WEBVTT - What is stagflation? 0:00:00.280 --> 0:00:02.840 Brought to you by the reinvented two thousand twelve camera. 0:00:03.160 --> 0:00:07.560 It's ready. Are you welcome to Stuff You Should Know 0:00:08.160 --> 0:00:16.439 from house Stuff Works dot Com. Hey, and welcome to 0:00:16.440 --> 0:00:19.680 the podcast. I'm Josh Clark, There's Charles W. Chuck Bryant, 0:00:19.840 --> 0:00:24.360 and this is Stuff you Should Know the podcast. Um, 0:00:24.400 --> 0:00:29.120 and we are going to be talking today about econ 0:00:29.440 --> 0:00:32.400 one oh one. That's right, this is Chuck's favorite subject. 0:00:33.000 --> 0:00:36.440 I think this in UM physics. I know, I know 0:00:36.479 --> 0:00:40.320 why I hate econ boy, because I just money. I 0:00:40.360 --> 0:00:45.360 hate money, and some tough economists beat you up on No, 0:00:45.560 --> 0:00:48.680 just money, the whole thing. Like Emily pays all our bills. 0:00:48.680 --> 0:00:51.280 I can't even if I had to do that. You said, 0:00:51.320 --> 0:00:53.760 she's the CFO, right, Yeah, if I had to be 0:00:53.800 --> 0:00:56.920 the CFO, then we'd be in big trouble. Yeah, because 0:00:56.920 --> 0:00:59.800 I just don't like it. I don't like anything about it. Well, 0:00:59.800 --> 0:01:04.240 this is more UM, less household economics, more macro economics. Yeah, 0:01:04.240 --> 0:01:06.480 this is interesting. I thought this is there. There's a 0:01:06.600 --> 0:01:14.320 historical battle involved the seventies. People in Bell Bottoms, probably Um, 0:01:14.480 --> 0:01:19.800 Ronald Reagan, everybody. That's the whole cast of characters. Let's 0:01:19.840 --> 0:01:23.400 do it well, Chuck. I was reading an article UM 0:01:23.440 --> 0:01:28.000 as is my Way, UM about rampant inflation in two 0:01:28.000 --> 0:01:33.200 thousand eleven. YEA. And basically, this guy named Michael Snyder 0:01:33.560 --> 0:01:38.480 UM was is warning that we're going to see, I think, 0:01:38.480 --> 0:01:41.760 as he puts, an inflation that we've never seen before 0:01:42.200 --> 0:01:46.440 in the US. And inflation is this huge boogeyman where 0:01:47.600 --> 0:01:53.280 money buys less because prices rise. And there's all sorts 0:01:53.320 --> 0:01:55.640 of reasons that comes about, but one of the one 0:01:55.680 --> 0:01:59.720 of the if you look at classic economics, the reason 0:01:59.760 --> 0:02:03.280 why inflation tends to happen is that there's too much 0:02:03.320 --> 0:02:06.680 of something, right, the old supply demand right. You have 0:02:06.880 --> 0:02:09.960 in this case, too much money on the market. Therefore, 0:02:10.560 --> 0:02:13.440 since money is subject to supply demand, more money there 0:02:13.480 --> 0:02:16.400 is on the market, the cheaper it is because there's 0:02:16.440 --> 0:02:20.280 more of it, demand goes down, prices go up, right 0:02:20.480 --> 0:02:25.720 for the cost of goods exactly, and you have inflation. 0:02:26.240 --> 0:02:29.680 What this guy's warning about is that UM airline fares 0:02:30.240 --> 0:02:33.079 for the past holiday season were thirty percent more than 0:02:33.080 --> 0:02:36.600 they were the year before. H price of food has 0:02:36.639 --> 0:02:42.799 been increasing, UM. There's been double digit health insurance premium 0:02:42.880 --> 0:02:45.880 race races. I haven't noticed. I don't think that that 0:02:46.120 --> 0:02:48.640 has anything to do with inflation. I think that's just 0:02:48.680 --> 0:02:53.880 the insurance companies punishing the USA UM. He also he 0:02:53.919 --> 0:02:58.440 gives some other steps cotton increased, beef up, pork up 0:02:58.520 --> 0:03:03.880 sixty percent, hides or ups you know that run for 0:03:03.960 --> 0:03:09.320 the hills. Hides are up. UM and food prices especially 0:03:09.320 --> 0:03:13.320 are kind of a problem when inflation occurs because you 0:03:13.400 --> 0:03:17.040 need food to eat. That's very sensitive. And the USDA 0:03:17.160 --> 0:03:20.640 released their figure saying basically like, yes, porks can arise, 0:03:20.760 --> 0:03:24.680 some beefs can arise some, but overall the food cost 0:03:24.760 --> 0:03:26.880 inflation is going to be like one percent, which is 0:03:26.919 --> 0:03:30.560 definitely doable. If you look at the government statistics, right, 0:03:31.040 --> 0:03:33.959 our inflation is pretty much at zero maybe one percent, 0:03:34.280 --> 0:03:37.000 which now, yeah, which is actually less than healthy. You 0:03:37.120 --> 0:03:40.520 want things to increase, you want inflation to take place, 0:03:40.720 --> 0:03:43.080 but you wanted to plod along at a very slow, 0:03:43.160 --> 0:03:46.720 steady rate. Inflation is the reason why up to say 0:03:46.800 --> 0:03:51.120 two thousand and seven, house grew in value over thirty 0:03:51.200 --> 0:03:54.600 years thanks to inflation. You paid X number of dollars 0:03:54.680 --> 0:03:57.080 for it, and it increased in value in large part 0:03:57.160 --> 0:03:59.680 because inflation. So inflation is good as long as the 0:03:59.760 --> 0:04:03.720 center control hyperinflation is really bad. The worst thing of all, though, 0:04:04.040 --> 0:04:07.400 is stag inflation. And if inflation happens right now, we 0:04:07.520 --> 0:04:10.320 are a prime in a in a prime seat for 0:04:10.560 --> 0:04:13.280 stag inflation, which would be very, very bad. Do you 0:04:13.360 --> 0:04:16.039 want to tell everybody what stag inflation? Can? I give 0:04:16.080 --> 0:04:18.760 a couple of stats because he's one form later on 0:04:18.839 --> 0:04:22.920 when when we're talking about inflation, h July two thousand 0:04:23.040 --> 0:04:26.440 eight is when it peaked in the last let's just 0:04:26.480 --> 0:04:29.880 say decade inflation. Yeah, July two thousand eight, it peaked 0:04:29.920 --> 0:04:32.640 at five point six percent, So keep that number in mind. Okay, 0:04:32.640 --> 0:04:36.120 I'm gonna write it down. And December of last year, 0:04:36.400 --> 0:04:38.320 so just a couple of short months ago, it was 0:04:38.360 --> 0:04:42.360 about one point five and the average for two thousand 0:04:42.480 --> 0:04:48.480 nine was negative point three. It's a negative percentage in 0:04:48.520 --> 0:04:50.960 two thousand nine. And there's something to be said about 0:04:51.040 --> 0:04:53.600 deflation as well, because that money that you do have, 0:04:53.800 --> 0:04:57.360 if you have any, becomes much more valuable. That's right. 0:04:57.600 --> 0:04:59.800 So keep those numbers in mind as as we proceed here. 0:05:00.120 --> 0:05:04.719 Uh down point point three four, negative point three four 0:05:05.320 --> 0:05:07.839 in two thousand nine, and we peaked in two thousand 0:05:07.920 --> 0:05:11.000 eight five, which was a staggering number I got him 0:05:11.080 --> 0:05:13.080 compared to like everybody. You can ask me if you 0:05:13.200 --> 0:05:15.880 need a reminder later on. So, stagflation, Josh, is not 0:05:16.000 --> 0:05:18.120 something that we made up, even though I thought it 0:05:18.160 --> 0:05:22.640 was something you made up. It describes a really bad, 0:05:22.839 --> 0:05:27.000 perfect storm of economic news. It's when you have high unemployment, right, 0:05:27.880 --> 0:05:32.880 slow growth coupled with high inflation. And this is something 0:05:32.920 --> 0:05:35.680 that people didn't think was possible. No, and and let's 0:05:35.839 --> 0:05:37.960 let's describe that. Let's point that out. Where we are 0:05:38.080 --> 0:05:39.920 right now. We have very high unemployment I think it's 0:05:39.960 --> 0:05:44.479 at ten percent nationally, pretty much getting better. Slow economic growth, 0:05:44.600 --> 0:05:47.640 for sure. We're in a recession, after all, still crawling 0:05:47.680 --> 0:05:49.320 out of it, trying to at least, Right, we're in 0:05:49.400 --> 0:05:52.520 a basically a stagnant economy, which means it's it's growing 0:05:52.640 --> 0:05:55.160 very sluggishly or not growing at all. Yes, but our 0:05:55.240 --> 0:05:58.960 inflation is is pretty good, right, thankfully. But since we 0:05:59.040 --> 0:06:01.080 have those other two I said, we're in a prime 0:06:01.200 --> 0:06:04.640 spot for if inflation does come along, We're in a 0:06:04.720 --> 0:06:08.160 prime spot for stag inflation. The reason stag inflation is 0:06:08.279 --> 0:06:12.800 so insidious, Chuck, is because it forms a vicious cycle. Right, 0:06:14.160 --> 0:06:18.560 So you've got um you have high prices because of inflation, 0:06:19.160 --> 0:06:22.960 which means that people can't spend as much money, or 0:06:23.000 --> 0:06:25.200 when they do spend money, it doesn't buy as much. 0:06:25.360 --> 0:06:28.480 Your dollars shrinking essentially. Okay, so you have a shrinking dollar. 0:06:28.560 --> 0:06:31.080 You know, high unemployment, which means people have less money 0:06:31.240 --> 0:06:34.600 to spend, right in, Your savings aren't worth as much, 0:06:34.920 --> 0:06:39.240 right which ultimately leads to a sluggish economy. So there's 0:06:39.279 --> 0:06:42.120 no way to to for this thing to naturally cycle 0:06:42.200 --> 0:06:45.160 out of it like this could keep going indefinitely, this 0:06:45.720 --> 0:06:50.720 horrible plodding along what I think Carter called malaise. What 0:06:50.839 --> 0:06:54.880 he said, I think so I believe it uh economic 0:06:54.920 --> 0:06:57.440 slow down as normal people don't. You know, a lot 0:06:57.480 --> 0:06:59.960 of people freaked out with the recession, but people really 0:07:00.000 --> 0:07:03.560 he knew about it. Economics said, recessions are kind of 0:07:03.600 --> 0:07:05.680 what corrects it in the end, exactly we've talked about, 0:07:06.040 --> 0:07:08.560 so don't freak out too much in our in our audiobook, Yeah, 0:07:08.600 --> 0:07:10.600 we talked about how if you look at the economy 0:07:11.040 --> 0:07:13.679 is made up of like a forest. There's a big, heavy, 0:07:13.840 --> 0:07:19.120 huge trees which represent really well managed businesses, and then 0:07:19.160 --> 0:07:21.720 you've got the underbrush which are just kind of add ons. 0:07:21.760 --> 0:07:25.840 They're they're artificial almost they they shouldn't necessarily be there. 0:07:25.840 --> 0:07:29.640 They're kind of sucking off of the bubble speculation and 0:07:29.880 --> 0:07:35.080 artificially inflated economy. Right, and then when the wildfire comes along, 0:07:35.440 --> 0:07:40.040 which is the recession, the underbrush is burned away and 0:07:40.680 --> 0:07:45.040 things correct themselves. Sure, it's a pretty um dehumanizing way 0:07:45.120 --> 0:07:49.360 of looking at things, but so is economics. You're right. Uh, 0:07:49.440 --> 0:07:51.800 And part of the seventies people didn't think this was 0:07:51.880 --> 0:07:55.240 possible because of our friend Mr Kane's John and Inner 0:07:55.320 --> 0:07:58.559 Kines with stagflation. Yeah, it wasn't even a word before 0:07:58.600 --> 0:08:00.320 the seventies. Yeah, well we should point out to it. 0:08:00.360 --> 0:08:02.760 It's a contraction of stagnant and inflation. If you didn't 0:08:02.760 --> 0:08:05.760 figure that out, So there that is. Did somebody thought 0:08:05.800 --> 0:08:12.040 a stagged party and inflation? Really? Oh well, a lot 0:08:12.040 --> 0:08:15.640 of people thought bartering was bartending. I noticed that that. 0:08:15.720 --> 0:08:19.160 We got a lot of suggestions for bartending podcasts, and 0:08:19.200 --> 0:08:21.520 all of a sudden, after the bartering podcast, people got 0:08:21.560 --> 0:08:24.600 their whistle wet. So if you're canes I in in 0:08:24.680 --> 0:08:29.200 your economic theory, you're gonna favor supply and demand and 0:08:29.240 --> 0:08:31.440 you're gonna think that's pretty much what it's all about. 0:08:31.520 --> 0:08:34.600 Demand is high. You got a booming economy, prices are 0:08:34.600 --> 0:08:37.520 going to go up. Inflation is gonna rise some in 0:08:37.640 --> 0:08:41.679 relation to uh, the economy rising. Right. What what you're 0:08:41.720 --> 0:08:44.599 talking about is the Phillips curve, right, yeah? Is that 0:08:44.800 --> 0:08:47.040 was was that the Phillips curve? Yeah, So that the 0:08:47.600 --> 0:08:52.520 X axis of the Phillips curve is unemployment, yes, and 0:08:52.600 --> 0:08:55.959 then the y axis is inflation, right, yeah, And that 0:08:56.040 --> 0:08:59.120 happened from about fifty eight to seventy three post war boom, 0:08:59.559 --> 0:09:01.839 things were rising in that in sort of a not 0:09:01.920 --> 0:09:05.280 a wonder one ratio, but it even happened before then, 0:09:05.360 --> 0:09:07.920 Like the Phillips curve is is vetted that that it 0:09:08.120 --> 0:09:15.760 is correct. Basically, as unemployment rises, inflation goes down naturally, 0:09:16.480 --> 0:09:21.839 and if you have low unemployment, inflation rises if the 0:09:21.960 --> 0:09:25.520 converse is true, supposedly right, And the reason why is 0:09:25.640 --> 0:09:31.800 because when unemployments high, demand is low, therefore inflation is down. 0:09:31.920 --> 0:09:35.319 Prices are low, so inflation is down. And historically this 0:09:35.600 --> 0:09:38.000 this holds up if you go back and chart all 0:09:38.080 --> 0:09:41.920 this up to the seventies, this is this was the case, 0:09:42.600 --> 0:09:45.520 and that's how it is naturally. The problem is the 0:09:45.679 --> 0:09:49.079 FED in the sixties thought, well, if we just keep 0:09:49.200 --> 0:09:54.560 unemployment artificially low, will trade that off for slightly higher inflation. 0:09:54.640 --> 0:09:56.800 But we can keep on top of that so we 0:09:56.920 --> 0:10:00.640 can expect high inflation and act accordingly, but we'll have 0:10:00.840 --> 0:10:04.200 artificially low unemployment or near full employment, which is where 0:10:04.280 --> 0:10:07.160 everybody's employing. Yeah. They basically thought the rate of inflation 0:10:07.280 --> 0:10:10.000 would rise in a safe manner that they could keep 0:10:10.080 --> 0:10:12.000 up with. Yes, do you remember I don't know if 0:10:12.000 --> 0:10:14.559 I've used this before, but do you remember um that 0:10:14.720 --> 0:10:18.160 Simpsons where Homer brings home Pinty the lobster. Have I 0:10:18.280 --> 0:10:21.520 used this one before and puts Pinchy in the fish 0:10:21.600 --> 0:10:25.560 tank And Pinching needs salt water, but the goldfish needs freshwater, 0:10:25.880 --> 0:10:28.120 so it keeps adding salt and then like regular water 0:10:28.240 --> 0:10:30.439 until they're both like half floating in the middle of 0:10:30.559 --> 0:10:33.199 trying to balance it, and you end up killing both. Right. 0:10:33.559 --> 0:10:35.600 But that's kind of what you have to do if 0:10:35.640 --> 0:10:38.840 you're going to get in and regulate the economy, if 0:10:38.880 --> 0:10:40.560 you're not just going to let it do its own thing, 0:10:41.080 --> 0:10:43.199 you have that's the that's the trick you have to 0:10:43.280 --> 0:10:45.720 do to keep a scary job. Oh yeah, it's gotta 0:10:45.760 --> 0:10:48.679 be terrifying. Imagine the pressure that like Bernanke and those 0:10:48.720 --> 0:10:51.559 who preceded him are under, because I mean, history will 0:10:51.600 --> 0:10:54.040 make a villain or a monster or a hero out 0:10:54.080 --> 0:10:57.240 of you depending on what you do. You're not going 0:10:57.360 --> 0:11:00.640 to just do nothing. It's you're going to leave an 0:11:00.679 --> 0:11:04.240 impression on depending on what you did. Like, you can't 0:11:04.240 --> 0:11:05.920 go in and lead the FED and be like, I'm 0:11:05.960 --> 0:11:08.320 not doing anything. You know, it's two thumbs and wouldn't 0:11:08.320 --> 0:11:12.880 want that job. This guy right here. So you said 0:11:12.920 --> 0:11:15.880 they got it wrong, Yeah, they got the Philip they 0:11:16.040 --> 0:11:18.679 got their interpretation of the Phillips curb wrong. Yeah, and 0:11:18.720 --> 0:11:21.599 what that produced is called a wage price spiral. And 0:11:22.559 --> 0:11:24.160 we can get into more detail, but the long and 0:11:24.240 --> 0:11:27.600 short of it is that inflation rows faster than wages. 0:11:27.720 --> 0:11:31.800 Did you want to know how let's hear it. Well, 0:11:31.880 --> 0:11:35.839 this is this is what basically bucked the Phillips curve. 0:11:36.520 --> 0:11:39.760 Is that through government spending, like the government can spend 0:11:39.840 --> 0:11:43.719 on uh, infrastructure, the public sector to create jobs right 0:11:44.160 --> 0:11:49.440 through government spending UM and through you know tax policy 0:11:50.120 --> 0:11:53.480 that that forms UM the way the government can create 0:11:54.040 --> 0:11:58.120 or manipulate aggregate demand. Okay, I's say for example, you 0:11:58.240 --> 0:12:02.240 keep taxes low and you increase consumer spending, you can 0:12:02.320 --> 0:12:06.880 kick start an economy. Right. Um, you keep unemployment low, 0:12:07.200 --> 0:12:09.160 you trade off for a higher rate of inflation, like 0:12:09.280 --> 0:12:12.560 we saw they did. That's fine, that can conceivably work. 0:12:12.920 --> 0:12:16.079 The problem is they put too much money into an economy, 0:12:16.480 --> 0:12:19.280 kept pumping money into the economy no matter what. And 0:12:19.400 --> 0:12:22.040 what they found was, like you said, the wage price spiral, 0:12:22.360 --> 0:12:26.240 and basically it's where prices rise. So the the they 0:12:26.480 --> 0:12:29.280 the fed, new that inflation was going to happen. But 0:12:29.400 --> 0:12:32.920 when inflation happens, prices rise. When labor is sitting there 0:12:32.960 --> 0:12:35.400 working their tail off and prices are rising, they make 0:12:35.480 --> 0:12:40.000 the assumption that that means that industry, their bosses, their 0:12:40.000 --> 0:12:43.800 employers are making gobs of cash. Well, labor says, we 0:12:43.880 --> 0:12:47.840 want some of that cash, so give us more, give 0:12:47.920 --> 0:12:50.199 us higher wages, which they did to a certain degree, 0:12:50.600 --> 0:12:52.439 but they couldn't keep up. But the problem with that 0:12:52.640 --> 0:12:56.000 if you're if you're captain of industry, is that if 0:12:56.080 --> 0:13:00.800 you pay more, that raises your cost of product, which 0:13:00.880 --> 0:13:03.040 means that you have to raise the price, which means 0:13:03.120 --> 0:13:06.640 that your employees need more money because of inflation, and 0:13:06.760 --> 0:13:09.760 it creates this again another vicious cycle, and that's the 0:13:09.840 --> 0:13:14.960 wage price spiral. It spirals upward and um basically eventually 0:13:15.000 --> 0:13:19.360 employers stop increasing wages and inflation just takes off. And 0:13:19.440 --> 0:13:22.320 we might have survived that Josh in the seventies, as 0:13:22.360 --> 0:13:24.880 bad as it was, we might have eked through if 0:13:24.960 --> 0:13:28.480 it were not for the oil embargo of nineteen seventy three. 0:13:29.160 --> 0:13:31.680 When everyone knows oil went through the roof, and that's 0:13:31.720 --> 0:13:35.040 not just uh, you know Sally at the gas pomp, 0:13:35.120 --> 0:13:38.880 that's across all industry, and it the that coupled with 0:13:39.000 --> 0:13:42.360 everything else going on, all of a sudden. In nineteen seventy, 0:13:43.040 --> 0:13:46.560 inflation was at five point five percent, which in July 0:13:46.640 --> 0:13:48.720 tw two thousand eight, I said it was five point six. 0:13:49.520 --> 0:13:51.560 So in nineteen seventy they thought it was high at 0:13:51.600 --> 0:13:56.160 five point five, seventy four, twelve point two, and then 0:13:56.200 --> 0:13:58.760 it peaked at thirteen point three percent in nineteen s 0:13:59.520 --> 0:14:03.319 and again most economists agree that you want an economy 0:14:03.440 --> 0:14:07.880 that's inflating in about two percent a year. This is yeah, 0:14:07.880 --> 0:14:10.040 I mean into July two thousand eight at five point 0:14:10.080 --> 0:14:13.640 six percent, people were freaking and imagine thirteen point three percent. 0:14:14.160 --> 0:14:18.000 So basically Carter's just standing around, just getting it from 0:14:18.120 --> 0:14:21.040 all sides. He's got hostages in a ran that he 0:14:21.120 --> 0:14:26.240 can't get get um released. Um, he's got malaise forever. 0:14:26.520 --> 0:14:29.880 You got stock market that basically stopped working, right, he's 0:14:29.920 --> 0:14:32.880 got brownouts and lines of the gas pump, and yeah, 0:14:33.040 --> 0:14:37.160 he's got an economy that's um and out of control 0:14:37.200 --> 0:14:39.520 of inflation. He has no idea what to do. Right, 0:14:40.280 --> 0:14:43.440 then insteps. This guy named Paul Volker cannot throw in 0:14:43.520 --> 0:14:46.960 one more stat Uh talked about the stock market. From 0:14:47.000 --> 0:14:50.040 seventy to seventy nine, the SMP five returned an average 0:14:50.080 --> 0:14:54.280 of five point nine percent annually. But when you've got UH, 0:14:54.440 --> 0:14:57.400 the inflation that you subtract, you're actually losing money. The 0:14:57.520 --> 0:15:00.400 entire market is losing money two point six per center, right, 0:15:00.480 --> 0:15:04.640 two point six percentage points lower than inflation. So basically 0:15:04.680 --> 0:15:07.360 everybody's throwing in on the stock market during that time 0:15:07.920 --> 0:15:12.680 was paying two point six percent in losses. Not good, No, 0:15:13.040 --> 0:15:16.160 that's very bad, especially couple with inflation. People like you said, 0:15:16.200 --> 0:15:18.800 we're freaking out right, So bring us on to the 0:15:19.120 --> 0:15:22.160 savior of sorts. So Paul Vulker comes along, and you 0:15:22.280 --> 0:15:26.000 might recognize that named chuck. He's an economic advisor to Obama, 0:15:27.160 --> 0:15:32.080 but he got his chops as the head of the FED. UM. 0:15:32.200 --> 0:15:36.200 And in nineteen seventy nine he basically says, Okay, Kensian 0:15:36.640 --> 0:15:41.400 liberal monetary policy is is done. It's failing us, or 0:15:41.560 --> 0:15:44.480 we're falling apart right now. We have to try something else. 0:15:45.000 --> 0:15:48.560 And basically what they tried was the stuff that was created. 0:15:48.640 --> 0:15:52.560 It's it's called neoliberalism. Is created by a guy named 0:15:52.600 --> 0:15:58.000 Milton Friedman. Yes, and his basic formula was, quote too 0:15:58.120 --> 0:16:01.280 much money chasing too few goods. So the Fed's free 0:16:01.360 --> 0:16:04.520 up too much money to circulate in the economy, and 0:16:04.680 --> 0:16:07.160 that's not a good thing. Right. So everything we see 0:16:07.200 --> 0:16:12.760 the FED doing now is based on Freedman's economic policies. Right. Um, 0:16:13.320 --> 0:16:18.120 Remember we said that um with with the FED in 0:16:18.200 --> 0:16:21.320 the sixties and then the seventies. Um that their whole 0:16:21.400 --> 0:16:23.480 thing was throw more money at it because that will 0:16:23.560 --> 0:16:27.560 increase spending, which will increase demand, and yetta, yetta, everything 0:16:27.560 --> 0:16:30.640 will be fine in the midst of this emergency. The 0:16:30.920 --> 0:16:33.800 what's considered the fatal flaw they made was that rather 0:16:33.920 --> 0:16:36.840 than start sucking up some of this money to make 0:16:36.920 --> 0:16:39.880 it more scarce, and two Hens make it more valuable. UM, 0:16:40.200 --> 0:16:44.120 they they pump more money into it. Well, Vulker comes along, 0:16:44.240 --> 0:16:47.240 using Freedman's ideas and says, we gotta get some money 0:16:47.280 --> 0:16:50.080 off of the market, so we're gonna start buying it up. 0:16:50.360 --> 0:16:53.160 And what they did was they started issuing treasury bonds. 0:16:53.400 --> 0:16:56.840 They sold t bills. That's how the government issues and 0:16:57.240 --> 0:17:00.600 UM and purchases debt, and that's how they control the 0:17:00.640 --> 0:17:02.840 amount of money on the market. You know that. Yeah, 0:17:03.480 --> 0:17:06.600 that's Freedman's ideas. So when the economy is good, they're 0:17:06.600 --> 0:17:10.800 gonna raise interest rates to slow down the flow of 0:17:10.840 --> 0:17:14.360 money basically, yeah, because bubbles no better than a recession. Yeah, 0:17:14.400 --> 0:17:16.280 and the same in reverse. When the economy is tanking, 0:17:16.280 --> 0:17:18.280 they're gonna lower the interest rate and say, hey, go 0:17:18.400 --> 0:17:20.760 out by house because look how it is exactly which 0:17:20.840 --> 0:17:22.760 is exactly what they're doing right now, what we're seeing 0:17:22.840 --> 0:17:25.760 right now. It was started in nineteen seventy nine, and 0:17:25.840 --> 0:17:28.280 it didn't really exist, at least in practice in the 0:17:28.400 --> 0:17:32.320 United States before then. Apparently Freedman and his UM people 0:17:32.920 --> 0:17:37.120 tested out these theories. Is neoliberalism with UM in Chile 0:17:37.640 --> 0:17:42.720 when Augusto Pinochet with US back c I A coup 0:17:43.359 --> 0:17:48.000 um took over the Freedman's Chicago School. People went down 0:17:48.040 --> 0:17:49.639 there were like, hey, let us help you set up 0:17:49.680 --> 0:17:54.440 this new economy. Yeah, that's what happened in Iraq. Apparently 0:17:54.520 --> 0:17:57.440 it was designed to figure out how to get the 0:17:57.800 --> 0:18:02.520 u S mits in other entries coffers by setting up 0:18:02.560 --> 0:18:06.320 an economy that was very friendly to capitalism. It's it 0:18:06.440 --> 0:18:09.240 happens here now too. One of the results of it, Chuck, 0:18:09.480 --> 0:18:13.280 is when you cut off the flow of money. And 0:18:13.359 --> 0:18:15.440 this was the reason why they didn't why the the 0:18:15.560 --> 0:18:17.720 FED in the sixties and seventies didn't think to do this. 0:18:18.160 --> 0:18:20.360 When you cut off the flow of money, that means 0:18:20.440 --> 0:18:24.920 companies have less money. Right, demand goes down and people 0:18:25.000 --> 0:18:28.200 get laid off. So, since the focus of the FED 0:18:28.520 --> 0:18:31.520 during the post war boom and up into the late 0:18:31.600 --> 0:18:34.720 seventies was to keep unemployment as low as possible, it 0:18:34.840 --> 0:18:37.359 was all on jobs. At the time, the way Freeman 0:18:37.400 --> 0:18:39.920 looked at it was the opposite, like, no, you don't 0:18:39.960 --> 0:18:43.120 focus on that. You focus on keeping the economy growing 0:18:43.160 --> 0:18:45.920 in a manageable pace. Maybe don't worry quite so much 0:18:45.920 --> 0:18:48.960 about unemployment. As a result of that, you took off money, 0:18:49.040 --> 0:18:52.159 unemployment goes up. So inflation and in fact is what 0:18:52.560 --> 0:18:56.280 the current standards think controls the economy more so than 0:18:56.800 --> 0:19:01.400 the joblessness rate. Right. Interesting, Well, there's less uh focus 0:19:01.520 --> 0:19:05.000 on on although it is a factor and a cause 0:19:05.119 --> 0:19:07.719 for concern. It's anything like it was as far as 0:19:07.800 --> 0:19:11.480 Fed monetary policy went in the sixties. The thing is, 0:19:11.960 --> 0:19:15.560 Freedman gets tons Freedman and Vulcar get tons of credit. 0:19:16.359 --> 0:19:19.960 But they fix the economy by kicking in like basically 0:19:20.040 --> 0:19:23.399 kickstarting a recession. Yeah, and the recession was painful, but 0:19:23.480 --> 0:19:26.400 then inflation stabilized, so it does work. But you're gonna 0:19:26.400 --> 0:19:29.520 have to go through an impression and a recession. Well yeah. 0:19:29.560 --> 0:19:33.479 And the trick is is the Fed has to predict 0:19:33.520 --> 0:19:35.399 the short term and the long term and they have 0:19:35.520 --> 0:19:39.320 to identify when that where that exact point is, or 0:19:39.359 --> 0:19:43.639 maybe not exact, but get pretty close when they need 0:19:43.720 --> 0:19:46.760 to start controlling that money flow again and the interest rates, 0:19:46.840 --> 0:19:49.200 and good lord, it's on the hands of a few, 0:19:49.240 --> 0:19:51.280 it isn't it. Right, Well, if you if you raise 0:19:51.359 --> 0:19:54.320 interest rates too early, um, what you're going to do 0:19:54.800 --> 0:19:58.600 is stop borrow when you're gonna stop growth. Right, So 0:19:58.840 --> 0:20:02.040 if you're if you're economy hasn't really been kickstarted, is 0:20:02.119 --> 0:20:05.400 on its own. Um, then you're gonna you're gonna push 0:20:05.440 --> 0:20:08.600 it right back into a reception, a double difference session. Right. Um, 0:20:08.760 --> 0:20:11.879 if you wait too long, then there's gonna be too 0:20:11.960 --> 0:20:14.240 much money on the market, which is what that guy 0:20:14.280 --> 0:20:16.639 I was talking about at the beginning is worried about 0:20:16.960 --> 0:20:19.160 that there's a lot of money and like cash reserves 0:20:19.200 --> 0:20:21.800 and banks and people hoarding it. But once it eventually 0:20:21.880 --> 0:20:24.080 hits the market, our inflation is going to just go 0:20:24.200 --> 0:20:26.280 through the roof. You worried about stagflation as you think 0:20:26.320 --> 0:20:30.760 it's common. He's worried about inflation. And if if, if 0:20:30.840 --> 0:20:33.840 we remain in these factors, then I'm saying that would 0:20:33.880 --> 0:20:37.639 cause stag inflation. But um, I guess I got one 0:20:37.720 --> 0:20:41.240 last thing. What you got? The irony of Freedman's success 0:20:42.280 --> 0:20:47.159 proves the Phillips curve works. Yeah. When he when his 0:20:47.320 --> 0:20:52.280 policies carried out by Vulker kicked in, unemployment, unemployment rose, 0:20:52.920 --> 0:20:55.840 inflation went down. Yeah, you're right. Yeah, I've never felt 0:20:55.880 --> 0:20:58.520 so helpless in my life. Yeah, we're we're in trouble. 0:20:58.680 --> 0:21:01.159 We're just as small but small little pieces in this 0:21:01.240 --> 0:21:03.520 whole puzzle. Yeah we are. Um, that's why they call 0:21:03.560 --> 0:21:08.200 it macro economics. And that's why you're concerned with microeconomics 0:21:09.000 --> 0:21:12.879 because you love your CFO exactly the end and my 0:21:12.960 --> 0:21:15.520 house right just reset lower, So I'm all, I'm all 0:21:15.560 --> 0:21:19.080 happy right now, I said the end? Oh sorry, Uh. 0:21:19.200 --> 0:21:21.720 If you want to learn more about stag inflation, um, 0:21:22.359 --> 0:21:25.760 can I borrow some money? Then chuck? No, because that's 0:21:25.760 --> 0:21:27.479 going to be used to paid on other debt. It's 0:21:27.480 --> 0:21:29.199 all a big visious cycle like we thought. Oh well, 0:21:29.240 --> 0:21:31.080 while we're on it, while are you talking about debt? 0:21:31.280 --> 0:21:35.600 Um f y I if you have fixed debt? Right? Yeah, Um, 0:21:35.760 --> 0:21:38.639 let's say you owe somebody twelve dollars. Best time to 0:21:38.720 --> 0:21:41.040 owe to pay that that money off is when inflation 0:21:41.119 --> 0:21:44.440 is high, money is cheap and abundant. Good point. Yeah, 0:21:44.560 --> 0:21:47.720 it's best to save when money is cheap or whey 0:21:47.760 --> 0:21:52.040 is expensive. Right, all right, So that's it, right, Truer 0:21:52.040 --> 0:21:53.920 words have never been spoken, that is it. If you 0:21:54.280 --> 0:21:57.520 want to learn more about stag inflation and see a 0:21:57.600 --> 0:22:02.800 really sad line of nineteen eighties auto workers in Detroit, 0:22:03.480 --> 0:22:06.240 you can type in stagflation in the search bart how 0:22:06.320 --> 0:22:09.119 stuff works dot com, And as always, we encourage you 0:22:09.200 --> 0:22:12.360 to read all of our economics articles because they are fascinating, 0:22:13.280 --> 0:22:16.080 I said, search bar right. Well, that means it's time 0:22:16.119 --> 0:22:20.960 for a listener mail. Hey guys, how this is from 0:22:21.080 --> 0:22:22.959 Jason How Hey guys, how's it going? I hope all 0:22:22.960 --> 0:22:25.399 as well? Catching up on the podcast and Chuck mentioned 0:22:25.440 --> 0:22:28.560 that he had a big wheel but wanted a green machine. Well, 0:22:28.640 --> 0:22:30.800 my first memory actually is of a green machine. My 0:22:30.920 --> 0:22:34.119 friend Boomer got one, and my mom Dot who was 0:22:34.160 --> 0:22:37.119 the greatest mother ever by the way, uh and I 0:22:37.240 --> 0:22:39.200 lived in an apartment complex. She was sitting on the 0:22:39.240 --> 0:22:40.879 bench outside with her neighbor and I went to the 0:22:40.920 --> 0:22:43.280 top of the hill to try this green machine. Out. 0:22:43.880 --> 0:22:46.280 Came down as fast as I could, because that's what 0:22:46.400 --> 0:22:49.600 you do, and uh I could Uh. I figured I 0:22:49.640 --> 0:22:51.200 would skid right out in front of the bench. I 0:22:51.280 --> 0:22:54.119 was going very fast though, pulled the handbrake the last second, 0:22:54.440 --> 0:22:57.680 and the handbrake came off completely in my hand, and 0:22:57.720 --> 0:23:01.600 I remember thinking, Uh. Then I was in my neighbor's 0:23:01.680 --> 0:23:03.800 arms running for the car as I crashed into the bench, 0:23:04.160 --> 0:23:07.000 busted my face and I wide open. At the hospital 0:23:07.040 --> 0:23:09.200 they had to put me in a straight jacket in 0:23:09.400 --> 0:23:12.600 order to stitch up my face, he's freaking out. I 0:23:12.680 --> 0:23:15.680 guess so. My eye was stuck shut for a few weeks. 0:23:15.760 --> 0:23:18.719 And my very next memory is the night my eye opened. 0:23:19.200 --> 0:23:24.200