Lacy Hunt: Bonds, Growth, and Jobs In a "Disinflationary Stew" with Danielle DiMartino Booth

i'd like to welcome everyone back it's been some time since i've been on real vision uh but there's absolutely no resisting uh coming back to visit with lacey hunt uh i i will tell you that the last time he and i sat down was in austin texas at the top of a wonderful building on a beautiful afternoon like it is here in dallas today but the one differentiating factor was there was we'd never heard of covid and so it was a different world back then uh but again i'm so so so pleased and honored and privileged and you name it uh to have lacie hunt back to visit with this is i've literally been counting the days the first time we had this scheduled we were engulfed in icemageddon uh but i'm happy that we could make this happen lacey welcome back thank you thank you for your kind remarks my pleasure so uh for those of you who are less less familiar with with lacey and myself we have a shared history albeit separated by several decades at the dallas federal reserve a few years in between but nonetheless i think we both understand and will probably never uh will will be indelibly marked by understanding how things work inside of the federal reserve system um with that i actually want to go back to a long time ago to 1981 40 years ago and and ask what it was like back then you know we saw in 1969 we we saw the unemployment rate troughed at 3.5 and it would be another 50 years before we revisit it such low levels with the u3 unemployment rate but in in the ten years or so that that that that went on from then we saw a slow build in inflation and i'm curious if you can take us back to what it was like to to sense this burgeoning thrust of inflation as the years ticked by way back then again off of this very low level of slack in the economy as it was back in 1969 my tax a little different than a lot of folks as you know and i take a monetary view i i take the monetary view of professor friedman's algebra not professor friedman's famous dictum that inflation is always and everywhere a monetary phenomenon in his algebra he makes it very clear that that statement is based upon the assumption that the velocity of money is stable and um of course people all they remember is the quote they don't remember the algebra most people don't even bother to study the algebra but um monetary policy was far different um from the early 1950s to the early 1980s than it has been since then and um the critical factor is that the us economy was very lightly indebted not heavily embedded as we are today and um one sign of this was that the marginal revenue product of debt while not constant was also relatively stable it was basically in a very tight range of between 70 and 80 cents in other words every dollar of new deal hi i'm rao powell sorry to interrupt your video i know it's a pain in the ass but look i want to tell you something important is i can tell that you really want to learn about what's going on in financial markets and understand the global economy in these complicated times that's what we do at real vision so this youtube channel is a small fraction of what we actually do you should really come over to realvision.com and see the 20 or so videos a week that we produce of this kind of quality of content the deep analysis and understanding of the world around us so if you click on the link below or go to realvision.com it costs you one dollar i don't think you can afford to be without it [Music] a constant was also relatively stable it was basically in a very tight range of between 70 and 80 cents in other words every dollar of new debt generated about 75 cents of gdp growth and during that time period the velocity of money was also staked and so the confluence of factors that made the 1970s and early 1980s so inflationary was that the money supply increases moved directly into the real economy for example if memory serves me correctly in in the 1970s m2 cr increased about 10 percent per hour velocity was stable i don't mean to say it was constant but it it when there were increases there were decreases and it was basically hanging around the same level and nominal gdp increased by 10 and so the the federal reserve allowed money supply growth to accelerate velocity did not detract and it and it showed up in rising inflation as we have moved away from the 1980s the u.s economy has been increasingly indebted and um [Music] today the marginal revenue product of debt is less than 40 cents in other words each dollar of new debt only generates 40 cents of gdp growth and what is happening is that the velocity of money is declining and so when you have a year like um 2020 where m2 increases at a 20 annual rate or 25 whatever the number was um the inclination of many people who remember professor friedman's words think we should have inflation but they don't remember his algebra and so when you have a large increase in the money supply and the velocity of money collapses to new all-time lows then the money supply is basically trapped in the financial markets it doesn't make its way into the real economy and and by the way um [Music] the monetary framework that friedman used the equation of exchange which says money times velocity equals was actually developed by irving fisher and fisher was cited by friedman as being america's greatest economist a fisher never believed the velocity of money was taped in other words he and friedman parted company and um fisher actually said in a very famous 1934 article that when economies become extremely over indebted the velocity of money falls and so what's happening is that we're we're taking on more and more debt that is not going to generate an income stream to repay principal and interest and this pushes the velocity of money lower and so although it's quite possible that economic growth this year will be as fast as it was in 1983. we're not going to have inflation we're facing cyclical deflation and so it's a major uh a major difference with the 1970s between then and now so where where are we in in the economic cycle that we're in right now you hear so much and i think about you every time i hear them that that stimulus spending in and of itself obviously not taking into the into account the difference between 75 cents on the dollar and 40 cents today but we hear that the stimulus spending is going to is going to miraculously and expeditiously close the output gap it's going to generate permanent job creation it's going to take the unemployment rate very rapidly back down to what the federal reserve terms is full employment what what are the masses missing in in in crafting this this this very simplistic construct well if that first was there's a lot of problems with it let me just let's do the we get there we can analyze it empirically then we'll analyze it theoretically um we've seen 30 or so uh different um major debt finance programs in japan since the late 1980s and um they were generally hailed as being a solution for japan's desperate circumstances um yet um [Music] uh in japan uh each dollar of debt is only generating 25 cents on the dollar and the velocity of money in japan is 0.5 70 points lower than in the united states and it hasn't worked there europe has about two two dozen programs uh that have been used to try to solve an indebtedness problem but taking on more debt and it's not worked for them and um i think there's a lot of other corroborating information to support this empirical data um if if uh when i was in graduate school um back in the 1960s i left to go into the fed in 1969 william mcchesney martin was chairman you know that name daniel oh he's my favorite yes indeed and uh when i left the fiat arthur burns was here a long long time ago but when when i left the federal reserve i mean left temple university to go to the dallas fed um [Music] there were two main propositions that were generally widely accepted about monetary and fiscal policy number one that the velocity of money was relatively stable which made monetary policy very powerful because if you get an 10 percent increase in money you get a 10 increase in knowledge and the second proposition was that fiscal policy was also very powerful and um i was sort of of the notion uh having been taught at three different universities the same basic concept that for each dollar of debt finance federal activity this would boost uh the gdp by four to five dollars three years later in other words that there was a very powerful government multiplier um [Music] today i would say the government expenditure multiplier after three years is negative 0.2 in other words if you engage in a dollar of debt finance fiscal activity um that will boost the gdp by a dollar but at the end of three years you will reduce private gdp by about a dollar and 20 cents in other words there is there is no magic keynesian multiplier um and uh we've really seen this happen um just there's i'm going to just cite some earlier programs in the u.s we had the shovel ready projects of 2009 bolstered by a massive expansion of the fed's balance sheet and folks said that this was a surefire growth engine and that would not only lead to faster growth but a quick turnaround in inflation and interest rates but when you look when you look at the debt finance shovel ready projects of 2009 we had about two strong quarters and that was it and then the growth rate decelerated and so initially the commodity prices rose because inflation was going up well it's going to be strong the dollar went down bond yields went up but within very short order once it became clear that that fiscal package was not going to change the dynamic we we slumped back and interest rates continued declining and so did inflation for a long time and then um if you go to um 2017 have a different administration different party in power and and they pass debt financed uh tax reductions uh it was about pumped about 300 billion dollars a year for 10 years uh and they and they said the tax rates would be low for 10 years people had some concept of permanent income which is an important concept in economics and what we and and the tax cuts were also bolstered by a huge bipartisan increase in the budget deficit in both uh 2019 and 2020. um and yet what was the result after the trump tax cuts took effect we had one strong one good quarter of growth we had a second quarter wasn't quite as good but it was better than we generally get and then the growth rate came off and that that pattern is going to be replayed in time and time again as long as you uh reorder it we have a larger size program than we've ever had before but it's still debt financed and that finance is not the solution it's more of a problem other than for a very transitory bout and so the pattern of disinflation that we've seen is going to persist it's not going to be interrupted now i might make one other point one does have to take account of the business cycle and one also has to take account for other initial conditions because they also matter i mean monetary and fiscal policy are not operating in a in a vacuum and uh so we we have a large debt finance program we're coming off a very very deep recession both domestically and globally um and one of the things that i think is vastly overlooked is that inflation and long bond yields high risk free bond wheels are what we in economics call lagging economic indicators um the the pioneering work on the business cycle was done um [Music] by wesley claire mitchell and his student arthur burns who was chairman of the federal reserve when i left the fed and they showed that interest rates are lagging economic indicator so is inflation gdp of course is the main coincident indicator so when a recovery starts and interest rates still go lower and the rationale of their arguments is that's the way it has to be in other words if you try to start a recovery and and get an immediate rebound in inflation and interest rates then you start building in imbalances and you immediately truncate the recovery so for example in 1983 um which some people say the growth rate this year will be as good as 1983 possibly as good as 1959. coming off a d procession early 1980s recoil to go up in 83 you have the debt financed reagan tax cuts however in 1983 gross government debt is 30 percent of gdp not 126 where we are today on the way to 140 in a matter of less than 10 years and uh so in 1983 we we had you know nearly 9 gdp growth but there was a cyclical rebound in productivity that's what happens after a deep recession and as a matter of fact the inflation rate fell and it continued moving lower all the way through the end of 1986. inflation's a lagging economic indicator interest rates also declined until 1987 but uh so the the when you look at the cyclical analysis you have to take account of of the different role of the business cycle now i would contend to you that there is another different cyclical element that points in the direction of lower inflation uh last year when covet hit the major supply chains were massively disrupted and what this meant is that the the low-cost producers in asia and elsewhere could not deliver their products into the u.s market and so as a consequence of of covin the [Music] u.s high-cost producers actually received an event that was more favorable to them than far more favorable than the trump tariff increases it was purely extraneous event so so the net result is is that the high-cost domestic producers were able to gain market share and the low-cost farm producers lost market share well now the number of sick people is declining hospitalizations going down we're vaccinating people and the supply chains are going to be restored they're not fully restored but they're moving in that direction and so what what what the situation is is that the loc the low-cost producers in asia have lost market share and the high cost producers in the us have gained market share and both of them are going to try to hold so what we're going to see as the supply chains are restored is a price war everybody's going to try to get back to where they were except the u.s producers are going to try to hold and there's another element that's different crises change the underlying economic circumstances uh the old phrase necessity is the mother of invention of course and and so when coveted hit it's like during a war time the um technologies of the future were telescoped into 2020 and so the underlying technology today is substantially different than it was a year ago and and that suggests that the gains in productivity are going to be good and they're not going to be bad and um so we're set up to to see renewed competition and uh there's already some evidence of this in spite of the psych inflationary psychosis that's been uh gripping the financial markets um if you go back and look at the core inflation rates in the in the third quarter they were actually at a four percent annual rate in the last three months they're under a one percent annual rate in other words the third quarter was the was the peak for the supply side disruptions and very quietly the core inflation rates have been working their way downward now we have a situation where the core inflation rate last three months in the united states is is hanging right below one percent but the core inflation rates in china are closer to zero so what what's going to happen here in this price war is that the core inflation rates are going to be pulled between the low cost rates in china and the higher cost rates here and that that to me is not an inflationary situation it's a disinflationary situation so before we get to the psychosis that's gripping the markets and it feels like a psychosis um talk to me about about permanent unemployment right now the percentage of the pool of unemployed americans uh as of the latest data points 41.5 percent we're at levels that have never been seen outside of the years that follow the financial crisis so you can go back to the double dip recession of the 1980s you still don't get as high of a percentage of permanent unemployment and that does not obviously incorporate the five plus million who've dropped out of the labor force since then to me at least and it's something that not many people talk about but to me at least it seems like there's been some permanent damage uh done to the labor force that that yellen and powell have a hard time convincing me is going to be rectified quickly well um you're absolutely right daniel and i like the way you stated it um i think the only thing that i can add is to kind of look at the broad sweep of history and um from uh the 1870s where where we have uh good numbers on the national accounts until the economy became heavily indebted uh in the late 1990s uh in real per capita terms the gdp growth rate was 2.2 per hour and um since then the real per capita gdp growth has only been 1.2 percent now you need a rising uh uh a rising uh real per capita growth rate to boost the standard of living and when you do not do that you you then cause a lot of uh of tertiary damage secondary and tertiary damage that reinforces the over indebtedness and um [Music] makes it increasingly difficult for the economy to to achieve a generic self-sustaining growth um and what i'm talking about here is is to look at the production function the production function says that economic output is determined by technology interacting with the factors of production land labor uh and that and and demographics as a result of of the deteriorating increase in our standard of living we have uh caused not just in the united states but globally a major deterioration in the demographics during this period of high indebtedness um if you go back to the early 1900s where we have comparable data population growth was 1.2 percent when uh we in the late 90s when we we started moving into this high indebtedness we were growing 1.3 percent now we're just growing 0.35 um what economies need is they need population growth they need family formation they need babies and they need to stay young well our birth rates at an all-time low the family formation rate is extremely depressed and the average age of the us population is creeping upward moreover the demographics are deteriorating worse in all of our major uh trading partners uh last year for example um population growth in europe was only 0.25 the average age of of europe is substantially greater than the us last year the population declined 0.3 percent per annum in japan when japan went into its debt bubble there in the late 1980s it was still growing almost one percent round otherwise we we we've we've seen as as the japanese have misplayed the debt card and it's pulled the growth rate down it's it's reinforced negative demographics and although the official numbers from china say that they have population growth the private demographers say that it they do not and it's hard to believe that a country that had one child for family for so many years and allowed a major mismatch between young men and young women how they could possibly reverse that uh is beyond me the the japanese demographics are greater the average age in china is already 40 years versus 38 something in the u.s and every 12 months that goes by the average age in china is getting six months older so when you when you pursue failed policies and they exist long enough long enough to cause a deterioration in demographics then you uh add another element to this disinflationary stew and um i suppose i suspect that we've changed attitudes in a lot of ways you know um there were a lot of cute articles um that came out when the pandemic hit and people said well we're close proximity the birth rate's going up yes u.s everywhere birthright's going up good news baby boom okay so well the the results are still prim preliminary and of course you gotta allow for the waiting time you know uh the nine month period gestation period lacey yes but we have some of the states in count including california and and florida and we have 50 000 fewer births than we did a year ago and the numbers have been coming in in various european countries and um we have some tentative indications in in china uh everywhere the birth rate went down and and this is a perfect illustration what was more important close proximity are deteriorating economics now the pandemic was a non-economic factor but it served to reinforce uh one of the biggest challenges that the u.s has and the rest of the world has and and so um to to blightly focus on the size of these fiscal packages and and assume that they're some sort of panacea that's not my view of economics and i i think that they will be just as wrong as they were with regard to the power of the tax cuts of the prior administration and of the uh shovel-ready projects of an even earlier administration so lacie something i've been harping on for years and a lot of the work that i did when i was inside the federal reserve was it's kind of the long-term effects of of this disinflationary stew as you just said of this two entire cycles one driven by real estate the next driven by financial engineering and what effect this would have long term on on homeowner excuse me on homeownership rates on headship rates on household formation and you know something we've seen coming out of covid is this this rush to have multiple generations living under one roof so rather than the baby boomers emptying out their homes and and and going smaller instead they've got their children moving in with them so that they can procreate at some point and have the money to do so because the income generated capacity for millennials not what it was for their parents generation so to me at least it seems that's been going on for some time it's been going on for spilling some time i'm not giving the youngsters enough of a cushion to reverse the deteriorating it's not right but but if anything to your point we've seen automation accelerate it by several years and if your joe q ceo cfo and you were on the fence about automating you're not on the fence anymore uh and if there was this trend told towards multiple generations and you've refinanced it a two and three quarters percent mortgage rate i mean what what's the outlook for mobility in this country well it it's it's it it's um [Music] let's look at it this way um if you take the production function which says that per capita gdp is equal to uh technology interacting with land labor capital so we know the marginal revenue product of debt in the united states which is about 35 cents um and uh our demographics last year were 0.35 um so that adds to 0.7 so let's assume that natural resource contribution is flat has been for a long time and let's assume that dr gordon at northwestern is correct that the technology is more evolutionary than revolutionary it's not what we're seeing today doesn't enhance the demand for labor and natural resources not like the internal combustion engine or modern communications sanitations things where you the technology requires everything else to work with it and so we were at 2.2 percent per capita gdp growth until we became heavily indebted then we dropped down to 1.2 and using the production function which is sort of a long run view of looking at the world it doesn't mean it's going to hold quarter to quarter year to year it's telling us we're dropping below one we do not have the physical inputs um to uh to break this mold and and there's another argument here that i i think is very very consistent with it um [Music] uh i'm sure you know the name michael spence nobel laureate 2001 uh dean stanford school of business highly regarded uh he's done some very interesting work with um former fed board member kevin wash and um the the thrust of their argument to my way of thinking is very compatible with what we're seeing when money supply goes up but velocity goes down and the funds don't make it into the real economy what what's vincent washer's saying is that inadvertently when the federal reserve um engages in quantitative easing uh and this long forward guidance and whenever the stock market is in trouble they come in and provide liquidity and price support through some type of operation what the fed is basically doing is they are signaling to the corporate managers that financial assets the price is protected and the liquidity is protected and so this causes the corporate managers to put more and more of their resources in financial investment and less investment in the real but now financial investment is is good for those assets but to get economic growth you need real investments and and so the net result is that the federal reserve in its in its um desire to support the financial markets they're actually causing increasingly inferior results and and there are a couple of very good economic relationships that are obliterated by what the fed does one is called moral hazard and the other is creative destruction free free market economies need to uh allow risk-taking to be rewarded when it's appropriate but to be punished when it's inappropriate and and also uh you you need what joseph schumpeter called creative destruction you need the markets to allocate capital to those areas that will achieve growth but when you come in and you you you pump up all assets as the fed did last april they obliterate moral hazard and creative destruction and so the net result is that the federal reserve is an unwinning accomplice of all of these patterns that are contributing to the deteriorating economic growth rate over time you know it's funny you mentioned that i just read that that corporate america is now sitting on 2.2 trillion dollars of cash and they're revving up their share buyback machine all over again after having survived this crisis that has resulted in negligible if any uh investment outside of again doing as much automation as they can um so let's stay on the financial markets for just a second some would argue that especially given retail participation being over 20 of of the market and some of the some of the zanier things that we're seeing happen with s packs and and and chat boards and the things that you wake up and you say surely that's not a real headline um does it matter where valuations are at any given point in time for how efficacious fed policy is or is it just a matter of they've got enough tools in the toolbox to continue incentivizing corporate management to do as they've done now for well since since the financial crisis well this is the way i look at it um [Music] two decades ago and prior to that the stock market was considered a leading economic educator i don't think it is anymore i think basically it's become a tool of monetary policy and they place considerable focus on it and the stock market no longer plays that role um and as as someone whose entire focus is on the fixed income markets i would have to say that it's been i've what i've had to do is i've had to look at the real economic indicators to pick up the trends in growth and inflation and ignore what was going on in the stock market if you go back in time corporate profits were also a leading economic indicator and i believe they still are and to me corporate profits are very very telling indicated and and to my measure of thinking is is the statistic that comes out of the national accounts and the numbers are very very revealed danielle very very revealing if you look at the um the after tax profits adjusted for inflation um [Music] last year we don't have the final numbers for the fourth quarter yet um profits in 2020 are unchanged from nine years ago um which to my way of thinking is very consistent with what we've seen in the deceleration in real per capita gdp growth and also the fact that net national saving keeps coming down that national saving has three components private government net foreign and generally speaking the government deficits have been so increasingly large they've absorbed all of this saving last year i think um net national saving government private and foreign was uh probably just barely positive historically it's been six and a half percent since 1929 and and the only time that it's lower is 2009 and then the readings in the great depression um we we don't generate saving out of income you're not going to get investment out of income and and so that is basically uh compatible with the story that the financial manager the corporate managers are told to invest in financial assets and ignore the real assets it it makes a huge difference and um the the fact of the matter is uh the u.s economy was not performing well before uh the pandemic hit um the pandemic will end but the structural problems of extreme over-indebtedness deteriorating disallow deteriorating demographics misallocation away from the real sector to the financial sector uh those problems are actually all intensified and and i'm i'm afraid that the those who who expect miracles from the huge fiscal uh programs is going to be very disappointed after a very short period of time so i i will never forget uh the last time we met uh you had taken you taken me back in time to every time in modern world history that global trade had contracted on an annual basis and every time in 2020 i heard the recession referred to as the covet recession you popped into my mind and i said wait a minute global trade was negative for the entire year in 2019 we might not have been but we were heading in that direction because global trade contracted and i don't think people have a good understanding for how sclerotic the growth was prior to the pandemic hitting no i think i think that the initial conditions were bad when the pandemic hit and they're worse today um so why if that makes me a grumple then make me a grump i mean nothing has nothing has really changed in terms of corporate balance sheets they've just become more indebted than they were before so uh you're you're right not very much has changed um but the money no because because we're more leveraged now well right yeah it's worse let me let me just let me just give you a couple of numbers i mean if you if you look at total debt which is what you have to do to go back over the last 150 years um we we had four major debt benches that culminated in 1873 1929 2008 2009 and today now those earlier debt binges we basically reverse them we with great difficulty paid off uh the railroad debt the industries that fed the railroad from the um hectic period of the 1860s and 70s and we had a fairly long sustained period until we started uh down the dent road in the 1920s um and but we and then the 1930s were difficult but we managed to pay the debt down as a consequence of world war ii and we had a another prolonged period until we got into the late 80s early 90s and the debts started taking off now we have set a new peak of debt to gdp within 12 years of the last week now what we know about looking at those earlier historic cases in all of them there was significant disinflation the higher indebtedness led to falling rates of inflation and in two of the cases there was such fall inflation that we actually went into deflation so the so the us economy is more indebted um if you think about the great work um done on on the role of government debt by uh uh in the american economic review article of 2012 done by uh the two reinhardts and ken rogoff and they show that there is a that when gross government debt rises above 90 percent of gdp for more than five years you lose a third of your economic growth rate and uh and in fact we've come down from 2.2 to 1.2 we're losing more but it's right in line with what they said but there's corroboration by other serious economists in the united states stephen cicchetti alan taylor there's the great work of dr phillip rother in europe at the ecb and uh christina checharita and what they show is that is that when when government debt starts approaching 40 to 50 percent you get this detraction from economic activity 50 it intensifies and as you go up it gets more and more significant and so uh you you you have now debt levels that are way outside any historical pattern but we know that when we've taken this road it leads to deteriorating growth this inflation and it reinforces negative trends and demographics and that's going to be a hard pattern to break mighty take us to where we are because i cannot tell you how many people and the evidence is i i visited for a long time recently with richard verner who spent many of his years in japan uh in in the aftermath of the 1990s and we've definitely created debt specifically for the purpose of consumption which should be inflationary in the short term and from what we've heard from airlines and hotels and resorts and what have you we are going to see a pickup in services inflation uh i'm fascinated by the tug of war the competition between between domestic suppliers and overseas suppliers who want to retain their pre-code market share so it seems like that input price peak may be behind us but right now it's still very much front and center in addition to very high shipping and freight rates and then you have these base effects but you have powell and yellen both standing firm saying this is going to be transitory there's nothing to see here so if there's one thing that we've seen it's the we have seen the sustained rise for seven to eight weeks off a very low base point four percent on the tenure more than tripled in very short order so there is some uh there is some sign of stress in the markets as a result let me let me tell you where i think the stress is coming from um and i actually draw a parallel between when the fed announced their new policy framework last fall and something that happened in 2009 and i'm sure you'll remember it um [Music] when the bernanke fed uh engaged in well then sheet expansion or quantitative easing uh former chairman bernanke appeared on 60 minutes with scott pelley and scott pelley asked chairman bernanke what exactly is this quantitative reason and bernanke said well we're basically printing money which of course immediately conjured up the notion of our inflation now of course the fed doesn't print money they the fed's liabilities are not medium of exchange they're not a store value they're not money they do not circulate people that want to make it you you should stop and repeat those three things one more time lacey money has to be a medium of exchange store value unit of account the fed's liabilities do not circulate they can have a first-round increa impact on money supply but you have to have coordinated with velocity the the federal reserve act was set up to make the fed lender of last resort not to make the fed spender of last resort the senator carter glass went to fisher at yale and whittlesea at penn and said how do we give the fed great lending power but we don't want to make them uh a banana republic i mean there are people that want to go that route danielle and you know but so far that that's not consistent with the federal reserve act and but but anyway so bernanke appears he says well the fed's printing money which of course they weren't he should have never said that it was a loose statement he does to his credit 18 months later appear again and said well he misspoke well okay you know in the heat of a television interview misspoke but this is the world leading monetary expert saying the fed's printing money okay so he with with in combination with the shovel ready projects there was a big surge in inflationary psychosis just like we had now and it gripped the markets big time major backup in in yields in in 2009 just just as we've seen in the last 14 months or so okay the federal reserve unveils a new monetary framework and they say they're no longer targeting a two percent inflation but they're going to allow it to go above we want higher inflation well okay for most folks they they more or less gotta follow a central bank i i don't think that that's a good investment strategy i i personally think that the fed has to be faded i mean um they're a big organization they're the most expensive research organization in the world but but the fact of the matter is only 784 phds 784. they've never hit their inflation targets since they've been making them for now more than 10 years they got the gdp forecast one year missed and in every case they overpredicted inflation and they over predicted real growth but nevertheless the fed is saying we're willing to tolerate higher inflation now think about that in context with what i just talked to you about earlier when when economy comes out of a recession we need interest rates and inflation to fall they're lagging indicators you you don't want inflation to go up at the start of an economic expansion and so here the federal reserve is trying to support higher inflation and con contravene the business cycle and and so to my way of thinking the fed's policy action of trying to move everybody into an inflationary mindset is exactly the same thing that berdaki did in 2009 and i don't believe that that the new approach of the pal fed will be any more successful than the old approach under bernanke well and this time they're they're they're they're trying even harder but now they own a fifth of the tips market so they're actually trying to buy and pay for the narrative uh and and and physically push up inflation expectations so that the market sees them and follows them into the tips market it's it's really extraordinary you i might teach you one thing for a change and this will be a first and the last i promise but but when they announced average inflation targeting as the new formal regime at jackson hole the the benchmark 10-year yield moved by 10 basis points that's it that's all they got for this average regime and bear in mind since bernanke announced this they've hit 2 percent on the court 12 times since since they announced quantitative easing it's the most ridiculous exercise and i don't know what so but the bottom line is uh is claire the fed the fed the fed doesn't think very highly of folks that think like you and i do no they don't but but but powell is going to be proven right about the transitory transient nature of inflation and yet you know we've seen foreign purchases of treasuries dropped from about 33 percent of of of what's in the public tanks about 25 uh you know from from what my beltway contacts tell me this next three to four trillion dollars can be accomplished via reconciliation so no no more than 50 votes needed again and it seems like the fed will be there to print the money so um what will be accomplished if and i'm gonna i i'm gonna spell out some very quick math i walked through this new stimulus package a a single working mother of two children uh who was unemployed and collecting the benefits and the beneficiary of the rental eviction moratorium and the obamacare premium being covered the utility bill uh being covered the 500 or so dollars per month deposited into the account uh in the form of child child care tax credit i added up all of the the inputs to an annualized salary if you will with not a penny of stimulus check money this is just a pure what she's getting by decree of the new legislation and it add up to 60 912 give or take so uh so this is my big burning question they're going to print more money yet and i i'm an acolyte of yours i believe that it's not going to work as it's designed to work given i don't know how many you said japan had had 40 since since 89 janet yellen is a uc berkeley educated labor economist she's going to grow frustrated with policies that that inadvertently appeal to people not coming back into the workforce and she is no longer in a position of being a central banker she is the treasury secretary and there is in my mind at least a pathway that you could see her level of frustration grow to be very high and and i think that this is where your your mindset finally departs from from pushing on a string to crossing a line and i think you know where i'm going with this about a month before the election in 2016 uh janet yellen gave a speech it was around it was in mid-october and she said questions about how the u.s economy functions and a couple of the questions that she said that needed to be answered by economists or what determines inflation and in other words she made very clear that she didn't really know the answer and then she also said uh how does the monetary sector of the economy interact with the real sector and she's basically chiding the um the economics profession to work on these two important issues well today she tells us that she does know how inflation works and uh that's a big switch but uh i don't think the foundation has been properly laid and i also don't think the foundation has been addressed as to how the financial sector interacts with the real sector and the relationships are are there but they're not there in the way that they are viewed conventionally in most of the uh macro theory books trickle down or even the advanced research in macroeconomics there and there is a strong view that is held by a number of people that when you become extremely over indebted uh basically monetary policies capabilities are asymmetric in other words if you want to use uh a tighter monetary regime that will slow the economy but stimulative measures are largely impotent not entirely but they're increasingly fragile and um the same is basically true with regard to fiscal policy that that these engines uh that were so powerful uh five decades ago are no longer really much in the way of the viable option and in fact i think what we're learning is that when we we combine monetary and fiscal policy to make the economies more indebted we're going down a counterproductive path so let's let's just take this one last step and let's say that janet yellen finally understands empirically that the transmission mechanism between monetary policy and the real economy is broken and that it stops somewhere in between in the financial markets and gets stuck there so if you want to provide money directly to the people if you want for for individuals to have accounts at the federal reserve uh if you want to start looking into the future and as they alluded to um in international meetings recently be prepared for china to roll out its own digital currency uh the she would finally find the mechanism lacie i think i think that she's well there are people that want people there are people out there that want to create a digital account for all non-institutional uh all non-institutionalized adults so that it can be funded with the fed's liabilities um in my view that is uh a whole different regime in that case you would be printing money and if we go down that route in very short order we will get half our inflation will you will trigger what's called gresham's law the bad money will chase out the good money and and so one of the risks to the evolution of monetary policy and fiscal policy is that it becomes apparent that even astronomically large increases in debt really do not produce a sanguine result that we we go to money printing and fortunately we are a nation of laws and in my view this would have to be a result of a law change and um i don't think the current fed chairman would advocate that in other words he he said repeatedly the fed has lending powers but it doesn't have spending powers and moreover um to change the federal reserve act you're going to have to have the federal reserve guide the congress through it and and so you if you open up the federal reserve act for revision then all the other proposals that are out there are going to be swept swept into it won't we won't just be whatever the fed says we'll we'll we'll take up and some of them are as you know pretty pretty extreme and and so um powell has his job until uh the end of january of 2022 and um uh he may or may not be reappointed uh but he someone would would have to be reappointed that would want to make the fed's liabilities medium of exchange and if that were to happen then we would know we would be on the road to hyperinflation so um to sort of paraphrase t.s eliot this is what i would say elliot said that the world ends with with a not with a bang but with a whimper it ends with a whimper if the solution is more and more dead it ends with a bang if you convert and start going to more and more money burning lacy i can't think of a better note to end on um that was poetic and i'm right there with you in applauding the fact that we are a nation of laws and let's not let's not open pandora's box let's bring the 19 close safe uh and you know hopefully a year from now we're still talking about a world of jay powell as much as i'm surprised to hear myself say that because he will draw the line i think at digital currencies to the extent he can and he does not advocate for negative interest rates so those those are those are two lines we can hope continue but let's let's do this again i like india on a cheery note daniel i like t.s eliot so that's a good thing thanks so much for your time today i really really good fun being with you as always take care i hope you enjoyed this special episode of the interview the premier business and finance series in the world however this is just the tip of the iceberg for more in-depth content and expert analysis visit the membership link in the description to unlock a week's access for only one dollar this dollar can change your life

Channel: Danielle DiMartino Booth

Views: 12,400

Keywords: Danielle DiMartino Booth, Quill Intelligence, Fed Up, Business, Economy

Id: boJG__D87fI

Length: 63min 29sec (3809 seconds)

Published: Thu Dec 16 2021