Joel Stern Says Fed Raising Rates Will Cause a Recession(Audio)

a drop of two tenths of one percent. Ten You're up eight thirty seconds, the old one point seven four percent. Gold down thirty dollars, the ounce to twelve sixty three, the drop of two point four percent. Nimex crude was down two point eight percent. West Texas Intermediate following a dollar twenty five to forty three dollars and forty one cents. I'm Charlie Pallett, and that's a Bloomberg Business Flash. You're listening to Taking Style with Kathleen and Pim Fox Bloomberg Radio.

What will the Federal Reserve do? What will the US economy do? What should it be doing? What you should be doing with your money. All these questions and more I'm gonna put to my next guest, Joel Stern. He is the chairman the chief executive of Stern Value Management, and just as a note, I believe that we can describe him as a pioneer in a shareholder value and linking financial economics with corporate performance and corporate valuation. Joel Stern,

thank you very much for coming. It's always a pleasure. So I started by, I mean, everyone wants to know if they if they knew, you know, wouldn't really be much fun, right, I mean if everybody had the same opinion. But tell me what your thoughts are about the U s economy. And I know you travel a great deal, so you have some perspective the US economy and the federal reserves place in it. Okay, the United States economy has been growing out about half of what its potential is.

It should be growing at close to four percent a year now. When we had the recession back in seven and eight and ending and nine, the drop was so substantial, so negative. We have to revert back to macroeconomic theory. What does it tell us? It says the faster you fall, the faster you come. Out, but that didn't happen this time,

and people were puzzled. The late Gary Becker, who was a very close friend and a Nobel Prize winner at the University of Chicago, he said that the major reason why the growth rate was so small was because of the reregulation of the US economy. In other words, let me use my my terminology for it. The determining factor is what is the return on total capital going to be.

You invest in a new project, you need to be sure in your mind or reasonably sure that the rate of return earned on capital employed will be greater than the required rate of return based on the risk of the investment. That's the whole key to this thing. Now, if the risks go up because government comes along and says, oh, we're gonna aggregate or revoke your property rights, essentially, that's what's happening. That increases the risk of making a decision.

And what if that crowds out good worthwhile investments that are job creators and that strengthen the dollar and do all kinds of good things for the U. S economy. When that happens, then the growth rate falls to about where it has been. And what's amazing is that whenever the President or other members of ex happening to talk about the economy, they always look for the snippet that's doing very well, but they don't tell us about all of the people who have dropped out of the workforce

because they are discouraged. They've been unable to find the work they want. Also, some people who accounted as working are working at jobs they don't really like and they don't want to have, and they would want to take the jobs that were would be the strong growth jobs, and they're just not available to them. So that's one thing. The second thing I should tell you is that because of the baggage, the excess baggage I carry as having been a student at the University of Chicago in economics

and finance, I am a compulsive free market here. In other words, I say to myself, what would things look like if we simply had a wide open and free economy. Incidentally, I'm even I even disagreed with Gary Gary Becker when I said to him one day I'm against anti trust laws. He said, why wouldn't that create monopolies? Not if we have very open borders. Let's have no tarists, no import quotas, no exports up todays. Be like whom not be like Mike.

Let's be like Singapore, Let's be like Hong Kong. Let's be like places that are growing like crazy. And by the way, for those people who believe in a larger role for government, what they should do is examine how well India has been doing, especially since Mr Modi became the Prime minister. It's not that he's been freeing the economy. He has simply been saying to himself, I'm not going to let regulations stand in the way. The monopolies and

governments still exists. Unfortunately, they should be either privatized or they should do what we did for the US Postal Service in the nineties and put them on our e V, a bonus system which will create tremendous innovation uh and and and on cost cutting. I want to bring this back though, to the June fourteen and fifteen meeting at the Federal Reserve and the current level of interest rates. What what did the economy tell you that the Federal

Reserve should do or not do? The reason why interest rates are low and the reason there's no way to escape this. In fact, the reason why interest rates are low is because the economy is doing so poorly. Interest rates would rise if real returns were rising at a rapid rate, because what higher real interest rates do is they signal the world that high rates of return on capitol are being earned. In the United States, the fact that we have low interest rates is a very sad tale.

By the way, you might say, oh, well, businesses benefit because they pay low borrowing costs, But think about all of the millions and millions of savers who are earning next to nothing. Can I tell you a pretty quick story. I was having my taxes done recently and I had forgotten about my checking account at Citi Bank, and they said, you forgot to give us the tax material. I said, no, no,

it won't make any difference. My total interest income for last year was thirty seven dollars and forty two cents. They will not care if we didn't report that, even though they have it from the bank and we all left. Isn't it sad? Hey? Not long ago I used to have a very big numbers interest income. Not anymore. So. The question is what should retired people do who cannot earn a decent return on their savings. And it might encourage them to make a mistake and put their money

into the share market. So what do you have a solution? What do you think can you do it in ten seconds? With the fellow reserves simply got to get out of the way. They have to let infest rates be whatever they would be. But you see right now they can't afford to raise infest rates because it would caused the economy to go right into recession. Thank you very much, Joel Stern, Chairman, chief executive Stern Value Management, sharing his thoughts about the economy and what needs to happen to

make it grow. You've been listening to taking Stock. I'm pim Fox, My co host Katheen Hayes is on holiday, and this is Bloomberg Radio. You're saying coming up, Bloomberg Law is brought to my Deutsch Atkins PC. If you feel you've been unlawfully terminated, you over to yourself to call the law from our Deutch Atkins. Now for a free phone consultation, call eight hundred