1 00:00:00,280 --> 00:00:02,840 Speaker 1: Brought to you by the reinvented two thousand twelve camera. 2 00:00:03,160 --> 00:00:07,560 Speaker 1: It's ready. Are you welcome to Stuff You Should Know 3 00:00:08,160 --> 00:00:16,439 Speaker 1: from house Stuff Works dot Com. Hey, and welcome to 4 00:00:16,440 --> 00:00:19,680 Speaker 1: the podcast. I'm Josh Clark, There's Charles W. Chuck Bryant, 5 00:00:19,840 --> 00:00:24,360 Speaker 1: and this is Stuff you Should Know the podcast. Um, 6 00:00:24,400 --> 00:00:29,120 Speaker 1: and we are going to be talking today about econ 7 00:00:29,440 --> 00:00:32,400 Speaker 1: one oh one. That's right, this is Chuck's favorite subject. 8 00:00:33,000 --> 00:00:36,440 Speaker 1: I think this in UM physics. I know, I know 9 00:00:36,479 --> 00:00:40,320 Speaker 1: why I hate econ boy, because I just money. I 10 00:00:40,360 --> 00:00:45,360 Speaker 1: hate money, and some tough economists beat you up on No, 11 00:00:45,560 --> 00:00:48,680 Speaker 1: just money, the whole thing. Like Emily pays all our bills. 12 00:00:48,680 --> 00:00:51,280 Speaker 1: I can't even if I had to do that. You said, 13 00:00:51,320 --> 00:00:53,760 Speaker 1: she's the CFO, right, Yeah, if I had to be 14 00:00:53,800 --> 00:00:56,920 Speaker 1: the CFO, then we'd be in big trouble. Yeah, because 15 00:00:56,920 --> 00:00:59,800 Speaker 1: I just don't like it. I don't like anything about it. Well, 16 00:00:59,800 --> 00:01:04,240 Speaker 1: this is more UM, less household economics, more macro economics. Yeah, 17 00:01:04,240 --> 00:01:06,480 Speaker 1: this is interesting. I thought this is there. There's a 18 00:01:06,600 --> 00:01:14,320 Speaker 1: historical battle involved the seventies. People in Bell Bottoms, probably Um, 19 00:01:14,480 --> 00:01:19,800 Speaker 1: Ronald Reagan, everybody. That's the whole cast of characters. Let's 20 00:01:19,840 --> 00:01:23,400 Speaker 1: do it well, Chuck. I was reading an article UM 21 00:01:23,440 --> 00:01:28,000 Speaker 1: as is my Way, UM about rampant inflation in two 22 00:01:28,000 --> 00:01:33,200 Speaker 1: thousand eleven. YEA. And basically, this guy named Michael Snyder 23 00:01:33,560 --> 00:01:38,480 Speaker 1: UM was is warning that we're going to see, I think, 24 00:01:38,480 --> 00:01:41,760 Speaker 1: as he puts, an inflation that we've never seen before 25 00:01:42,200 --> 00:01:46,440 Speaker 1: in the US. And inflation is this huge boogeyman where 26 00:01:47,600 --> 00:01:53,280 Speaker 1: money buys less because prices rise. And there's all sorts 27 00:01:53,320 --> 00:01:55,640 Speaker 1: of reasons that comes about, but one of the one 28 00:01:55,680 --> 00:01:59,720 Speaker 1: of the if you look at classic economics, the reason 29 00:01:59,760 --> 00:02:03,280 Speaker 1: why inflation tends to happen is that there's too much 30 00:02:03,320 --> 00:02:06,680 Speaker 1: of something, right, the old supply demand right. You have 31 00:02:06,880 --> 00:02:09,960 Speaker 1: in this case, too much money on the market. Therefore, 32 00:02:10,560 --> 00:02:13,440 Speaker 1: since money is subject to supply demand, more money there 33 00:02:13,480 --> 00:02:16,400 Speaker 1: is on the market, the cheaper it is because there's 34 00:02:16,440 --> 00:02:20,280 Speaker 1: more of it, demand goes down, prices go up, right 35 00:02:20,480 --> 00:02:25,720 Speaker 1: for the cost of goods exactly, and you have inflation. 36 00:02:26,240 --> 00:02:29,680 Speaker 1: What this guy's warning about is that UM airline fares 37 00:02:30,240 --> 00:02:33,079 Speaker 1: for the past holiday season were thirty percent more than 38 00:02:33,080 --> 00:02:36,600 Speaker 1: they were the year before. H price of food has 39 00:02:36,639 --> 00:02:42,799 Speaker 1: been increasing, UM. There's been double digit health insurance premium 40 00:02:42,880 --> 00:02:45,880 Speaker 1: race races. I haven't noticed. I don't think that that 41 00:02:46,120 --> 00:02:48,640 Speaker 1: has anything to do with inflation. I think that's just 42 00:02:48,680 --> 00:02:53,880 Speaker 1: the insurance companies punishing the USA UM. He also he 43 00:02:53,919 --> 00:02:58,440 Speaker 1: gives some other steps cotton increased, beef up, pork up 44 00:02:58,520 --> 00:03:03,880 Speaker 1: sixty percent, hides or ups you know that run for 45 00:03:03,960 --> 00:03:09,320 Speaker 1: the hills. Hides are up. UM and food prices especially 46 00:03:09,320 --> 00:03:13,320 Speaker 1: are kind of a problem when inflation occurs because you 47 00:03:13,400 --> 00:03:17,040 Speaker 1: need food to eat. That's very sensitive. And the USDA 48 00:03:17,160 --> 00:03:20,640 Speaker 1: released their figure saying basically like, yes, porks can arise, 49 00:03:20,760 --> 00:03:24,680 Speaker 1: some beefs can arise some, but overall the food cost 50 00:03:24,760 --> 00:03:26,880 Speaker 1: inflation is going to be like one percent, which is 51 00:03:26,919 --> 00:03:30,560 Speaker 1: definitely doable. If you look at the government statistics, right, 52 00:03:31,040 --> 00:03:33,959 Speaker 1: our inflation is pretty much at zero maybe one percent, 53 00:03:34,280 --> 00:03:37,000 Speaker 1: which now, yeah, which is actually less than healthy. You 54 00:03:37,120 --> 00:03:40,520 Speaker 1: want things to increase, you want inflation to take place, 55 00:03:40,720 --> 00:03:43,080 Speaker 1: but you wanted to plod along at a very slow, 56 00:03:43,160 --> 00:03:46,720 Speaker 1: steady rate. Inflation is the reason why up to say 57 00:03:46,800 --> 00:03:51,120 Speaker 1: two thousand and seven, house grew in value over thirty 58 00:03:51,200 --> 00:03:54,600 Speaker 1: years thanks to inflation. You paid X number of dollars 59 00:03:54,680 --> 00:03:57,080 Speaker 1: for it, and it increased in value in large part 60 00:03:57,160 --> 00:03:59,680 Speaker 1: because inflation. So inflation is good as long as the 61 00:03:59,760 --> 00:04:03,720 Speaker 1: center control hyperinflation is really bad. The worst thing of all, though, 62 00:04:04,040 --> 00:04:07,400 Speaker 1: is stag inflation. And if inflation happens right now, we 63 00:04:07,520 --> 00:04:10,320 Speaker 1: are a prime in a in a prime seat for 64 00:04:10,560 --> 00:04:13,280 Speaker 1: stag inflation, which would be very, very bad. Do you 65 00:04:13,360 --> 00:04:16,039 Speaker 1: want to tell everybody what stag inflation? Can? I give 66 00:04:16,080 --> 00:04:18,760 Speaker 1: a couple of stats because he's one form later on 67 00:04:18,839 --> 00:04:22,920 Speaker 1: when when we're talking about inflation, h July two thousand 68 00:04:23,040 --> 00:04:26,440 Speaker 1: eight is when it peaked in the last let's just 69 00:04:26,480 --> 00:04:29,880 Speaker 1: say decade inflation. Yeah, July two thousand eight, it peaked 70 00:04:29,920 --> 00:04:32,640 Speaker 1: at five point six percent, So keep that number in mind. Okay, 71 00:04:32,640 --> 00:04:36,120 Speaker 1: I'm gonna write it down. And December of last year, 72 00:04:36,400 --> 00:04:38,320 Speaker 1: so just a couple of short months ago, it was 73 00:04:38,360 --> 00:04:42,360 Speaker 1: about one point five and the average for two thousand 74 00:04:42,480 --> 00:04:48,480 Speaker 1: nine was negative point three. It's a negative percentage in 75 00:04:48,520 --> 00:04:50,960 Speaker 1: two thousand nine. And there's something to be said about 76 00:04:51,040 --> 00:04:53,600 Speaker 1: deflation as well, because that money that you do have, 77 00:04:53,800 --> 00:04:57,360 Speaker 1: if you have any, becomes much more valuable. That's right. 78 00:04:57,600 --> 00:04:59,800 Speaker 1: So keep those numbers in mind as as we proceed here. 79 00:05:00,120 --> 00:05:04,719 Speaker 1: Uh down point point three four, negative point three four 80 00:05:05,320 --> 00:05:07,839 Speaker 1: in two thousand nine, and we peaked in two thousand 81 00:05:07,920 --> 00:05:11,000 Speaker 1: eight five, which was a staggering number I got him 82 00:05:11,080 --> 00:05:13,080 Speaker 1: compared to like everybody. You can ask me if you 83 00:05:13,200 --> 00:05:15,880 Speaker 1: need a reminder later on. So, stagflation, Josh, is not 84 00:05:16,000 --> 00:05:18,120 Speaker 1: something that we made up, even though I thought it 85 00:05:18,160 --> 00:05:22,640 Speaker 1: was something you made up. It describes a really bad, 86 00:05:22,839 --> 00:05:27,000 Speaker 1: perfect storm of economic news. It's when you have high unemployment, right, 87 00:05:27,880 --> 00:05:32,880 Speaker 1: slow growth coupled with high inflation. And this is something 88 00:05:32,920 --> 00:05:35,680 Speaker 1: that people didn't think was possible. No, and and let's 89 00:05:35,839 --> 00:05:37,960 Speaker 1: let's describe that. Let's point that out. Where we are 90 00:05:38,080 --> 00:05:39,920 Speaker 1: right now. We have very high unemployment I think it's 91 00:05:39,960 --> 00:05:44,479 Speaker 1: at ten percent nationally, pretty much getting better. Slow economic growth, 92 00:05:44,600 --> 00:05:47,640 Speaker 1: for sure. We're in a recession, after all, still crawling 93 00:05:47,680 --> 00:05:49,320 Speaker 1: out of it, trying to at least, Right, we're in 94 00:05:49,400 --> 00:05:52,520 Speaker 1: a basically a stagnant economy, which means it's it's growing 95 00:05:52,640 --> 00:05:55,160 Speaker 1: very sluggishly or not growing at all. Yes, but our 96 00:05:55,240 --> 00:05:58,960 Speaker 1: inflation is is pretty good, right, thankfully. But since we 97 00:05:59,040 --> 00:06:01,080 Speaker 1: have those other two I said, we're in a prime 98 00:06:01,200 --> 00:06:04,640 Speaker 1: spot for if inflation does come along, We're in a 99 00:06:04,720 --> 00:06:08,160 Speaker 1: prime spot for stag inflation. The reason stag inflation is 100 00:06:08,279 --> 00:06:12,800 Speaker 1: so insidious, Chuck, is because it forms a vicious cycle. Right, 101 00:06:14,160 --> 00:06:18,560 Speaker 1: So you've got um you have high prices because of inflation, 102 00:06:19,160 --> 00:06:22,960 Speaker 1: which means that people can't spend as much money, or 103 00:06:23,000 --> 00:06:25,200 Speaker 1: when they do spend money, it doesn't buy as much. 104 00:06:25,360 --> 00:06:28,480 Speaker 1: Your dollars shrinking essentially. Okay, so you have a shrinking dollar. 105 00:06:28,560 --> 00:06:31,080 Speaker 1: You know, high unemployment, which means people have less money 106 00:06:31,240 --> 00:06:34,600 Speaker 1: to spend, right in, Your savings aren't worth as much, 107 00:06:34,920 --> 00:06:39,240 Speaker 1: right which ultimately leads to a sluggish economy. So there's 108 00:06:39,279 --> 00:06:42,120 Speaker 1: no way to to for this thing to naturally cycle 109 00:06:42,200 --> 00:06:45,160 Speaker 1: out of it like this could keep going indefinitely, this 110 00:06:45,720 --> 00:06:50,720 Speaker 1: horrible plodding along what I think Carter called malaise. What 111 00:06:50,839 --> 00:06:54,880 Speaker 1: he said, I think so I believe it uh economic 112 00:06:54,920 --> 00:06:57,440 Speaker 1: slow down as normal people don't. You know, a lot 113 00:06:57,480 --> 00:06:59,960 Speaker 1: of people freaked out with the recession, but people really 114 00:07:00,000 --> 00:07:03,560 Speaker 1: he knew about it. Economics said, recessions are kind of 115 00:07:03,600 --> 00:07:05,680 Speaker 1: what corrects it in the end, exactly we've talked about, 116 00:07:06,040 --> 00:07:08,560 Speaker 1: so don't freak out too much in our in our audiobook, Yeah, 117 00:07:08,600 --> 00:07:10,600 Speaker 1: we talked about how if you look at the economy 118 00:07:11,040 --> 00:07:13,679 Speaker 1: is made up of like a forest. There's a big, heavy, 119 00:07:13,840 --> 00:07:19,120 Speaker 1: huge trees which represent really well managed businesses, and then 120 00:07:19,160 --> 00:07:21,720 Speaker 1: you've got the underbrush which are just kind of add ons. 121 00:07:21,760 --> 00:07:25,840 Speaker 1: They're they're artificial almost they they shouldn't necessarily be there. 122 00:07:25,840 --> 00:07:29,640 Speaker 1: They're kind of sucking off of the bubble speculation and 123 00:07:29,880 --> 00:07:35,080 Speaker 1: artificially inflated economy. Right, and then when the wildfire comes along, 124 00:07:35,440 --> 00:07:40,040 Speaker 1: which is the recession, the underbrush is burned away and 125 00:07:40,680 --> 00:07:45,040 Speaker 1: things correct themselves. Sure, it's a pretty um dehumanizing way 126 00:07:45,120 --> 00:07:49,360 Speaker 1: of looking at things, but so is economics. You're right. Uh, 127 00:07:49,440 --> 00:07:51,800 Speaker 1: And part of the seventies people didn't think this was 128 00:07:51,880 --> 00:07:55,240 Speaker 1: possible because of our friend Mr Kane's John and Inner 129 00:07:55,320 --> 00:07:58,559 Speaker 1: Kines with stagflation. Yeah, it wasn't even a word before 130 00:07:58,600 --> 00:08:00,320 Speaker 1: the seventies. Yeah, well we should point out to it. 131 00:08:00,360 --> 00:08:02,760 Speaker 1: It's a contraction of stagnant and inflation. If you didn't 132 00:08:02,760 --> 00:08:05,760 Speaker 1: figure that out, So there that is. Did somebody thought 133 00:08:05,800 --> 00:08:12,040 Speaker 1: a stagged party and inflation? Really? Oh well, a lot 134 00:08:12,040 --> 00:08:15,640 Speaker 1: of people thought bartering was bartending. I noticed that that. 135 00:08:15,720 --> 00:08:19,160 Speaker 1: We got a lot of suggestions for bartending podcasts, and 136 00:08:19,200 --> 00:08:21,520 Speaker 1: all of a sudden, after the bartering podcast, people got 137 00:08:21,560 --> 00:08:24,600 Speaker 1: their whistle wet. So if you're canes I in in 138 00:08:24,680 --> 00:08:29,200 Speaker 1: your economic theory, you're gonna favor supply and demand and 139 00:08:29,240 --> 00:08:31,440 Speaker 1: you're gonna think that's pretty much what it's all about. 140 00:08:31,520 --> 00:08:34,600 Speaker 1: Demand is high. You got a booming economy, prices are 141 00:08:34,600 --> 00:08:37,520 Speaker 1: going to go up. Inflation is gonna rise some in 142 00:08:37,640 --> 00:08:41,679 Speaker 1: relation to uh, the economy rising. Right. What what you're 143 00:08:41,720 --> 00:08:44,599 Speaker 1: talking about is the Phillips curve, right, yeah? Is that 144 00:08:44,800 --> 00:08:47,040 Speaker 1: was was that the Phillips curve? Yeah, So that the 145 00:08:47,600 --> 00:08:52,520 Speaker 1: X axis of the Phillips curve is unemployment, yes, and 146 00:08:52,600 --> 00:08:55,959 Speaker 1: then the y axis is inflation, right, yeah, And that 147 00:08:56,040 --> 00:08:59,120 Speaker 1: happened from about fifty eight to seventy three post war boom, 148 00:08:59,559 --> 00:09:01,839 Speaker 1: things were rising in that in sort of a not 149 00:09:01,920 --> 00:09:05,280 Speaker 1: a wonder one ratio, but it even happened before then, 150 00:09:05,360 --> 00:09:07,920 Speaker 1: Like the Phillips curve is is vetted that that it 151 00:09:08,120 --> 00:09:15,760 Speaker 1: is correct. Basically, as unemployment rises, inflation goes down naturally, 152 00:09:16,480 --> 00:09:21,839 Speaker 1: and if you have low unemployment, inflation rises if the 153 00:09:21,960 --> 00:09:25,520 Speaker 1: converse is true, supposedly right, And the reason why is 154 00:09:25,640 --> 00:09:31,800 Speaker 1: because when unemployments high, demand is low, therefore inflation is down. 155 00:09:31,920 --> 00:09:35,319 Speaker 1: Prices are low, so inflation is down. And historically this 156 00:09:35,600 --> 00:09:38,000 Speaker 1: this holds up if you go back and chart all 157 00:09:38,080 --> 00:09:41,920 Speaker 1: this up to the seventies, this is this was the case, 158 00:09:42,600 --> 00:09:45,520 Speaker 1: and that's how it is naturally. The problem is the 159 00:09:45,679 --> 00:09:49,079 Speaker 1: FED in the sixties thought, well, if we just keep 160 00:09:49,200 --> 00:09:54,560 Speaker 1: unemployment artificially low, will trade that off for slightly higher inflation. 161 00:09:54,640 --> 00:09:56,800 Speaker 1: But we can keep on top of that so we 162 00:09:56,920 --> 00:10:00,640 Speaker 1: can expect high inflation and act accordingly, but we'll have 163 00:10:00,840 --> 00:10:04,200 Speaker 1: artificially low unemployment or near full employment, which is where 164 00:10:04,280 --> 00:10:07,160 Speaker 1: everybody's employing. Yeah. They basically thought the rate of inflation 165 00:10:07,280 --> 00:10:10,000 Speaker 1: would rise in a safe manner that they could keep 166 00:10:10,080 --> 00:10:12,000 Speaker 1: up with. Yes, do you remember I don't know if 167 00:10:12,000 --> 00:10:14,559 Speaker 1: I've used this before, but do you remember um that 168 00:10:14,720 --> 00:10:18,160 Speaker 1: Simpsons where Homer brings home Pinty the lobster. Have I 169 00:10:18,280 --> 00:10:21,520 Speaker 1: used this one before and puts Pinchy in the fish 170 00:10:21,600 --> 00:10:25,560 Speaker 1: tank And Pinching needs salt water, but the goldfish needs freshwater, 171 00:10:25,880 --> 00:10:28,120 Speaker 1: so it keeps adding salt and then like regular water 172 00:10:28,240 --> 00:10:30,439 Speaker 1: until they're both like half floating in the middle of 173 00:10:30,559 --> 00:10:33,199 Speaker 1: trying to balance it, and you end up killing both. Right. 174 00:10:33,559 --> 00:10:35,600 Speaker 1: But that's kind of what you have to do if 175 00:10:35,640 --> 00:10:38,840 Speaker 1: you're going to get in and regulate the economy, if 176 00:10:38,880 --> 00:10:40,560 Speaker 1: you're not just going to let it do its own thing, 177 00:10:41,080 --> 00:10:43,199 Speaker 1: you have that's the that's the trick you have to 178 00:10:43,280 --> 00:10:45,720 Speaker 1: do to keep a scary job. Oh yeah, it's gotta 179 00:10:45,760 --> 00:10:48,679 Speaker 1: be terrifying. Imagine the pressure that like Bernanke and those 180 00:10:48,720 --> 00:10:51,559 Speaker 1: who preceded him are under, because I mean, history will 181 00:10:51,600 --> 00:10:54,040 Speaker 1: make a villain or a monster or a hero out 182 00:10:54,080 --> 00:10:57,240 Speaker 1: of you depending on what you do. You're not going 183 00:10:57,360 --> 00:11:00,640 Speaker 1: to just do nothing. It's you're going to leave an 184 00:11:00,679 --> 00:11:04,240 Speaker 1: impression on depending on what you did. Like, you can't 185 00:11:04,240 --> 00:11:05,920 Speaker 1: go in and lead the FED and be like, I'm 186 00:11:05,960 --> 00:11:08,320 Speaker 1: not doing anything. You know, it's two thumbs and wouldn't 187 00:11:08,320 --> 00:11:12,880 Speaker 1: want that job. This guy right here. So you said 188 00:11:12,920 --> 00:11:15,880 Speaker 1: they got it wrong, Yeah, they got the Philip they 189 00:11:16,040 --> 00:11:18,679 Speaker 1: got their interpretation of the Phillips curb wrong. Yeah, and 190 00:11:18,720 --> 00:11:21,599 Speaker 1: what that produced is called a wage price spiral. And 191 00:11:22,559 --> 00:11:24,160 Speaker 1: we can get into more detail, but the long and 192 00:11:24,240 --> 00:11:27,600 Speaker 1: short of it is that inflation rows faster than wages. 193 00:11:27,720 --> 00:11:31,800 Speaker 1: Did you want to know how let's hear it. Well, 194 00:11:31,880 --> 00:11:35,839 Speaker 1: this is this is what basically bucked the Phillips curve. 195 00:11:36,520 --> 00:11:39,760 Speaker 1: Is that through government spending, like the government can spend 196 00:11:39,840 --> 00:11:43,719 Speaker 1: on uh, infrastructure, the public sector to create jobs right 197 00:11:44,160 --> 00:11:49,440 Speaker 1: through government spending UM and through you know tax policy 198 00:11:50,120 --> 00:11:53,480 Speaker 1: that that forms UM the way the government can create 199 00:11:54,040 --> 00:11:58,120 Speaker 1: or manipulate aggregate demand. Okay, I's say for example, you 200 00:11:58,240 --> 00:12:02,240 Speaker 1: keep taxes low and you increase consumer spending, you can 201 00:12:02,320 --> 00:12:06,880 Speaker 1: kick start an economy. Right. Um, you keep unemployment low, 202 00:12:07,200 --> 00:12:09,160 Speaker 1: you trade off for a higher rate of inflation, like 203 00:12:09,280 --> 00:12:12,560 Speaker 1: we saw they did. That's fine, that can conceivably work. 204 00:12:12,920 --> 00:12:16,079 Speaker 1: The problem is they put too much money into an economy, 205 00:12:16,480 --> 00:12:19,280 Speaker 1: kept pumping money into the economy no matter what. And 206 00:12:19,400 --> 00:12:22,040 Speaker 1: what they found was, like you said, the wage price spiral, 207 00:12:22,360 --> 00:12:26,240 Speaker 1: and basically it's where prices rise. So the the they 208 00:12:26,480 --> 00:12:29,280 Speaker 1: the fed, new that inflation was going to happen. But 209 00:12:29,400 --> 00:12:32,920 Speaker 1: when inflation happens, prices rise. When labor is sitting there 210 00:12:32,960 --> 00:12:35,400 Speaker 1: working their tail off and prices are rising, they make 211 00:12:35,480 --> 00:12:40,000 Speaker 1: the assumption that that means that industry, their bosses, their 212 00:12:40,000 --> 00:12:43,800 Speaker 1: employers are making gobs of cash. Well, labor says, we 213 00:12:43,880 --> 00:12:47,840 Speaker 1: want some of that cash, so give us more, give 214 00:12:47,920 --> 00:12:50,199 Speaker 1: us higher wages, which they did to a certain degree, 215 00:12:50,600 --> 00:12:52,439 Speaker 1: but they couldn't keep up. But the problem with that 216 00:12:52,640 --> 00:12:56,000 Speaker 1: if you're if you're captain of industry, is that if 217 00:12:56,080 --> 00:13:00,800 Speaker 1: you pay more, that raises your cost of product, which 218 00:13:00,880 --> 00:13:03,040 Speaker 1: means that you have to raise the price, which means 219 00:13:03,120 --> 00:13:06,640 Speaker 1: that your employees need more money because of inflation, and 220 00:13:06,760 --> 00:13:09,760 Speaker 1: it creates this again another vicious cycle, and that's the 221 00:13:09,840 --> 00:13:14,960 Speaker 1: wage price spiral. It spirals upward and um basically eventually 222 00:13:15,000 --> 00:13:19,360 Speaker 1: employers stop increasing wages and inflation just takes off. And 223 00:13:19,440 --> 00:13:22,320 Speaker 1: we might have survived that Josh in the seventies, as 224 00:13:22,360 --> 00:13:24,880 Speaker 1: bad as it was, we might have eked through if 225 00:13:24,960 --> 00:13:28,480 Speaker 1: it were not for the oil embargo of nineteen seventy three. 226 00:13:29,160 --> 00:13:31,680 Speaker 1: When everyone knows oil went through the roof, and that's 227 00:13:31,720 --> 00:13:35,040 Speaker 1: not just uh, you know Sally at the gas pomp, 228 00:13:35,120 --> 00:13:38,880 Speaker 1: that's across all industry, and it the that coupled with 229 00:13:39,000 --> 00:13:42,360 Speaker 1: everything else going on, all of a sudden. In nineteen seventy, 230 00:13:43,040 --> 00:13:46,560 Speaker 1: inflation was at five point five percent, which in July 231 00:13:46,640 --> 00:13:48,720 Speaker 1: tw two thousand eight, I said it was five point six. 232 00:13:49,520 --> 00:13:51,560 Speaker 1: So in nineteen seventy they thought it was high at 233 00:13:51,600 --> 00:13:56,160 Speaker 1: five point five, seventy four, twelve point two, and then 234 00:13:56,200 --> 00:13:58,760 Speaker 1: it peaked at thirteen point three percent in nineteen s 235 00:13:59,520 --> 00:14:03,319 Speaker 1: and again most economists agree that you want an economy 236 00:14:03,440 --> 00:14:07,880 Speaker 1: that's inflating in about two percent a year. This is yeah, 237 00:14:07,880 --> 00:14:10,040 Speaker 1: I mean into July two thousand eight at five point 238 00:14:10,080 --> 00:14:13,640 Speaker 1: six percent, people were freaking and imagine thirteen point three percent. 239 00:14:14,160 --> 00:14:18,000 Speaker 1: So basically Carter's just standing around, just getting it from 240 00:14:18,120 --> 00:14:21,040 Speaker 1: all sides. He's got hostages in a ran that he 241 00:14:21,120 --> 00:14:26,240 Speaker 1: can't get get um released. Um, he's got malaise forever. 242 00:14:26,520 --> 00:14:29,880 Speaker 1: You got stock market that basically stopped working, right, he's 243 00:14:29,920 --> 00:14:32,880 Speaker 1: got brownouts and lines of the gas pump, and yeah, 244 00:14:33,040 --> 00:14:37,160 Speaker 1: he's got an economy that's um and out of control 245 00:14:37,200 --> 00:14:39,520 Speaker 1: of inflation. He has no idea what to do. Right, 246 00:14:40,280 --> 00:14:43,440 Speaker 1: then insteps. This guy named Paul Volker cannot throw in 247 00:14:43,520 --> 00:14:46,960 Speaker 1: one more stat Uh talked about the stock market. From 248 00:14:47,000 --> 00:14:50,040 Speaker 1: seventy to seventy nine, the SMP five returned an average 249 00:14:50,080 --> 00:14:54,280 Speaker 1: of five point nine percent annually. But when you've got UH, 250 00:14:54,440 --> 00:14:57,400 Speaker 1: the inflation that you subtract, you're actually losing money. The 251 00:14:57,520 --> 00:15:00,400 Speaker 1: entire market is losing money two point six per center, right, 252 00:15:00,480 --> 00:15:04,640 Speaker 1: two point six percentage points lower than inflation. So basically 253 00:15:04,680 --> 00:15:07,360 Speaker 1: everybody's throwing in on the stock market during that time 254 00:15:07,920 --> 00:15:12,680 Speaker 1: was paying two point six percent in losses. Not good, No, 255 00:15:13,040 --> 00:15:16,160 Speaker 1: that's very bad, especially couple with inflation. People like you said, 256 00:15:16,200 --> 00:15:18,800 Speaker 1: we're freaking out right, So bring us on to the 257 00:15:19,120 --> 00:15:22,160 Speaker 1: savior of sorts. So Paul Vulker comes along, and you 258 00:15:22,280 --> 00:15:26,000 Speaker 1: might recognize that named chuck. He's an economic advisor to Obama, 259 00:15:27,160 --> 00:15:32,080 Speaker 1: but he got his chops as the head of the FED. UM. 260 00:15:32,200 --> 00:15:36,200 Speaker 1: And in nineteen seventy nine he basically says, Okay, Kensian 261 00:15:36,640 --> 00:15:41,400 Speaker 1: liberal monetary policy is is done. It's failing us, or 262 00:15:41,560 --> 00:15:44,480 Speaker 1: we're falling apart right now. We have to try something else. 263 00:15:45,000 --> 00:15:48,560 Speaker 1: And basically what they tried was the stuff that was created. 264 00:15:48,640 --> 00:15:52,560 Speaker 1: It's it's called neoliberalism. Is created by a guy named 265 00:15:52,600 --> 00:15:58,000 Speaker 1: Milton Friedman. Yes, and his basic formula was, quote too 266 00:15:58,120 --> 00:16:01,280 Speaker 1: much money chasing too few goods. So the Fed's free 267 00:16:01,360 --> 00:16:04,520 Speaker 1: up too much money to circulate in the economy, and 268 00:16:04,680 --> 00:16:07,160 Speaker 1: that's not a good thing. Right. So everything we see 269 00:16:07,200 --> 00:16:12,760 Speaker 1: the FED doing now is based on Freedman's economic policies. Right. Um, 270 00:16:13,320 --> 00:16:18,120 Speaker 1: Remember we said that um with with the FED in 271 00:16:18,200 --> 00:16:21,320 Speaker 1: the sixties and then the seventies. Um that their whole 272 00:16:21,400 --> 00:16:23,480 Speaker 1: thing was throw more money at it because that will 273 00:16:23,560 --> 00:16:27,560 Speaker 1: increase spending, which will increase demand, and yetta, yetta, everything 274 00:16:27,560 --> 00:16:30,640 Speaker 1: will be fine in the midst of this emergency. The 275 00:16:30,920 --> 00:16:33,800 Speaker 1: what's considered the fatal flaw they made was that rather 276 00:16:33,920 --> 00:16:36,840 Speaker 1: than start sucking up some of this money to make 277 00:16:36,920 --> 00:16:39,880 Speaker 1: it more scarce, and two Hens make it more valuable. UM, 278 00:16:40,200 --> 00:16:44,120 Speaker 1: they they pump more money into it. Well, Vulker comes along, 279 00:16:44,240 --> 00:16:47,240 Speaker 1: using Freedman's ideas and says, we gotta get some money 280 00:16:47,280 --> 00:16:50,080 Speaker 1: off of the market, so we're gonna start buying it up. 281 00:16:50,360 --> 00:16:53,160 Speaker 1: And what they did was they started issuing treasury bonds. 282 00:16:53,400 --> 00:16:56,840 Speaker 1: They sold t bills. That's how the government issues and 283 00:16:57,240 --> 00:17:00,600 Speaker 1: UM and purchases debt, and that's how they control the 284 00:17:00,640 --> 00:17:02,840 Speaker 1: amount of money on the market. You know that. Yeah, 285 00:17:03,480 --> 00:17:06,600 Speaker 1: that's Freedman's ideas. So when the economy is good, they're 286 00:17:06,600 --> 00:17:10,800 Speaker 1: gonna raise interest rates to slow down the flow of 287 00:17:10,840 --> 00:17:14,360 Speaker 1: money basically, yeah, because bubbles no better than a recession. Yeah, 288 00:17:14,400 --> 00:17:16,280 Speaker 1: and the same in reverse. When the economy is tanking, 289 00:17:16,280 --> 00:17:18,280 Speaker 1: they're gonna lower the interest rate and say, hey, go 290 00:17:18,400 --> 00:17:20,760 Speaker 1: out by house because look how it is exactly which 291 00:17:20,840 --> 00:17:22,760 Speaker 1: is exactly what they're doing right now, what we're seeing 292 00:17:22,840 --> 00:17:25,760 Speaker 1: right now. It was started in nineteen seventy nine, and 293 00:17:25,840 --> 00:17:28,280 Speaker 1: it didn't really exist, at least in practice in the 294 00:17:28,400 --> 00:17:32,320 Speaker 1: United States before then. Apparently Freedman and his UM people 295 00:17:32,920 --> 00:17:37,120 Speaker 1: tested out these theories. Is neoliberalism with UM in Chile 296 00:17:37,640 --> 00:17:42,720 Speaker 1: when Augusto Pinochet with US back c I A coup 297 00:17:43,359 --> 00:17:48,000 Speaker 1: um took over the Freedman's Chicago School. People went down 298 00:17:48,040 --> 00:17:49,639 Speaker 1: there were like, hey, let us help you set up 299 00:17:49,680 --> 00:17:54,440 Speaker 1: this new economy. Yeah, that's what happened in Iraq. Apparently 300 00:17:54,520 --> 00:17:57,440 Speaker 1: it was designed to figure out how to get the 301 00:17:57,800 --> 00:18:02,520 Speaker 1: u S mits in other entries coffers by setting up 302 00:18:02,560 --> 00:18:06,320 Speaker 1: an economy that was very friendly to capitalism. It's it 303 00:18:06,440 --> 00:18:09,240 Speaker 1: happens here now too. One of the results of it, Chuck, 304 00:18:09,480 --> 00:18:13,280 Speaker 1: is when you cut off the flow of money. And 305 00:18:13,359 --> 00:18:15,440 Speaker 1: this was the reason why they didn't why the the 306 00:18:15,560 --> 00:18:17,720 Speaker 1: FED in the sixties and seventies didn't think to do this. 307 00:18:18,160 --> 00:18:20,360 Speaker 1: When you cut off the flow of money, that means 308 00:18:20,440 --> 00:18:24,920 Speaker 1: companies have less money. Right, demand goes down and people 309 00:18:25,000 --> 00:18:28,200 Speaker 1: get laid off. So, since the focus of the FED 310 00:18:28,520 --> 00:18:31,520 Speaker 1: during the post war boom and up into the late 311 00:18:31,600 --> 00:18:34,720 Speaker 1: seventies was to keep unemployment as low as possible, it 312 00:18:34,840 --> 00:18:37,359 Speaker 1: was all on jobs. At the time, the way Freeman 313 00:18:37,400 --> 00:18:39,920 Speaker 1: looked at it was the opposite, like, no, you don't 314 00:18:39,960 --> 00:18:43,120 Speaker 1: focus on that. You focus on keeping the economy growing 315 00:18:43,160 --> 00:18:45,920 Speaker 1: in a manageable pace. Maybe don't worry quite so much 316 00:18:45,920 --> 00:18:48,960 Speaker 1: about unemployment. As a result of that, you took off money, 317 00:18:49,040 --> 00:18:52,159 Speaker 1: unemployment goes up. So inflation and in fact is what 318 00:18:52,560 --> 00:18:56,280 Speaker 1: the current standards think controls the economy more so than 319 00:18:56,800 --> 00:19:01,400 Speaker 1: the joblessness rate. Right. Interesting, Well, there's less uh focus 320 00:19:01,520 --> 00:19:05,000 Speaker 1: on on although it is a factor and a cause 321 00:19:05,119 --> 00:19:07,719 Speaker 1: for concern. It's anything like it was as far as 322 00:19:07,800 --> 00:19:11,480 Speaker 1: Fed monetary policy went in the sixties. The thing is, 323 00:19:11,960 --> 00:19:15,560 Speaker 1: Freedman gets tons Freedman and Vulcar get tons of credit. 324 00:19:16,359 --> 00:19:19,960 Speaker 1: But they fix the economy by kicking in like basically 325 00:19:20,040 --> 00:19:23,399 Speaker 1: kickstarting a recession. Yeah, and the recession was painful, but 326 00:19:23,480 --> 00:19:26,400 Speaker 1: then inflation stabilized, so it does work. But you're gonna 327 00:19:26,400 --> 00:19:29,520 Speaker 1: have to go through an impression and a recession. Well yeah. 328 00:19:29,560 --> 00:19:33,479 Speaker 1: And the trick is is the Fed has to predict 329 00:19:33,520 --> 00:19:35,399 Speaker 1: the short term and the long term and they have 330 00:19:35,520 --> 00:19:39,320 Speaker 1: to identify when that where that exact point is, or 331 00:19:39,359 --> 00:19:43,639 Speaker 1: maybe not exact, but get pretty close when they need 332 00:19:43,720 --> 00:19:46,760 Speaker 1: to start controlling that money flow again and the interest rates, 333 00:19:46,840 --> 00:19:49,200 Speaker 1: and good lord, it's on the hands of a few, 334 00:19:49,240 --> 00:19:51,280 Speaker 1: it isn't it. Right, Well, if you if you raise 335 00:19:51,359 --> 00:19:54,320 Speaker 1: interest rates too early, um, what you're going to do 336 00:19:54,800 --> 00:19:58,600 Speaker 1: is stop borrow when you're gonna stop growth. Right, So 337 00:19:58,840 --> 00:20:02,040 Speaker 1: if you're if you're economy hasn't really been kickstarted, is 338 00:20:02,119 --> 00:20:05,400 Speaker 1: on its own. Um, then you're gonna you're gonna push 339 00:20:05,440 --> 00:20:08,600 Speaker 1: it right back into a reception, a double difference session. Right. Um, 340 00:20:08,760 --> 00:20:11,879 Speaker 1: if you wait too long, then there's gonna be too 341 00:20:11,960 --> 00:20:14,240 Speaker 1: much money on the market, which is what that guy 342 00:20:14,280 --> 00:20:16,639 Speaker 1: I was talking about at the beginning is worried about 343 00:20:16,960 --> 00:20:19,160 Speaker 1: that there's a lot of money and like cash reserves 344 00:20:19,200 --> 00:20:21,800 Speaker 1: and banks and people hoarding it. But once it eventually 345 00:20:21,880 --> 00:20:24,080 Speaker 1: hits the market, our inflation is going to just go 346 00:20:24,200 --> 00:20:26,280 Speaker 1: through the roof. You worried about stagflation as you think 347 00:20:26,320 --> 00:20:30,760 Speaker 1: it's common. He's worried about inflation. And if if, if 348 00:20:30,840 --> 00:20:33,840 Speaker 1: we remain in these factors, then I'm saying that would 349 00:20:33,880 --> 00:20:37,639 Speaker 1: cause stag inflation. But um, I guess I got one 350 00:20:37,720 --> 00:20:41,240 Speaker 1: last thing. What you got? The irony of Freedman's success 351 00:20:42,280 --> 00:20:47,159 Speaker 1: proves the Phillips curve works. Yeah. When he when his 352 00:20:47,320 --> 00:20:52,280 Speaker 1: policies carried out by Vulker kicked in, unemployment, unemployment rose, 353 00:20:52,920 --> 00:20:55,840 Speaker 1: inflation went down. Yeah, you're right. Yeah, I've never felt 354 00:20:55,880 --> 00:20:58,520 Speaker 1: so helpless in my life. Yeah, we're we're in trouble. 355 00:20:58,680 --> 00:21:01,159 Speaker 1: We're just as small but small little pieces in this 356 00:21:01,240 --> 00:21:03,520 Speaker 1: whole puzzle. Yeah we are. Um, that's why they call 357 00:21:03,560 --> 00:21:08,200 Speaker 1: it macro economics. And that's why you're concerned with microeconomics 358 00:21:09,000 --> 00:21:12,879 Speaker 1: because you love your CFO exactly the end and my 359 00:21:12,960 --> 00:21:15,520 Speaker 1: house right just reset lower, So I'm all, I'm all 360 00:21:15,560 --> 00:21:19,080 Speaker 1: happy right now, I said the end? Oh sorry, Uh. 361 00:21:19,200 --> 00:21:21,720 Speaker 1: If you want to learn more about stag inflation, um, 362 00:21:22,359 --> 00:21:25,760 Speaker 1: can I borrow some money? Then chuck? No, because that's 363 00:21:25,760 --> 00:21:27,479 Speaker 1: going to be used to paid on other debt. It's 364 00:21:27,480 --> 00:21:29,199 Speaker 1: all a big visious cycle like we thought. Oh well, 365 00:21:29,240 --> 00:21:31,080 Speaker 1: while we're on it, while are you talking about debt? 366 00:21:31,280 --> 00:21:35,600 Speaker 1: Um f y I if you have fixed debt? Right? Yeah, Um, 367 00:21:35,760 --> 00:21:38,639 Speaker 1: let's say you owe somebody twelve dollars. Best time to 368 00:21:38,720 --> 00:21:41,040 Speaker 1: owe to pay that that money off is when inflation 369 00:21:41,119 --> 00:21:44,440 Speaker 1: is high, money is cheap and abundant. Good point. Yeah, 370 00:21:44,560 --> 00:21:47,720 Speaker 1: it's best to save when money is cheap or whey 371 00:21:47,760 --> 00:21:52,040 Speaker 1: is expensive. Right, all right, So that's it, right, Truer 372 00:21:52,040 --> 00:21:53,920 Speaker 1: words have never been spoken, that is it. If you 373 00:21:54,280 --> 00:21:57,520 Speaker 1: want to learn more about stag inflation and see a 374 00:21:57,600 --> 00:22:02,800 Speaker 1: really sad line of nineteen eighties auto workers in Detroit, 375 00:22:03,480 --> 00:22:06,240 Speaker 1: you can type in stagflation in the search bart how 376 00:22:06,320 --> 00:22:09,119 Speaker 1: stuff works dot com, And as always, we encourage you 377 00:22:09,200 --> 00:22:12,360 Speaker 1: to read all of our economics articles because they are fascinating, 378 00:22:13,280 --> 00:22:16,080 Speaker 1: I said, search bar right. Well, that means it's time 379 00:22:16,119 --> 00:22:20,960 Speaker 1: for a listener mail. Hey guys, how this is from 380 00:22:21,080 --> 00:22:22,959 Speaker 1: Jason How Hey guys, how's it going? I hope all 381 00:22:22,960 --> 00:22:25,399 Speaker 1: as well? Catching up on the podcast and Chuck mentioned 382 00:22:25,440 --> 00:22:28,560 Speaker 1: that he had a big wheel but wanted a green machine. Well, 383 00:22:28,640 --> 00:22:30,800 Speaker 1: my first memory actually is of a green machine. My 384 00:22:30,920 --> 00:22:34,119 Speaker 1: friend Boomer got one, and my mom Dot who was 385 00:22:34,160 --> 00:22:37,119 Speaker 1: the greatest mother ever by the way, uh and I 386 00:22:37,240 --> 00:22:39,200 Speaker 1: lived in an apartment complex. She was sitting on the 387 00:22:39,240 --> 00:22:40,879 Speaker 1: bench outside with her neighbor and I went to the 388 00:22:40,920 --> 00:22:43,280 Speaker 1: top of the hill to try this green machine. Out. 389 00:22:43,880 --> 00:22:46,280 Speaker 1: Came down as fast as I could, because that's what 390 00:22:46,400 --> 00:22:49,600 Speaker 1: you do, and uh I could Uh. I figured I 391 00:22:49,640 --> 00:22:51,200 Speaker 1: would skid right out in front of the bench. I 392 00:22:51,280 --> 00:22:54,119 Speaker 1: was going very fast though, pulled the handbrake the last second, 393 00:22:54,440 --> 00:22:57,680 Speaker 1: and the handbrake came off completely in my hand, and 394 00:22:57,720 --> 00:23:01,600 Speaker 1: I remember thinking, Uh. Then I was in my neighbor's 395 00:23:01,680 --> 00:23:03,800 Speaker 1: arms running for the car as I crashed into the bench, 396 00:23:04,160 --> 00:23:07,000 Speaker 1: busted my face and I wide open. At the hospital 397 00:23:07,040 --> 00:23:09,200 Speaker 1: they had to put me in a straight jacket in 398 00:23:09,400 --> 00:23:12,600 Speaker 1: order to stitch up my face, he's freaking out. I 399 00:23:12,680 --> 00:23:15,680 Speaker 1: guess so. My eye was stuck shut for a few weeks. 400 00:23:15,760 --> 00:23:18,719 Speaker 1: And my very next memory is the night my eye opened. 401 00:23:19,200 --> 00:23:24,200 Speaker 1: I was at my grandmother sisters house. He's either talking 402 00:23:24,240 --> 00:23:28,639 Speaker 1: about his great aunt or his grandmother was named. Says okay, okay. 403 00:23:29,480 --> 00:23:31,800 Speaker 1: When it opened, I was really excited. I showed my grandmother. 404 00:23:31,920 --> 00:23:34,560 Speaker 1: She told me to shut his tic Tac dough was on. 405 00:23:35,720 --> 00:23:38,600 Speaker 1: Remember that show. I love that show, l O L. 406 00:23:38,720 --> 00:23:41,560 Speaker 1: He says, these moments made me laugh so hard. Thank you, 407 00:23:41,640 --> 00:23:43,760 Speaker 1: Chuck and Josh. We're talking about the green machine and 408 00:23:44,040 --> 00:23:48,280 Speaker 1: letting me reminisce. It's from Jason in Baltimore, Maryland. Wait 409 00:23:48,359 --> 00:23:51,280 Speaker 1: to talk about the green machine, Chuck, it was the best. 410 00:23:51,400 --> 00:23:53,320 Speaker 1: It's good news. I bet you could find those on 411 00:23:53,400 --> 00:23:56,800 Speaker 1: the on the eBay. They'll cost you some money maybe. 412 00:23:57,040 --> 00:24:01,280 Speaker 1: So if you've got okay enough and do you have one? Oh, 413 00:24:01,359 --> 00:24:03,240 Speaker 1: I don't know, Jerry got my green machine? How about 414 00:24:03,280 --> 00:24:06,920 Speaker 1: if you've got a story about someone you're nemesis getting 415 00:24:06,960 --> 00:24:10,399 Speaker 1: something that you deserved. Good one, very good one. Okay, 416 00:24:10,720 --> 00:24:14,240 Speaker 1: what Chuck just said? Wrap it up, spanking on the bottom. 417 00:24:14,320 --> 00:24:17,920 Speaker 1: Sending in an email to Stuff podcast at how Stuff 418 00:24:17,960 --> 00:24:24,359 Speaker 1: works dot com for more on this and thousands of 419 00:24:24,440 --> 00:24:26,879 Speaker 1: other topics. Is it how stuff works dot com. 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