Todd Sanders:
Welcome back to the podcast. We are honored today to have Steve Wyett, who's the chief investments strategist for BOK Financial. He's part of our Economic Outlook program. He's here with us today. Steve, welcome back.
Steve Wyett:
Todd, great to be here. I'm really looking forward to our conversation today. I think we've got some interesting stuff to talk about.
Todd Sanders:
We really do, and I think when we have you for Economic Outlook, usually, we'll hear back from folks for a number of days about how much they learned, how much information is out there, and you were kind enough to come back mid-year to give us an update. I think when we heard you last, you talked about potential soft landing of the economy. Where are we now?
Steve Wyett:
Until the CPI came out this morning, I would say that's definitely where we were. Look, I do think that's still where we are. Let's just define what a soft landing is as we think about what that may mean from a Fed standpoint. Because the way the Fed uses monetary policy to try and alter economic activity, or in this case, really, what's been the biggest thing that's been our problem since we came out of the pandemic? It was inflation, and we saw inflation go really high. CPI peaked over 9%. The way the Fed thinks about their monetary policy, they use interest rates as a tool to try and control economic demand, which in effect then has a secondary effect on inflation.
As inflation is moving higher, the Fed is raising interest rates that has the impact of historically slowing economic activity that reduces demand from consumers, that allows supply to catch up with that lower demand and prices will fall. That's the transmission mechanism of what the Fed is trying to do. Here's the hard part, and I can remember, Todd, when the Fed started raising rates in March of 2022 and they'd kept rates near zero, remember coming through the pandemic? Actually, all the way back to the financial crisis in '08 and '09 where it was the first time the Fed took interest rates to zero and held them there for a long time.
Todd Sanders:
Unprecedented.
Steve Wyett:
Unprecedented. That's right. In 2018, they tried to raise interest rates and they got them as high as 2% and then the economy slowed down again, so they went back to zero. Then of course, when the pandemic hit, we're just taking them right to the floor. They supported the capital markets. They did some other things to inject liquidity, not the least of which is double the size of their balance sheet. They were actually buying treasuries and even some corporate bonds to support the market. Those lower interest rates are meant to spur economic activity. Lower interest rates from a business standpoint that makes more projects profitable because the hurdle bar of what your cost of capital is lower. On the flip side, then when they raise rates, that makes the hurdle bar a lot higher and that's why it tends to slow demand.
When the Fed started raising rates, I can remember Fed Chair Powell walking out of that first meeting at his press conference and he looked directly into the camera and he said, "I want to talk to the American people. We understand we have to get inflation down, but the actions we're going to take are going to cause some pain." Now, the pain that we normally see from higher interest rates and as the economy slows, you think about the economy slowing, companies start making a little bit less money. How do they respond to that? They normally start cutting costs, and one of the biggest costs that they'll go, they'll start laying off people, so we see unemployment start to rise.
Todd Sanders:
The Fed, that was their goal. We knew there was going to be some pain.
Steve Wyett:
That was the pain that Fed Chair Powell was talking about. When you think about labor force in the United States, we have about 160 million makes up our labor force. A 1% increase in unemployment, that's 1.6 million jobs. That can be uncomfortable. That's an uncomfortable thing to think about that the Fed is, it's not like they're saying we want to put people out of work, but the end result of what their actions are normally, that's what it does. I can remember thinking as Fed Chair Powell did that, that wow, that's different than what we've seen in the past. The way the Fed has communicated with the markets has evolved a lot. When I got back, I got in the business in January of 1982. This was way back in the old days. Paul Volcker was the chairman of the Fed during that period of time.
Todd Sanders:
The Volcker Curve, right?
Steve Wyett:
For those listeners that can remember, interest rates were very high because inflation had gotten away from us and the Fed had to raise interest rates dramatically at that point. Even though unemployment in the US was at 10%, the Fed had to keep interest rates high because inflation was just hard to get down. At that point in time, Todd, the Fed didn't talk to the public at all. Chair Volcker would have to make testimony to Congress twice a year in what was called the Humphrey Hawkins Testimony. That's the only time the Fed talked that people could ask the chair, what are you doing? It was a real art form for the fed chair to say nothing while speaking English as he was trying to answer these questions. Fast-forward to today where after every meeting, Fed Chair Powell comes out and has a press conference, says, "Here's what we did. Here's what we're thinking. Here's why we're thinking about it." It's just so different than it used to be.
I think the point of this is, is that the Fed Chair Powell has over the course of his chairmanship, wanted to continue to increase the transparency of what the Fed is doing. The Fed went on a national kind of a listening tour, if you will. It was called the Fed Listens, and they just talked to people about monetary policy and what they were thinking and how that impacted people. I think that the Fed does have a better sense. When you get down to it, the Federal Reserve is filled with a lot of really smart people. These are people that are highly educated. It tends to be a highly analytically driven type of a committee. They've got hugely complex econometric models that they built that try to take all of the inputs and just thinking about how complex the US economy is, much less the global economy. It's impossible to create a model that will absolutely tell you what's going to happen, but that's what they try and do, and so it's a very analytical.
Fed Chair Powell in that press conference was not talking from an analytical standpoint, he was trying to explain what we should expect from an outcome. Now, I've got to tell you, Todd, that put us in a position where as we went through 2022 and then in 2023, we were cautious on our outlook. When I came to the fall conference in 2022, I laid out a pretty clear case of why the economy was going to continue to slow and the unemployment was going to go up some, but that was what was needed for inflation to fall. Well, as we went through 2023, that's not what happened. We did see inflation come down, but at that press conference in March of 2022, the unemployment rate in the United States was 3.6%.
We just got a report last Friday and the unemployment rate in the United States is 3.8%. We saw the Fed raise interest rates by 5%, and not only did the economy not slow down, it's accelerated and unemployment is only up by 20 basis points, an unbelievable economic outcome, really different. I think there's some reasons for that and we can talk about that. This soft landing is the idea that the Fed could raise rates enough to see inflation come down, but we don't see unemployment go up and the economy can continue to grow. That was a very low probability outcome as we thought what was happening in 2022 and 2023. As we sit here today, that looks like the most probable outcome, which is completely different.
Todd Sanders:
Such a difference.
Steve Wyett:
I just have to say, look, if we're going to be wrong, I'd rather us be wrong because things are better than what we were anticipating. There's still possibilities. I would say recession risk have receded a lot. They're not gone. There are still things that could push us in that direction. If we can accomplish this, it's a huge win for our economy, it's a huge win for the Fed, it's a huge win for the markets, it's a huge win for American consumers and job holders that if we can see inflation come down.
Now, this is the hard part about the inflation data that we're getting now in really the last two to four months is that, that improvement in the inflation has slowed down a little bit. It's still coming down, but it's not coming down as much. There are some parts of the inflation picture that look like they might actually be turning up a little bit. This is why the Fed is, they're just cautious about lowering interest rates too quickly. There's still a lot of underlying demand in the economy. They don't want to ease too quickly and see us spur a secondary wave of inflation, which has happened historically.
Todd Sanders:
Which happened to Volcker, correct?
Steve Wyett:
Well, Volcker was brought in to clean up the mess of the person that was before him, which was a fed chair named Arthur Burns. What I would tell you is Jay Powell much more wants to be remembered like Paul Volcker than Arthur Burns. The idea is, is that inflation does come in waves, and so the Fed is thinking, "What can we do today that will keep this echo wave of inflation from coming?" The hard part is, is it's not this month. It's really hard to look at one month and say, okay, here's exactly what's going to happen. This is what's given the Fed pause. Inflation is not going to go away quietly. It doesn't appear. There's just remains that question of how much you think it's three, isn't that good enough? They're target is two, they are only 1% away.
That difference between three and two is a really big difference if we go over a number of years, so the Fed wants to get it to two, I understand completely what they're saying. Inflation is probably the biggest factor that keeps our economy from moving forward in a homogenous way. It impacts people way differently depending on what part of the income bracket you're in, and it really hurts the people that can least afford it the worst. I applaud what Fed Chair Powell is trying to do. Consider that getting it back to 2% is important. He just got a tough job right now.
Todd Sanders:
Well, absolutely. It seemed like those first two percentage points came relatively.
Steve Wyett:
It did.
Todd Sanders:
Not that it wasn't painful, but it came down pretty fast, and now it seems like we're just plateaued, we're stuck. It's that last percentage to your point that we just can't get off.
Steve Wyett:
We call that the last mile of inflation. Look, you remember what the term was that the Fed was using about inflation early as it started up, the Fed was saying inflation is transitory, it's transitory. It turned out to be not as transitory as they thought, but if you start to break down inflation between the cyclical parts of inflation and the secular parts of inflation, I'm not trying to get too wonky here, but we can see it in the data. Remember as we went into the pandemic, we shut everything down. The big thing was I mentioned the Fed did much what they did back in the financial crisis. They took interest rates to zero.
Here was the big difference, as we came out of the financial crisis where unemployment peaked at 10%, that was a really ugly period. It was a long period, and unemployment took the better part of 10 years to get down to 4% as it worked its way down. While the Fed did much the same thing, Congress didn't do much of anything. There were no fiscal policy response necessarily in the pandemic. I think what Congress learned in that is look, if we go through another period like that, we're going to act big too, and they did. Look, I know what the intent was. Remember as we shut down the economy, Todd, man, the uncertainty was so high because we saw unemployment over the course of two months move from 4% to 15.3%.
Todd Sanders:
It was those days.
Steve Wyett:
It was scary. I applaud the Fed and Congress for taking action to avoid what they wanted. They wanted to avoid the risk of an extended long great depression type of an economic event. If you just look at the data, they effectively avoided that. As we think about things, it's probably the avoidance of one risk is the acceptance of the other. As you look at inflation today, we shut down the economy. We couldn't take trips, we couldn't go eat at restaurants anymore, but the federal government was sending all this money out. What did we do? We bought stuff. We bought a lot of stuff, including housing. You can see in the inflation data that core goods inflation just spiked. It went up to as high as 12%. It's now backed down. If we could figure out a way, Todd, to live on flat screen TVs, we'd be fine because flat screen TV prices are actually declining.
Todd Sanders:
They're pretty low.
Steve Wyett:
They're declining. I think that brings up another interesting point as we talk about inflation. As economists, we talk about inflation getting better. It's down, that doesn't mean prices are falling.
Todd Sanders:
They've got some misinterpretation for people.
Steve Wyett:
That means they're just going up more slowly.
Todd Sanders:
Yes.
Steve Wyett:
It's like when you see new budgets from the Federal Government and they say, "We've cut government spending." Now, what they did is they just cut the growth rate. We're not going to spend as much more. My wife's a big proponent of that type of a definition. I tend to come on a different side of that. That's not a cut. From an inflation standpoint, what you and I are dealing with is what consumers are dealing with is just the aggregate level of price increases. From January 1 of 2020 through today, it's roughly 20% on CPI. Now, that's a fifth of our spending power that we've lost over that period of time.
Todd Sanders:
People feel it.
Steve Wyett:
Absolutely. There's a lot of economic ideas that we could talk about that not many people would understand or be interested in, but inflation is one that impacts everybody.
Todd Sanders:
Yes, absolutely. We haven't felt it here in decades. One of the things that was discussed at one of our board meetings was that thinking about people who are running today's companies, nobody who's running a company today had to deal with inflation, really, from the 70s, really. It's such an interesting place be.
Steve Wyett:
I think that look, that means risk management looks a little bit different for companies. The cost of capital was so low for so long because interest rates were being held down. It changed. The advantage of lower interest rates is it makes some of those projects that may have been a little bit iffy, you go ahead and do that. The fact is the return on those are not as high as what some other projects would be. As you keep interest rates really low, you see projects get done that you're kind of like, "I'm not sure that in a normal time that would've been a project that would've got approved."
The hard part as rates move up, again, that's what slows down the economy. We're seeing that. There's still a lot of public infrastructure stuff being, and the government's still spending a lot of money. I want to talk about that a little bit. In the private sector, you're seeing some slowdown on some projects. We've had huge increases in multifamily housing. As we get through this year, and those projects are done as we look forward into 2025, 2026, not a lot on the drawing board.
Todd Sanders:
Which will be interesting to see. I think to your earlier point, the economy today defined the laws of economics. Because even with some really aggressive cut or cuts or increases in rates, we're still growing. What do you attribute that to? It just the massive amount of money out there?
Steve Wyett:
There's really two things. It's a reflection of the fact that as we went through the pandemic, when I talk about the amount of money that the Fed or that the Congress put into the economy, it's five to $6 trillion, and a lot of that went directly into consumer pockets. Consumers are 66% of our economy, that two thirds of our economy. Look, as long as the consumer is healthy, and that's why unemployment, it's so important to the economic outlook. If unemployment is going to stay low, you can find some cracks in credit card debt and auto loans and some stuff like that. Generally, this last unemployment report at 3.8%, Todd, that was the 25th month, I think in a row of unemployment below 4%. That has not happened in this country since the 1960s. Just a fabulous performance by the economy.
What we missed as we were thinking about the potential for unemployment going up, is that the Federal Government would continue to spend the amount of money. Now it's different. They're not sending checks to individuals to put that in those pockets, but they just updated through the end of March, our fiscal position for this year, it's a $1.7 trillion budget deficit. Now, that's going to get a little better as we go through April and May. That's big tax collection season. It wouldn't surprise me to see there would be some pronouncements about how much the deficit has improved as we go over the next couple of months. The bottom line is this, we're still spending, deficit spending is 5 to 6% of our budget. It's 5 to 6% of GDP. It's a material amount of money, and it's unprecedented that we do that during a period that unemployment is below 4% and GDP growth last year, which averaged 3% for the year was accelerating as we went into the end of the year. It's just unprecedented that we've continued to spend that amount of money.
Todd Sanders:
When we're not in a crisis.
Steve Wyett:
When we're not in a crisis. Short term, that's been highly additive to growth. We can look at charts that look at the growth rate in like the US versus the European Union, going even back to before the pandemic. We're both highly developed economies, roughly the same size if you look at the EU versus the US in totality. Growth rate was pretty much the same. We both went way down during the pandemic. Coming out of the pandemic, the EU, that's an economic union but not a political union, so their ability to do coordinated fiscal response just wasn't there like it was here. If you look at the growth rate of the US economy coming out of the pandemic versus the EU, we have way better.
If you just look at it from that standpoint, what Congress did has allowed us to recover to a much greater degree than what they're witnessing in the EU. The way I think about this, Todd, if you take a snapshot of the economy, it looks really good. Low unemployment, look, inflation is coming down, we've got positive GDP growth, we've still got positive retail sales. How much airbrushing are we having to do to make that picture look that good? That's the term I'm going to use for all this deficit spending that we're doing. It's not that deficit spending in and of itself is necessarily bad, but it's a question of how sustainable is at the level that we're doing it now.
Most people would say, and if you look at a forecast from the Congressional budget office, which is probably the most bipartisan scorekeeper out there of what's happening in Washington, and you just look at their forecast of how much public debt of GDP is going to be held by as we move forward based upon current law, which would include the sun setting of the 2017 tax cuts that were passed during the Trump administration. You just see trillion-dollar-plus deficits as far as the eye can see. We've put ourselves in a position where I think that there's going to need to be some shift in how we view what we're doing from a fiscal position to see that growth in and debt start to, it doesn't need to go down, but certainly, the growth rate needs to slow. That growth line needs to start to flatten so that it can become a little bit more sustainable. I think that'll happen. As we sit here today, we've got a presidential election coming up. By the way, neither party owns the moral high ground on fiscal responsibility.
Todd Sanders:
It is true.
Steve Wyett:
I'm not making a partisan statement here. We view this purely just from a math standpoint. Neither party is even talking about fiscal responsibility because it's hard. The solution is going to be hard, and so it's going to eventually catch up with us.
Todd Sanders:
What would your message be for policymakers at the congressional level today? What should they be thinking about?
Steve Wyett:
Look, I think the reality of it is, Todd, they're just going to have to review everything that we're doing from a spending standpoint.
Todd Sanders:
Everything.
Steve Wyett:
Everything. I'm talking not just discretionary spending, I'm talking the entitlement programs and everything else. If you look at how the federal budget is set up, 60% of it is mandatory that Congress doesn't even control that in effect.
Todd Sanders:
Autopilot.
Steve Wyett:
That's social security, Medicare, Medicaid, other types of income guarantees, the vast majority of that is indexed to inflation. The government does have a vested interest in seeing inflation come down as well, because so much of our entitlement programs are tied to that. Well, what that means is, is that's 60% of the budget that's continuing to go up in spending. If you get to the 40% where we talk about the discretionary part where Congress, this is when we get into these government shutdown discussions and all of this, there's really three big areas that you're talking to. The biggest today is defense spending. Now, I don't know exactly which way defense spending is going, but it doesn't appear to me that the world is any more stable today than it was 24 or 36 months ago.
At best you would say defense spending is going to stay stable. I could build a pretty good case that it probably needs to go up some. The second biggest is interest expense, that's going higher, not just because the amount of debt that we continue to add. I read a stat the other day, we're adding a trillion dollars in debt every 100 days in this country right now. That's a big number. Just as a quick aside on that, Todd, remember that was back in June of 2023, that we were bumping up against the debt ceiling at that time. We were approaching that day and nothing was getting done. Fitch, one of the three major rating agencies, S&P, Moody's and Fitch. Fitch downgraded us to double A plus, and one of the things that they highlighted was this growing debt problem, but also the dysfunctional nature of our governmental processes.
I'm not sure we've done anything to improve their view of our dysfunctional governmental process to begin with, but as we work through that, we finally did come to that agreement. I think it's important to realize that when we raised the debt ceiling, that's the wrong term, because we didn't actually raise the debt ceiling, we suspended it. That meant that we put a date out there, January of 2025 and said, "We're going to act like we don't have a debt ceiling between now and then." Now, that's been done before. It happened during the pandemic, it's happened in periods. That, in and of itself, was not necessarily a real issue. I do find it amusing that the name of the bill that suspended the debt ceiling was the Fiscal Responsibility Act of 2023.
Todd Sanders:
What an Irony in DC, right?
Steve Wyett:
Kind of like the Inflation Reduction Act that they did.
Todd Sanders:
Yes.
Steve Wyett:
Since that time, it was at 31.4 trillion. The CBO estimated that we would add $4 trillion in debt between then and 2025. I've looked for anybody that will take 4 trillion or less because I want the over on a bet. I can't find anybody to take that. I'm suspecting that we're going to be even more than $4 trillion by the time we get to January of 2025.
Todd Sanders:
You're going to need some serious policymakers making some hard choices.
Steve Wyett:
This is hard choices. I'm almost 65 myself, so as I'm approaching retirement age and you start thinking about how that's going to impact entitlement programs. Let's keep this in mind, even again by the CBO's budget estimate to the social security plan is going to spend through its surplus by something like 2035. Not that far into the future. If they allow that to happen, the current law is that every beneficiary of social security takes a 23% cut in their benefits. I mean, here's the thing, yes, you start talking about social security and you start talking about things like maybe we should raise the retirement age, not for me necessarily, and I'm not trying to be special there, but you need some time to work that through.
If you're 30 years or younger now, your retirement age isn't going to be 67, it's going to be 69 or something like that. Or you look at the FICA tax and you uncap the income that you're taxing while still capping the benefit that you're going to get. You start getting into stuff where maybe they have to start means testing beneficiaries of social security. If you've been successful outside of that, how Medicare costs are going up rapidly, you've got to have those types of discussions. Because if you get down to just thinking about where you're going to cut spending, it's hard in military, it's not going to happen in the interest expense. You've only got about 15% of the government where everything else lives. It's going to have to take a review of spending. It's a review of the tax policies.
I don't know how you feel about it. I do my taxes every year and it's a Saturday in March that I just write off. I just say, "This is going to be a bad day." I go in and do it, and I get to the end and I use TurboTax. At the end it says, "Your effective tax rate is X." I'm like, "I would pay 2% more than that number to just not have to go through this." I think there's some opportunities there, and then not to belabor the point, but here's the other as we think about policies that we could look to Washington to help us, a better way to deal with this is to find a way to grow the economy faster. Now, we just think of labor as a raw material for output.
If you want a rough idea of what the trend growth in our economy is, look at what your population growth is, add some productivity, which it's running about one point a half percent long-term, it varies a lot. In fact, it went negative during the pandemic when people's salaries were going way up. We're back to about one and a half, 2%. That's where you get 2 to 2.5% on the potential growth rate. Well, if we could either improve productivity, that tends to come from the private sector, that is an opportunity for AI or some technology to continue to do that, or we could find a way to grow the labor force faster. Now, organic growth is hard. Birth rates for a lot of developed countries are down.
Todd Sanders:
Ours is down, correct?
Steve Wyett:
US is no different than that. This is where topics like immigration have to be dealt with. I know that can become very a political hot potato very quickly. Again, just thinking about this from an economic standpoint, just thinking about labor as a raw material for output, we need more of that. I know there are millions of people that want to come to this country and work, and it would make sense if we could find a way to ease that process to get those workers into our workforce, expand the output capacity of the economy. That also helps the Fed. Now all of a sudden, they don't have to do as much with interest rates to try and lower demand because you've got actual supply in the economy coming up to meet that level of demand.
Maybe that lets the Fed ease up on interest rates a little bit because we've actually got more output capacity in the economy. This can sound almost relatively easy from an economic standpoint. It's hard, I get it. No one's going to sit here and say that everybody's coming across our border as a good person. That's not what we're saying. We do know that historically immigration has been a positive part of what we've done from an economic standpoint within our country. Having some sort of a cogent immigration policy would go a long ways towards helping us. Because look, let's be clear, three and a half percent growth versus two and a half, when we start thinking about everything that we might have to be doing from a tax or spending standpoint, man, more growth is way better than having to deal with all this stuff over here.
Todd Sanders:
You're not wading into the politics of immigration. You're agnostic, you're just saying we need to figure it out.
Steve Wyett:
I'm agnostic.
Todd Sanders:
Let people in legally.
Steve Wyett:
Thank you for letting me confirm that. Again, this is not a political statement. I'm thinking about this from a purely economic standpoint. There's plenty of anecdotal stories that we could talk about, about how difficult it is. In fact, if you look at the employment data, there's a pretty big gap between the two surveys, the establishment survey and the household survey. A lot of that could be immigration, illegal immigration that is coming into this country that's not getting picked up in the household survey that's in the establishment survey. People that work in that part of whether it's construction or a number of different parts of our economy, they see that.
It's the hard part about hiring a lot of people now, and we still have more open jobs than we do unemployed people. What I hear from business owners about the difficulty in hiring people and for a lot of jobs is that you got two things, one is finding somebody can pass a drug test, and that's a social issue that I'm not going to try and solve today. The other part of that is finding people that can clear the government's I-IX-E verify process. I know it spurred a black market for social security numbers and federal ID numbers that these people want to work, they want to have a job. I just look at that and go, there's got to be a better way, Todd.
Todd Sanders:
Absolutely. That's something that we need serious debate and policymakers thinking about this in a rational way.
Steve Wyett:
Arizona could be a big beneficiary of that.
Todd Sanders:
Absolutely.
Steve Wyett:
I mean, as a border state, this is a front and center issue.
Todd Sanders:
It is. I agree. On the other side, AI, taking a bigger and bigger role in the economy. Maybe give us your thoughts on where AI is going as far as it relates to the economy.
Steve Wyett:
It's really early to know for sure. I think that our sense is, and certainly, if you've looked at the stock market, AI has been what's driving the performance of the top of the stock market. Nvidia has been the poster child, but it's Microsoft, it's all of them that are using AI. I would just say from a company standpoint, we better be looking at AI as a tool. I know at BOK Financial, we're figuring out ways how to use AI as a tool to help us become more productive. The hard part of that is that means we can grow without adding as many people. I think the biggest thing about AI as we think about it, two things. I go back to you think about the stock market and the way that has moved, my mind immediately goes back to the tech bubble in '99 and 2000 where we saw the internet explosion and we saw a number of companies get huge valuations that were really not worth anything.
There's a big difference in the companies that are getting the benefit of AI today versus what happened in the tech bubble. Here's the important part of that, what was really happening there in the internet bubble is what it turned out, the internet did revolutionize our entire economy. There's none of us that really can do our job anymore without having access to the internet. AI has a similar type of a long-term. I'm not sure what companies, it may be a company that hasn't even been formed yet that's going to be the biggest beneficiary of that. I don't know if it's Nvidia. It's hard for me to see a company that can continue to make a chip and have 80% profit margins forever without the Intel just announced a potential competitor chip might be built right here in Phoenix.
Todd Sanders:
That's the hope.
Steve Wyett:
I think that as you look from an individual company standpoint, it's different. AI as a technology, as we think about how that may move forward, huge promise.
Todd Sanders:
A lot of opportunity and challenge out there as we move forward.
Steve Wyett:
Absolutely.
Todd Sanders:
Briefly, you mentioned deflation. A lot of people would say, well, that sounds great. We don't like inflation, deflation must be the answer.
Steve Wyett:
That's true, unless you owe money. Look, inflation is not that bad if you don't owe anybody money, it hurts you less. Deflation, particularly in a highly-leveraged economy, think about this, if you've made a loan to a company, just say a million dollars, and they have put up a million and a half dollars in collateral, their business starts to slow down. You think, okay, I've still got a million and a half dollars' worth of collateral. Oh, wait a minute, that's not worth a million and a half, it's only worth 900,000. Now I'm in a position where I might lose $100,000. The response to that is as prices start to fall, creditors start to call in those credit lines faster because their protection against losing money is declining. You're right, falling prices can feel good and it's great. Let me personalize it from this standpoint, living in Oklahoma, we're an energy state. As a consumer, I love it when gas prices fall during the pandemic when gasoline fell below a dollar a gallon.
I was like, "Man, that's great." Wait a minute. No, that's bad. Because there's so much of our economy that's driven by the oil and gas business. It can be beneficial. I would liken it to the paradox of thrift as people save more money, that's good for them personally. That's bad from an overall economic standpoint. We need people spending money that turns money over in our economy and gets the velocity of the economy improving. Deflation can sound good, it can be good. It can also be very painful. That's why the Fed and Congress wanted to avoid that risk. The last big deflationary, national deflationary environment, that was the Great Depression. I don't think anybody would look back at that and say, that was a great period in our economy. Living in Oklahoma, Texas, Colorado, energy states in the mid to late 80s, we suffered deflation there as oil prices fell, that was hugely stimulative to the rest of the economy. We saw real estate values fall 20, 25%. We closed a third of our banks. We closed all of our savings and loans. It was a really painful period.
Todd Sanders:
Not the answer.
Steve Wyett:
I'm not going to say inflation is good, but it's better than deflation.
Todd Sanders:
Than deflation. I think Japan has been experiencing that for a couple of years.
Steve Wyett:
Exactly.
Todd Sanders:
I know we're running near the end of our show, but I did want to ask a little bit about the US dollar as the world currency. Clearly, there's been some movement by China and others to destabilize us as the world currency. Where do you see that?
Steve Wyett:
I want to go back to where I think this started. Look, part of this is you just say, okay, what we're doing as a fiscal from our fiscal standpoint has to mean that the dollar is going down, and that's what inflation is. It's a debasement of your currency. That 20% CPI that I talked about, that's a debasement of our currency. That's just here domestically. Then if you're talking about the world's reserve currency, it's relative to what's going on in the rest of the world. If we have one advantage, it is for the actions that we're taking. There's not a real clear opportunity or a real clear option in the rest of the world that you can point to and say, okay, that's a lot better. Now, part of this is there's only really three currencies today that could serve as a world's reserve currency. That's the dollar, the euro and the yen.
The euro is no better than we are. We just talked about the problems that Japan has. Now, then you say, okay, well, Steve, what about this consortium of company called the BRICS? It started out the B is Brazil, the R is Russia, the I is India, the C is China, and the S is South Africa. Now, I could look at a couple of those countries, Russia and maybe China as potential red flags to begin with. Here's the thing, to serve as a world's reserve currency, it's got to be freely trading with limited capital restraints. You've got to be able to buy and sell that currency at any given time with no restraints on where that money is moving. This is why if people say, oh, it's China. China is the second-largest economy in the world. I get it, but they're still an emerging market and they still peg the yuan to the dollar.
If we think about how China considers what their economy is doing, Todd, they're a communist country. Communism as a political and economic principle is built on control. China wants to control their currency. That flies in the face of what it would take to be the world's reserve currency. Not surprising that China was the first country to do a central bank digital coin, CBDC, because that's totally built on control. I don't think that's the direction that we're going in the United States. I would not want to see us do that. The other thing that really happened, Todd, is when Russia invaded Ukraine, and you think about how we responded to that, yeah, we're sending a bunch of money in arms to the Ukraine, but Russia had about $600 million in dollar-denominated reserves, and we cut off their access to those dollar-denominated reserves. The effect was we weaponized the dollar-denominated Western financial system. These other countries that may not be particularly friendly with us are thinking, maybe I need to have another alternative to this.
Now, China still holds a ton of US treasuries and a lot of dollar-denominated assets. Their potential action in Taiwan, which is a real geopolitical risk for stability around the world, what would the US reaction be to that? Is it possible that we would cut off? I'm not saying I have any idea. I'm not saying that at all. What I am saying is that these other countries said we need to have some other alternative than just the dollar. There's going to be some move on the fringes. The dollar is still about 58% of total global transactions. Maybe it goes to 55, maybe it goes to 52. The concept of us not being the world's reserve currency, I would say this, we are abusing the heck out of that privilege, but there's just not another alternative. It's not China, it's not the BRICS, it's not Bitcoin, it's not gold. There's not enough gold in the world to support that.
Todd Sanders:
No more gold standard. We're not going back.
Steve Wyett:
There's not enough gold to support it. We still ultimately think that the dollars of the world's reserve currency, but we would agree that there's some work we could do on our fiscal side that would improve our position.
Todd Sanders:
No doubt. Well, you're so generous to come out now twice this year. You fly all over the country and generously give of your time, and you get a lot of questions, and I'm sure a lot of them are repeats. What's the one question that you wish someone would ask you that they never do?
Steve Wyett:
I wish you would've set me up for that a little bit, Todd. Look, it's maybe not a question, but I think that what concerns me as I travel and I talk is that there's a pretty broad sense of negativity. We see this in the consumer sentiment numbers where consumer sentiment, even though unemployment is low, and if you listen to President Biden and his staff, it's like they're not getting any credit for how good the economy is. There's this underlying unease about, yeah, the economy is good, but what are we doing to get there? I think there's a growing willingness to think badly about our future. That bothers me. We are clearly still the greatest country in the world. This is where people want to come to have a better life.
Todd Sanders:
Well, I'm glad I didn't set you up because that was a great answer. I agree with you. I think we are. Having lived overseas for a number of years, you always look back and it makes you appreciate this country more and more when you look back at the amazing things that happen on a daily basis.
Steve Wyett:
Yes.
Todd Sanders:
Well, we're going to do a quick lightning round with you and learn a little bit more about you. Okay, first job?
Steve Wyett:
The first job that I really remember making money because I wanted to was mowing lawns.
Todd Sanders:
Okay, man. What did you learn from that, other than It's tough?
Steve Wyett:
It is hard. At five, I undercharged, I think. I would mow, edge and sweep for $5. I was trying to save some money for a new tennis racket and the new tennis racket, I was able to. It's the first time I learned, hey, I can go make my own money and do this and not have to look at my mom and dad for a new tennis racket.
Todd Sanders:
Is the proper patterns sort of like lawn rows or the crisscross?
Steve Wyett:
Well, I see the baseball stadiums now and they did that.
Todd Sanders:
I love that that.
Steve Wyett:
That is not what I offered. That would've been $7 and 50 cents if I had done that. No, I did pick up the grass. I just mowed it as quick as I could and swept an edge.
Todd Sanders:
Excellent. Of course, you did go to college and played tennis. I remember.
Steve Wyett:
Yes, I did. I actually went to a junior college in Midland, Texas, grew up in Lubbock. I went to a junior college in Midland, Texas for two years and then finished at Oklahoma State in Stillwater. Fantastic way to go through school. We got to play all over the country. OSU was, we were kind of in a period where our tennis team was good. Got to go to NCAAs. My senior year was fun. Great fun.
Todd Sanders:
There you go. Awesome. Okay, first car?
Steve Wyett:
My first car was from my grandmother, a 1968 Buick Wildcat, which is for anybody that knows those cars, it was a land yacht. This was a gigantic car, 440 44-barrel V8 in it. Got about eight miles to the gallon. You could raise the hood and stand on either side of the engine to work on it. You could have a dinner party in the backseat.
Todd Sanders:
All your friends fit.
Steve Wyett:
The trunk was cavernous. I moved to and from school three times with a desk and a bicycle and all my clothes and didn't have anything in the front seat with me. I wish I had that car now. It's a true classic. It could be really cool. I didn't realize just how cool I was at the time.
Todd Sanders:
Your grandma is pretty darn cool
Steve Wyett:
She was happening. That's right.
Todd Sanders:
Yeah, absolutely. Very good. Okay, two wins there. First concert?
Steve Wyett:
Is this the last question?
Todd Sanders:
This is the last one.
Steve Wyett:
Because this is going to embarrass me, Todd. We lived in Guymon, Oklahoma. I don't know if anybody knows where that is, out in the middle of the panhandle of Oklahoma. My mom and dad, my dad was the principal of the high school there. My mom was a teacher. We signed up for at some grocery store, was giving away a trip to Six Flags Over Texas.
Todd Sanders:
That's good.
Steve Wyett:
My dad won that trip. We took a trip to Six Flags and we didn't plan it this way, but after all day at Six Flags, we got to go to a concert and listen to the Captain & Tennille. I listened to Tony Tennille singing about Muskrat Love and that was the first concert that I ever went to. I thought it was pretty cool at the time. Now as I look back on it, I'm not so sure.
Todd Sanders:
You can't go wrong with the Captain. Well, Steve, thanks for spending this so much time with us, for coming to Arizona, for making sure that we really are in the know in terms of what's happening. We look forward to having you back for Economic outlook in September.
Steve Wyett:
That sounds great. Todd. Love to be here and look forward to being back. Thanks.
Todd Sanders:
All right, thank you.