to trade with basically at
Speaker 1: the end of the day, then they can go to
Speaker 1: the FED and say big Mama, we need a little
Speaker 1: money from you, actually, right, And the FED doesn't like that,
Speaker 1: so they actually charge banks more for the UM for
Speaker 1: to borrow money directly from the BED for overnight requirements.
Speaker 1: That's right, but it's ironically called the discount rate even
Speaker 1: though it's the larger of the two rates. The other rate,
Speaker 1: where a bank borrows from another bank overnight to satisfy
Speaker 1: the FED reserve requirements, that's called the UM Federal Funds rate. Right,
Speaker 1: I answered my own right, I thought you're waiting on me. Uh.
Speaker 1: And within that discount rate, there are a few different tiers, uh,
Speaker 1: kind of just like you would scale or a tier
Speaker 1: any loan. You've got your primary rate, which is the
Speaker 1: lowest one, and that's you know, if you're a great uh,
Speaker 1: if you're a great bank and good standing, you're gonna
Speaker 1: get that rate. You've got the secondary rate. Uh. And
Speaker 1: that's if I think this is by the way, is
Speaker 1: Dave Ruse but from house works dot com. Uh, And
Speaker 1: Dave said, slightly less sound institutions Galloping Gulch State Bank. Yeah. Probably.
Speaker 1: And then you've got your seasonal rate. And these are
Speaker 1: very small banks with that are based sort of around
Speaker 1: seasonal economies. Like tourism or agricultural something like that. Yeah,
Speaker 1: because like and when when it comes time to bring
Speaker 1: in the crops for harvest, all the farmers come and say,
Speaker 1: I need some money to get this stuff to market.
Speaker 1: I need loans, and those banks get strained at those times. Yeah.
Speaker 1: Or there's lots of great I feel old timey heist
Speaker 1: movies where uh, someone will you know, like during crop season,
Speaker 1: they'll know a bank will have just be flooded with
Speaker 1: cash on a certain afternoon. Yeah, there's a movie you're
Speaker 1: talking about, Raising Arizona that was definitely the case. Okay,
Speaker 1: was that it? But Wisdom, it's been in other movies.
Speaker 1: To Familio Estevez, is that a bank rubber? He was
Speaker 1: like a Robin Hood where he I think he robbed
Speaker 1: banks to get rid of the deeds so that the
Speaker 1: farmers could couldn't have their farms foreclosed. I never saw that.
Speaker 1: I know the movie you're talking about that, I saw it, Wisdom,
Speaker 1: I saw it. Hey, while we're talking about movies, I've
Speaker 1: been meaning to give a shout out to so our
Speaker 1: friend Toby his production company made a movie called The
Speaker 1: Green Night that slipped under the radar, not for me,
Speaker 1: buddy that's on the theater. Wasn't that an amazing movie?
Speaker 1: It is and one of the most like, uh, just
Speaker 1: sort of like in a in a day in time
Speaker 1: where everything is a Marvel movie or something, to to
Speaker 1: have something so original based on like an ancient tale.
Speaker 1: It was. It was great. It was so David Lowry
Speaker 1: is the director, and he's just a straight up a tier. Yeah,
Speaker 1: he's just making the movies that he wants to make.
Speaker 1: And their production companies called Sailor Bear. I think I'm
Speaker 1: so mad that that got snubbed at the Oscar. It's crazy.
Speaker 1: It's like cinematography and set design and costumes like it
Speaker 1: got nothing. It's crazy. It's wonderful. Yeah, and I think
Speaker 1: picked it up, which means their streak of like amazing movies, yes, flawless.
Speaker 1: It's a flawless streak they have. They haven't stumbled once
Speaker 1: in the entire the entire history of Come at me.
Speaker 1: If you've got a bad movie, it's not you know
Speaker 1: what I hear? Crickets? Is there a movie called Crickets?
Speaker 1: Maybe there's a movie out there called egg Egg from
Speaker 1: the sixties. Really yeah, I haven't seen it though, I
Speaker 1: just read about in Uncle John's Bathroom. Reader, I thought
Speaker 1: you were talking about the movie head the Monkeys, Monkeys
Speaker 1: right where they they tried to do the whole smile thing.
Speaker 1: Oh really, I think so they were there was kind
Speaker 1: of their answer to the beach Boys. Interesting. Alright, Uh,
Speaker 1: can we just keep talking about that stuff? All? Right?
Speaker 1: Here we go, Let's get back on this. The Fed
Speaker 1: funds rate. Is that what we're talking about. Yeah, we're
Speaker 1: talking about that's the rate that banks charge one another
Speaker 1: to borrow overnight to satisfy the reserve. Right, And this
Speaker 1: is the one that is just very simple supply and demand.
Speaker 1: If there are uh, there's a lot of cash and
Speaker 1: a lot of banks, then the rate is going to
Speaker 1: be lower. If there's demand for more money, then it's
Speaker 1: going to be higher. The Fed controls all of this
Speaker 1: in a roundabout way. Yeah, I mean they kind of
Speaker 1: control all of it in the roundabout way. And like
Speaker 1: also the economy like a Rube Goldberg mouse trap kind
Speaker 1: of way. Like it'd be so much easier if they
Speaker 1: were like, this is what you guys can charge one
Speaker 1: another as an interest rate. Yeah, but they don't do that.
Speaker 1: They let the market decide. They set a target and
Speaker 1: then let the market work and then they manipulate the market.
Speaker 1: That's right. So if the FED wants to lower that
Speaker 1: funds rate, it's going to buy securities from those banks.
Speaker 1: There's gonna be a more cash on hand all of
Speaker 1: a sudden. If they want to raise the funds rate,
Speaker 1: they're gonna sell government securities, which are I mean, anytime
Speaker 1: you start talking debt instruments, I just go a little
Speaker 1: crazy with excitement. But government securities are just debt instruments.
Speaker 1: They're used to fund government operations. Uh, it's basically so
Speaker 1: like the way I understood it was if Uh, like
Speaker 1: a lot of it. It's military spending and operations, and
Speaker 1: it just keeps them from having to like raise and
Speaker 1: lower taxes a lot because they want to keep taxes
Speaker 1: kind of stable. Right. So yeah, So with all that
Speaker 1: deficit spending, what they're doing is if if if the
Speaker 1: government could operate just on the taxes tax revenue it
Speaker 1: brings in, it would be it would be neutral, It
Speaker 1: wouldn't be operating at a depth that the wouldn't be
Speaker 1: any profit would be great. But it spends more money
Speaker 1: than it takes in, so it has to issue that debt,
Speaker 1: which is basically loans in the form of treasury bills.
Speaker 1: And that's what the FED is doing when they're out
Speaker 1: there buying or selling treasury bills, these debt securities. They're
Speaker 1: they're taking um debt in or out of the market.
Speaker 1: They're adding cash into or out of the market. And
Speaker 1: it's not like banks who trade with it's just a
Speaker 1: very select elite group of of what it's called primary
Speaker 1: dealers who buy and sell um these treasury bills with
Speaker 1: the Fed. They don't have a choice in this. If
Speaker 1: you want to be a primary dealer, you have to
Speaker 1: buy or sell depending on what the Fed wants to
Speaker 1: do at any given time. Right, And so by doing that,
Speaker 1: they say, all right, we want to buy a bunch
Speaker 1: of treasury bills because we want to inject cash into
Speaker 1: the market. UM. Here like sell those to us. Here's
Speaker 1: the cash. And by the way, we're not actually giving
Speaker 1: you this cash to go do anything with. This cash
Speaker 1: goes into your FED Federal Reserve account. Remember, and this
Speaker 1: is really important, Chuck, that account is non interest sparing.
Speaker 1: It makes zero sense in both sense of the word
Speaker 1: to um leave money in there when you, as a
Speaker 1: bank could make some money off of it loaning it
Speaker 1: to other banks. So the more money that the FED
Speaker 1: is put into those accounts, the more money there is
Speaker 1: to loan, meaning that interest rate drops. And this is
Speaker 1: also arcane. And again this is like a dozen people
Speaker 1: who deal with this on a day to day basis,
Speaker 1: But it has a ripple effect in that, um, when
Speaker 1: you when you lower the federal funds rate, those banks
Speaker 1: in turn end up lowering their rates to people like
Speaker 1: you and me. It has a cascading effect throughout the economy. Yeah,
Speaker 1: Like I think I used to look at the Federal
Speaker 1: eight and when they would move that and think that's
Speaker 1: the home mortgage loan rate. Essentially it translates into that.
Speaker 1: It does in a certain way for sure, but I
Speaker 1: thought the Fed sort of set that until last week.
Speaker 1: But the same but it's just you know, it's it's
Speaker 1: passed along on you know, like you said, both ways,
Speaker 1: either in better interest rates or worse interest rates for
Speaker 1: everything across the board for regular smells like us. Uh,
Speaker 1: there's also I mean, you can also buy you know,
Speaker 1: we'll talk about inflation in the stock market, which is
Speaker 1: where I get really confused. But um, remember how I
Speaker 1: was talking about, like the interest rates have to do
Speaker 1: with nothing but risk. Basically, if you want to buy
Speaker 1: if if you want to get out of the stock
Speaker 1: market and just say I'm only going to invest in
Speaker 1: like bonds and things like that in securities, then uh,
Speaker 1: you're not gonna make much money. The return on those
Speaker 1: is very very low because their government backed, which means
Speaker 1: the risk is very very low. People play the stock
Speaker 1: market because ideally you can get it like eight uh
Speaker 1: more money every year that you're doing it, whereas you're
Speaker 1: making like half of a percent. And that's the same way.
Speaker 1: Like you know, you you you make interest when you
Speaker 1: have money in the bank because the bank wants to
Speaker 1: use your money, so they're kind of taking a loan
Speaker 1: from you every day. You just don't realize it, but
Speaker 1: you get just a tiny less This why it doesn't
Speaker 1: payage to keep a ton of money in the bank,
Speaker 1: because you're making a tiny amount there too. Yeah, and
Speaker 1: so the federal funds rate UM has an effect on
Speaker 1: that as well. Right in the real world with the
Speaker 1: stock market. So if the federal if the Fed takes
Speaker 1: a bunch of money out of the out of the
Speaker 1: market um and floods the market with with like um
Speaker 1: treasury bills, right those treasury bills are easy peasy to
Speaker 1: come by, which means that they're worth less, which means
Speaker 1: that people are going to get less money from investing
Speaker 1: in them, which means they're going to turn to the
Speaker 1: style market because you're gonna make more money, right even
Speaker 1: though it's riskier. That juices the stock market when interest
Speaker 1: rates are low. When interest rates are high, meaning the
Speaker 1: Fed has soaked up a bunch of money, um, and
Speaker 1: they have sold a bunch of those those like treasury bills. Um.
Speaker 1: That means, yeah, I think I'm right, it's easy to get.
Speaker 1: That means that the interest rate has gone up, which
Speaker 1: means that you can get more money from those treasury bills,
Speaker 1: which makes the stock market less attractive to people who
Speaker 1: are investing in it, which usually signals a cooler economy.
Speaker 1: That's right. And I guess the final effect here before
Speaker 1: we break and then talk about inflation, which is so
Speaker 1: so fun, is if the FED lowers the funds rate,
Speaker 1: it's going to decrease the value of the dollar on
Speaker 1: the exchange market, on the foreign exchange market. And that
Speaker 1: is um, it's a little counterintuitive, but um, a little
Speaker 1: bit of a like a long term drop like the
Speaker 1: is not good you don't want the dollar to decrease
Speaker 1: and stay low. But on the short term, on the
Speaker 1: near term, um, it can be good for the American
Speaker 1: economy because if the dollar drops uh, then our money
Speaker 1: is not gonna be worth this much elsewhere. So buying
Speaker 1: things like products, are goods or services from overseas, it's
Speaker 1: gonna be more expensive. So they might turn to the
Speaker 1: home front to buy some of those goods and services,
Speaker 1: which can actually inject uh like kind of supercharge the
Speaker 1: local American economy on the near term, right, And so
Speaker 1: that actually can in turn lead to inflation accidentally. So
Speaker 1: if you have low interest rates, that means that money
Speaker 1: is abundant and cheap borrowing is cheap. A lot of
Speaker 1: people are out spending because interest rates are low. Um.
Speaker 1: So the dollar is actually deflating, which means that prices
Speaker 1: are going up. Right in some cases like this is
Speaker 1: actually good. The Fed wants to keep inflation at about
Speaker 1: two growth per year, So prices are going up. And
Speaker 1: the reason why the Fed would want to do that,
Speaker 1: as we'll see, is because there um, if you know
Speaker 1: that prices are going to generally continue going up, you're
Speaker 1: gonna buy something today rather than putting it off for later.
Speaker 1: They love you spending money. That's what they want is
Speaker 1: Americans buying things constantly, exactly. But you so you want
Speaker 1: prices to go up, but at a steady rate and
Speaker 1: a manageable rate. UM. The problem is is if you
Speaker 1: if if money becomes too abundant in the economy, UM,
Speaker 1: prices start to go up really quick because a lot
Speaker 1: of people have money, but there's not enough supply to
Speaker 1: satisfy that demand, which drives prices up even further, which
Speaker 1: is pretty much the situation that we find ourselves in now.
Speaker 1: So to deal with this, the FED has raised interest
Speaker 1: rates in the hope that it becomes more expensive to
Speaker 1: borrow money, people will spend less, and then it becomes
Speaker 1: more lucrative to save money because interest rates for like
Speaker 1: loans or for CDs for savings announce. All that stuff
Speaker 1: goes up, all right, and so you're spending less. Prices
Speaker 1: hopefully come down, but not so much that people start
Speaker 1: to get laid off because consumer demand has bottomed out.
Speaker 1: That's where we're at right now. This is the tight
Speaker 1: rope that we're watching. The FED kind of transverse right now.
Speaker 1: That's right, they're on a penny farthing on a tight
Speaker 1: rope with a little tiny umbrella that's comically small, comically small.
Speaker 1: All right, well, let's take our final break and we'll
Speaker 1: finish up with a little bit on inflation and how
Speaker 1: the interest rate continues to affect that right after this.
Speaker 1: So I have a feeling I'm trying to think of
Speaker 1: the stuff you should know, audience right now, all of
Speaker 1: our friends out there, and I feel that of them
Speaker 1: will not hear this part. Okay. Uh. The ones in
Speaker 1: that that that managed to stick this one out are
Speaker 1: probably like, I'm sort of learning this, guys, but it's
Speaker 1: really confusing. And then there's ten percent are economists and
Speaker 1: people that are sitting back and laughing and going, Nope,
Speaker 1: they got that part wrong. Wrong again. Alright, guys. Yeah,
Speaker 1: I feel like if you took all of the information
Speaker 1: in this episode and cut and paste it into a
Speaker 1: more coherent way that's Jerry's job, it would be it
Speaker 1: would be Yeah, it would be like we we got it. Yeah.
Speaker 1: I think we just explained it in a really confusing way. Probably,
Speaker 1: so we're a little all over the place. Um. All right,
Speaker 1: So we talked a little bit about inflation that they
Speaker 1: inflation is good in a slow and steady way. Would
Speaker 1: you say two percent a year? Yeah, that's what the
Speaker 1: FED shoots for. Shoots for two percent. Um. No inflation
Speaker 1: at all is is not good because that means you're
Speaker 1: looking at deflation. We talked about stag inflation in one
Speaker 1: of those a long time ago. What does stag inflation?
Speaker 1: Was that it? Yeah? Yeah, so stagflation is no good.
Speaker 1: I think that's when the rate is above like a
Speaker 1: certain percentage, and unemployments below a certain percentage, and there's
Speaker 1: one other indicator, uh, productivity I think maybe declines. Maybe,
Speaker 1: so prices remain high and keep going higher, but the
Speaker 1: wages are tumbling and people are getting laid off, and
Speaker 1: like the economy is starting to cool, but prices are
Speaker 1: staying high. Yeah, because ideally with inflation, wages are kind
Speaker 1: of going up in lockstep. Yeah, Like that's what you want.
Speaker 1: That's what you want ideally. I don't know the last
Speaker 1: time that that actually happened. You're probably right, so um,
Speaker 1: so you do want some inflation, but you don't want
Speaker 1: too much. Inflation is the upshot of it and a
Speaker 1: lot of um. We also did one on inflation two
Speaker 1: is um. I can't remember what the name of it.
Speaker 1: But it was just this past like June, I think,
Speaker 1: I look really yeah. Um, So there's a couple of
Speaker 1: explanations about how inflation works, and I don't know that
Speaker 1: one is necessarily right and the other is wrong. I
Speaker 1: think it just depends on the context, yeah, or the
Speaker 1: way you're looking at it, seems like. But they both
Speaker 1: seem really familiar. So I think we talked about them
Speaker 1: in the inflation episode we would have had to have.
Speaker 1: But one is called the demand pole theory, and that's
Speaker 1: kind of the explanation for what's going on right now
Speaker 1: that because of government stimulus, checks, because um of productivity
Speaker 1: being through the roof, because interest rates being really low,
Speaker 1: the economy has been a wash in easy money and
Speaker 1: people are buying, spending buying. A lot of people have
Speaker 1: a lot of money and are ready to spend it. Also,
Speaker 1: I think there was a lot of probably pent up
Speaker 1: demand from hanging around your house because of COVID. Now
Speaker 1: you're like, take my money, I want to do something,
Speaker 1: interest saying you know, I'm so bored. It's unprecedented stuff
Speaker 1: these past couple of years, and I don't think anyone
Speaker 1: really knew what the overall effect was going to be right.
Speaker 1: So the tight rope, if you look closely, is actually
Speaker 1: an ultra sharp razor blade that the FED is on
Speaker 1: thanks to this unprecedented event that we've just gone through.
Speaker 1: That's what they're trying to deal with. So, UM, the
Speaker 1: idea of a bunch of people having a bunch of
Speaker 1: money wanting everything all at once, from houses to cars
Speaker 1: to um, you know, game boys, maybe vintage game boys,
Speaker 1: um to poison t shirts um Like that means that
Speaker 1: we're all competing with one another for the finite supply
Speaker 1: of those things, which means that people selling them things
Speaker 1: to just supply and demand. Basically, you know capitalism and economics,
Speaker 1: Those prices rise, that's inflation. That's the demand pole theory,
Speaker 1: that's right. The other is cost push uh And this
Speaker 1: is basically kind of the opposite of that in some ways.
Speaker 1: It's the cost of doing business is going up. Uh.
Speaker 1: It is sort of separated from demand in that way. Uh.
Speaker 1: And they're they're all kinds of reasons this might happen.
Speaker 1: Dave mentioned a couple that like labor unions might have
Speaker 1: um like have to pay people a lot more money
Speaker 1: because they negotiated a new contract or something. Um. Exporting
Speaker 1: foreign goods shoots through the roof or something, or maybe
Speaker 1: there's a new administration all of a sudden, there's new
Speaker 1: taxes going on. But basically it's cost push because the
Speaker 1: rise in cost of doing that business, any business, is
Speaker 1: going to push the price of the products higher and
Speaker 1: higher and higher. Right. But it has nothing to do
Speaker 1: with demand necessarily. It's just no, it's become the cost
Speaker 1: of doing business has become more expensive. Right. And now
Speaker 1: this is where like I did pretty good with the
Speaker 1: stuff until interest rates affecting inflation because it seemed, I
Speaker 1: don't know, it just seems so uh rigged, and like
Speaker 1: I hate saying the word now, but that's the whole
Speaker 1: that's the whole thing. That's the entire point of what
Speaker 1: the Fed is doing. By raising that interest rate by
Speaker 1: half of a percent, they're trying to manipulate the economy
Speaker 1: and they're trying to do it in just the right
Speaker 1: way so that they can keep those inflation, keep inflation,
Speaker 1: slow it down, they can keep it in check. But
Speaker 1: at the same time, they don't want to bring prices
Speaker 1: down so much that businesses have less incentive to produce goods,
Speaker 1: right because right now, with prices really high, businesses are
Speaker 1: doing everything they can to get out as many widges
Speaker 1: as possible because they can sell them for historically high
Speaker 1: prices right now. If prices fall, eventually you get to
Speaker 1: a point where businesses are like, it's not really worth
Speaker 1: the investment. I I don't need this many people to
Speaker 1: make this many whiges anymore. People start laying people off,
Speaker 1: so unemployment starts to go up, and all of a sudden,
Speaker 1: you've overstepped. You've cooled the economy too much by adjusting,
Speaker 1: by targeting inflation, by adjusting the interest rate. That's the
Speaker 1: precarious position that they're in right now. They're trying to
Speaker 1: create that soft landing to get prices back down to
Speaker 1: a normal rate of inflation without cooling off the economy inadvertently.
Speaker 1: That's right. And uh, what I'm meant to look up
Speaker 1: to see is it always by quarters of a point? No?
Speaker 1: I mean they just did a half of a point No? No, no,
Speaker 1: But but that's too quote. Yeah, is there any an
Speaker 1: increment that's less than not that I've ever seen? Okay,
Speaker 1: so they go a quarter at a time, I feel
Speaker 1: like three quarters yeah, yeah, I think the most I
Speaker 1: saw was one point seven five or something like that,
Speaker 1: and that was back in two thousand, two thousand, I think,
Speaker 1: so the last time they had such a huge hike
Speaker 1: um as a as a half of a percent, it
Speaker 1: was actually like two and three quarters of a percent
Speaker 1: because I think of the dot com bubble, and they
Speaker 1: probably overstepped because there's a recession after that, right and
Speaker 1: in the housing uh situation. Yeah, that came later, right,
Speaker 1: but that was I'm sure all of that has affected
Speaker 1: all the tendrils effect one another. I'm sure. I think
Speaker 1: there was somebody who had a theory that every recession
Speaker 1: was connected to the last one somehow. Well, they say
Speaker 1: we're headed for one uh. Since the nineteen fifties. Um,
Speaker 1: there are economists that say every time we've exceeded four
Speaker 1: percent inflation unemployment was below five percent, then recession comes
Speaker 1: within two years of that moment, and that has happened
Speaker 1: here in April two, right, So they're they're saying, like
Speaker 1: recession is probably becoming historically speaking, Yeah, and so there's
Speaker 1: some tips if you want to prepare for recession. It's
Speaker 1: not necessarily the end of the world. Um. One thing
Speaker 1: is because job market is so hot right now. If
Speaker 1: you've been sitting there thinking like maybe I'll get a job.
Speaker 1: Go get a job now, so you don't have to
Speaker 1: like try to get a job during a recession and
Speaker 1: you can already have the job. Um, if you're thinking
Speaker 1: of selling your house, especially if you can downsize, this
Speaker 1: is a good time to sell because the housing market
Speaker 1: is really high right now, but you can expect it
Speaker 1: to come down if we go into a recession. Right,
Speaker 1: Set a little cash aside if you can sure. And
Speaker 1: then if you're an investor, if you have stocks sticks
Speaker 1: your plan, don't panic, don't worry, just stay the course.
Speaker 1: You can weather a recession in your stock prices will
Speaker 1: eventually go back up on the other side. Yeah, you
Speaker 1: know what, there was one thing I meant to mention
Speaker 1: before that's worth pointing out real quick. Is that remember
Speaker 1: we were talking about the Fed sets this rate that
Speaker 1: banks you know they lend each other money and stuff
Speaker 1: federal something federal funds. Right. Yeah, they don't actually say
Speaker 1: like you have to use this rate. Like banks still
Speaker 1: negotiate that with with each other, but they're they're saying,
Speaker 1: like that's the target rate, and then they do things
Speaker 1: to try and nudge these banks toward that, right, Right,
Speaker 1: And that's what they're doing when they're buying or selling
Speaker 1: bonds on the market, they're injecting or removing cash to
Speaker 1: make that the bank's actually charged closer to that target rate.
Speaker 1: They've said that's how they manipulate. But it's not like
Speaker 1: a bank says, well, we can only turn to this
Speaker 1: because the FED said, So that's what I'm saying. It'd
Speaker 1: be so much easier and so much more straightforward. The
Speaker 1: Fed said, this is what you can charge each other
Speaker 1: for the overnight rate and then adjust that rather than
Speaker 1: setting a target and then manipulating the markets. Yeah, but
Speaker 1: then that takes a negotiation out of the deal, and
Speaker 1: like it's just no fun. Yeah, it's probably it. Actually,
Speaker 1: you got anything else? I got nothing else? Well, that
Speaker 1: was a good first take. Let's start over and try
Speaker 1: it again. Well, since Chuck's made that sound, of course,
Speaker 1: that means it's time for a listener mate. I'm gonna
Speaker 1: call this uh new gin and tonic recipe I want
Speaker 1: to try. Yeah, it sounds good. That just came in.
Speaker 1: Hey guys, been listening for you years down end and
Speaker 1: was keen to learn about more about Champagne. As a
Speaker 1: fan of the Bubbly beverage but I got an extra
Speaker 1: treat when he went on a tangent about gin. Uh.
Speaker 1: This must have been a select champage. Yeah, Sampaigne one
Speaker 1: came out this past Saturday. Yeah, in real life, I
Speaker 1: r l so. Although I must say the best gin
Speaker 1: in the world now comes from Australia, arguably Tasmania. I'm
Speaker 1: also a big fan of the Saint George share war
Speaker 1: and chuck. It does not taste like feet. Maybe you
Speaker 1: should stop soaking your socks, your lime in your socks.
Speaker 1: So this is a cocktail recipe I'm going to try
Speaker 1: because it all sounds lovely. This is from Meg. Just
Speaker 1: get your basic London dry gin and tonic, but instead
Speaker 1: of just squirting a line in there, um, squeeze some
Speaker 1: orange in there and add a full rind and then uh,
Speaker 1: rub of fresh rosemary stick. Get that thing activated and
Speaker 1: then put that in there and stirred around. You sound
Speaker 1: like you're making this listener mail up. No, no no, no,
Speaker 1: and then uh and cracked pepper. So you basically got
Speaker 1: a gin and tonic with orange, rosemary and black pepper. Yeah,
Speaker 1: be careful with the pepper though I've had it before
Speaker 1: with even just not cracked, but whole peppercorns. You can
Speaker 1: act sidentally bring your throat pretty good, Yeah, because the
Speaker 1: gin like gets it ready and the black pepper finishes
Speaker 1: the job. Okay, well I'm gonna try it out. That's
Speaker 1: from Meg and Australia. Just remember a little goes a
Speaker 1: long way. A little goes a long way. Thanks a lot, Meg,
Speaker 1: we appreciate that. Um we love new gin recipes. Really,
Speaker 1: any kind of recipe. Yeah, if you want to get
Speaker 1: in touch with us like Meg did and give us
Speaker 1: a recipe or just say hi or whatever, you can
Speaker 1: send us an email to Stuff podcast at iHeart radio
Speaker 1: dot com. Stuff you Should Know is a production of
Speaker 1: iHeart Radio. For more podcasts my heart Radio, visit the
Speaker 1: i heart Radio app, Apple Podcasts, or wherever you listen
Speaker 1: to your favorite shows.