Hello, and welcome to another episode of the Odd Lots podcast.
I'm Joe Wisenthal and I'm Tracy Halloway. So, Tracy, uh, I think we recorded an episode on the recent CPI day, But regardless of when it was, I think there is this view now that although I don't know like whether it's like team persistent or team transitory, or whether teams are the right way to be thinking about this, that the sort of elevated inflation that we've seen for various reasons logistics, commodities, etcetera, it doesn't seem to be going
away anytime soon. Yeah. We actually spoke about this on an All Bots episode. It was with one of the FED governors. I think it might have been Caplan, but um we asked whether or not transitory was like a good way to describe it, or whether they regretted choosing that word, and I think, like, you know, fast forward a few weeks, it's very very clear that the FED probably um regrets using the term transitory and probably would have benefited from using something like um, you know, I
guess broad based inflation versus narrow inflation something like that. Yeah, or just maybe like pandemic related inflation, like something super pedestrian, because I do think like we were in this situation where people have taken transitory to mean like, oh, it's gonna be like this very brief spike, like we have two months up and then we quickly go down. And that hasn't happened yet. That being said, we are still in the mix of just like this very weird, tumultuous
time for the global economy. We talked about it recently with Jeff Curry, and just like all the different things going Chinese energy rationing and Indian call shortages and weather patterns and all kinds of stuff, and so there's just a bunch happening, and I think like the question is, well, will this normalize? Well, when the pandemic is over and policy normalizes, will we have an inflationary environment that more or less resembles the pre crisis environment or are we
going to be at some like new elevated inflationary regime. Yeah, I mean with the surge and energy prices, the analogy that everyone is reaching for right now is the nineties seventies, right, the idea of double digit inflation and slower economic growth. So the sort of double punch of stagflation, although I gotta say I feel like a lot of people are just using stagflation as like a synonym for inflation now, um, when they are two very different things. But you're definitely
seeing more people talking about that, yeah, you know. And obviously job creation in the US has been a little bit slower than perhaps we would have hoped in the spring, so that but on the other hand, like retail sales, the consumer seems to be absolutely booming. So the stag part of the stag inflation is a little bit hard
to see at the moment. But you brought up the seventies, and I think that's really important because obviously that is the decade that people reach for when they look for analogs.
And not only was it the last time that I think the US really had uh sort of sustained elevated inflation, but a lot of our policy makers, central bank governors and you know, sort of grandees at university is sort of like made their chops in the seventies or eighties, And so I think it looms very large for how they may say the economy now and how they may
view the proper policy response. So understanding what actually happened yeah, and we had that episode with Ulrika Malmondi and she was talking about inflation expectations and how how much individual experience has actually mattered to perceptions of inflation, and of course she did that great paper all about how if you look at the age of f OMC members, you can basically figure out how they're going to vote on interest rates just based on their age and you know
their own personal experience of inflation. Right. Well, I think both of us missed the seventies by a little bit, and I think, you know, we talked about the seventies, but like what happened in the seventies strikes me as then therefore an important question, and then you can think about, like, well, can we have these conditions today. So I'm very excited about the guest because he has a new report out. It's titled Inflation in the twenty one Century, taking down
the inflationary straw man of the nineteen seventies. We'd be speaking with Daniel Alpert. He's a senior fellow at Cornell, an adjunct professor at the law school, and he has a managing partner at the investment banking firm Westwood Capital. Daniel, thank you, so much for coming on, nod lots, thanks for having me on. So what prompted you to write this? I mean sort of looking at now versus then, what really happened in the sies. Well, I think the prime
anything is coming out of the pandemic. You know, it causes you to reflect on what's happened over the last twelve years since the global financial crisis, and what you know we did right and what we did wrong, and what opportunities are ahead of us now that we've demonstrated the capacity of the government to step in and do things that at the time you know then and certainly you know really all right right up to the pandemic.
We're considered anathema by many people. And given the fact that we have a domestic policy agenda that's being put forward by the administration and many people in Congress, it's worth examining what the real inflationary risks are today, And by default you have to go back to looking at what those people who exhibit significant concerns over high inflation are saying with regard to parallels to the nineteen seventies. So the report is far more than just examining the seventies.
That it actually examines the economy today. But the period of the seventies is fascinating because you know, I think you correctly pointed out a couple of things. One very few people remembered. I happen to remember it because unfortunately I'm old enough. But the the this is fifty years of debate going on over what caused it and is
still unresolved. I mean, the profession, the economics profession, has no consensus on what caused this very very odd double spike in inflation during the nineteen seventies, and I hope we can get into that a little bit today. You know that that I think is is very important. The
second thing is you mentioned um stagflation. Well, you know, we pretty much have gotten to the point prior to the pandemic where you know, there was a there was a assumption that the economy was in a form of stagnation lirry summer secular stagnation for example, and so the idea that you might have that situation accompanied by inflation naturally leads everybody to say the word stagflation. Now, I
think it's completely ridiculous after the research that I've done. Um. But having said that, I understand where they're coming from. A fairly low growth economy with price inflation, which you know, back in the seventies people thought. Before the seventies, people thought was an impossibility, and now people are thinking, oh my god, that could happen again. But I think the
important thing here is that the seventies were unique. They were sweet generous in terms of the situations that occurred during that period, and more importantly, prior to that period, or at least just as importantly prior to that crea I'd love to talk to you guys about it, right, well, why don't we go ahead and get into it? So you know, I know a little bit about the nineteen
seventies inflationary experience. I mean very very little. Mostly I know that there was double digit inflation and there was a big energy crisis, and people have talked about it for, you know, every decade since then. It feels like, so, why why don't you go ahead and why don't you go ahead and walk us through what exactly happened and the different theories around what happened, because as you pointed out, there isn't really a consensus about what drove the price
increases of that time. So they're basically three main theories, and then we'll talk about some other things that I'd like to introduce that that really accompanied this debate. They are somewhat overlapping, but they each have their own economic theory and political bent to them. The first one is that the government in UH spent enormous amounts of money during the Great Society Program of the nineteen seventies UH
and incurred significant federal deficits during that period. Obviously, the Vietnam War increased that as well, um and coupled with a period of Fed accommodative monetary policy from one that somehow all of this money flowing into the economy. This was basically Freedman in his in his theory, you know, was what ignited this inflation. So that's sort of the
monitorist view, I guess you could say. The second is the one thing I think that you know, it's probably most compelling, is that we had what was called the Nixon Shock of nineteen seventy one and then in nineteen seventy three where Nixon by Fiat and that's why we call it the fiat currency system ended the dollars convertibility into gold, and then ultimately in ninety three ended the ninety four Bretton Wood system, meaning that all other currencies
that were packed to the dollar were no longer pegged to the dollar, and everybody's currency floated freely. And then you have this complicating factor of the oil price shocks. There were two of them that followed one after the other, UH, and those rippled through the economy obviously adversely, because when you increase the price of oil by the percentage that it rose, which was far more than anything you see today, you know, you you UH create create pressures on the
entire economy, and that obviously caused inflation as well. Each of these, however, were somewhat disconnected. Um. You know that the oil price shocks have direct connections, for example, to the Nixon shock, right because Nixon Chuck ended up devaluing the dollar. Well, oil is denominated in dollars, so clearly the oil producers in the Middle East wanted to know, maintain their purchasing power and so increase prices to offset
that devaluation. On top of that, you had you know, two massive Mid East wars in Israel, one in sixty seven and the other one in seventy three. UH. And and so there was political and geo strategic problems that were going on with regard to the oil supply. So it's not a simple story, but when you step back fifty years later and look at it, you start to
understand a little bit at least about its uniqueness. Well, the one thing that I think we can discard as an explanation at this point is the whole monitorist deficit argument, because what happened obviously since is that the government has been occurring incurring massive deficits, and we've had this incredibly low inflation. So it's very hard to look at government deficits.
So basically been in like you know, the term forever war gets bandied about, but we've been in some sort of like NonStop foreign engagements for seemingly decades and that hasn't contributed to inflation. Of examples, sure, sure, and that and you know that whether the spending is military or whether the spending is domestic, I don't think it really matters,
but you know, there's certainly a lot of spending. And the second thing I think that you know, really sort of trash is that argument at the end is when Friedman was writing, certainly prior to you know, the whole notion of quantity, theory of money was based on one variable, which is the velocity of that money through the economy being relatively stable and really from the you know, both throughout the post war period until the nineteen seventies it
was stable, and then suddenly velocity started to tumble beginning in the mid such that you know, the velocity of money was was over two times, the voss of them two was over two times in uh in today it's about one point one or one point two. That proved to be a very non non staple variable. And then of course that allows you to increase the money supply to whatever you want it to be because money is not moving through the economy as quickly as the economy
becomes sluggish. Obviously, during the pandemic period, you know, the the velocity of money dropped like a stone. So this this whole issue of money quantity really kind of guys shown it to the side. And then you have the Nixon shocked Nicks and shock. As I say, it's more compelling because suddenly you devalue the dollar, and it affects things like oil, it affects things like imports, well imports were not as big a factor today. They're a huge
factor then. Rather they're a huge factor today, But they did impact the one thing that we were importing by, you know, in huge quantities, but which was oil. I mean oil was I know, this is hard to believe, you know, four dollars of barrel right before work with this all started three and a half four dollars a barrel, and it's spiked up in the mid nineteen seventies, nine
seventy three to ten dollars a barrel. Well, that that's a fairly large percentage increase, right And by the time we hit nineteen eighty, it was forty dollars a barrel. So just you know, you get the you get the people looking at at oil on an inflation adjusted basis at what is it this morning, eighty two bucks West Texas um. You know, you're you can draw any comparisons you like. It's nothing like what you saw seventies. You know, as you say, there are multiple theories and there's certainly
no consensus. It was kind of a unique time. We have to get further into some of the the factors that made it unique or different than the current environment. One deep lesson that central bankers have seemed to have taken away from that period was this the importance of
credibility and inflation expectations. And there is this story that the central bankers tell themselves, which kind of positioned themselves, in my view, is like the heroes of history, where Paul Volker stepped up crushed inflation by raising rates dramatically, and then ever since then we've never experienced the nineteen seventies again, in part or maybe even significant part, because central bankers have committed themselves so seriously to fighting inflation
at its very first sign. And because we've all been now convinced that central bankers are so committed to fighting inflation, we don't think it's possible that we'll get inflation, and that we don't get inflation, and there's this virtuous cycle. And I'm curious, when you look at in your study of the nineteen seventies, do you see evidence or counter evidence to this idea of like the sort of like the expectations channel for surgery surgery price levels throughout the decade.
So you know, it's funny you can look at it that way. Uh, And I certainly think what what Paul Volker did was was heroic because of the political flak that he took in doing so, and he clearly shut down the trend of higher inflation. Once that, once inflation of prices and services caught up to wage growth, we
were off to the races in thees. Rather, that was the actual story of the of the expansion from the eighties to present day, was that we eliminated this drag on the economy, and that took a ferocious amount of activity on the part of Vulgar and the FED to staunch that that situation. But what he did is effectively shut down the economy, and that was fairly painful. So the idea that you know, this was UH expectations signaling was a little bit of a of a reverse history.
It was not expectations UH signaling. He just went and did it and hyped up rates to the point where basically he cut off this pigot, you know. So that that I think is not an expectations issue. The problem I think that we've had really is that we've gone through most of the post war, post World War two
period with two assumptions. One prior to the nineteen seventies said inflation was something that happened a little bit, you know, it would go up from you know, two to three to four percent back down with recessions, and that was sort of bad to the period since the nineteen seventies or after the nineteen seventies, where we've suddenly, you know, we've been carrying this boogeyman on our back that somehow says at some point we could end up with hyper inflation,
this sort of Weimar Republic German fear of inflation. And yet that is not when you map out that entire period of time. This is an exception, not some thing that is a natural state. So I I think I agree with guys like Jeremy Rudd, who wrote an incredible paper for the FED a couple of weeks ago on expectations there. I think I think there's not as much to it as people think. People are looking at prices.
You know, there was an interesting comment made to me by somebody talking to a regional central bank president last week, and he said that he's been talking to his his folks in the district about, you know, what they think they're going to be able to do with prices in two and basically the feedback he's getting is yeah, sure, we hike prices this year and it's great to be
able to make money. We have absolutely no confidence we're going to be able to sustain those prices in two And that's very telling, right, So no wonder what the expectations signaling is. The reality is that the businessmen know that they don't want to sacrifice unit volume, you know, to to obtain high unit price, and they don't want
to sacrifice capacity. And so you know, at the end of the day, that's a very highly competitive economy with enormous skew in household incomes to top top ten percent or whatever you want how everyone put it. And so in order to be able to grab agg demand, you really do need to calibrate your prices to those that
they can afford. But the really telling thing, and I don't mean change the subject, but I think it's important to point out the really telling thing about the nineteen seventies is what preceded it, because what happened in the nineteen sixties is as worthy of looking at as what happened in the nineteen seventies. What happened in the nineteen sixties is that wages growth, household income growth, exceeded the
growth in prices for most of the time, right. It actually happened in three swings of five year periods each um going back to the nineteen fifties. The reason for that is that you don't know whether or not it's union contracts that were renegotiated or whatever it was. But you had these, you know, enormously long periods which are very would never really happened very much since then of
huge growth in incomes exceeding growth and prices. When you look at that from a wealth standpoint, you overlay wealth growth rather, you know, and look at the condition of households going into the nineteen seventies, you see this huge wealth peak. American households made a lot of money and went into the nineteen seventies rich, with most of their capacity either being domestic, which was subject to exports too. That we exported a lot of stuff without access to
capacity from abroad. Only about ten center or so of our consumption was importance, and so you know, we we effectively started to consume at a voracious pace after many years of being rather parsimonious. UM. At that same time, the baby boomb shows up and enters their prime consumption years.
So you have to look at this not just from the standpoint of these unique historical situations that I spoke about before, but about the demographics of the era, about the wealth of households during that era, things that just aren't existing today. So this is exactly what I want to ask you about exactly what happened with wages in the nineteen seventies, because I think that informs the way a lot of people feel about inflation, whether it's good
or bad. So obviously, if your wages are rising um as much or maybe even more an inflation, you might not feel that bad about it. But if you think that you're purchasing power is being eaten into because your wages aren't increasing as fast, then you're probably really going to hate the idea of inflation. So can you give us a little bit more color on wages in the nineteen seventies? And then two to your latter point, do you think the conditions that allowed wages to increase in
the nineteen seventies are in place um today? So clearly prices for goods and services rose much higher than wages did during the nineteen seventies. All of the gains that were obtained by labor in the nineteen sixties, which were significant. We're effectively wiped out by nineteen seventy nine because of the high level of price growth UM. So that that was the pain. And typically, you know, when you look at that period, you see about an eighteen month lag.
It's not that wages didn't grow at all. Of course, they grew, and they grew at at a at a higher percentage than they had any other time because of price and services UH growth, but they were growing less and they were more importantly growing with about an eighteen month lag. So that's where the pain of that error comes from. Right, you have goods and services prices growing,
wages catching up eighteen months later. It's constant pain going on year and year, year after year, which is why the Vulcan intervention was so important because he stopped that pain. Right every eighteen months later everything caught up and we were off. We were off to the races. So that that, I think is what people remember when they remember the
agony of that period. But again they don't remember what happened in the decade prior where the opposite was occurring, where wages UH and and incomes were actually growing faster than prices, which is where that feeling of prosperity came from in the fifties and sixties. Today, obviously we don't
have that. The present state of transmission from GDP growth to household income growth is so lacking in force that even this you know, massive pandemic era support of household incomes where we replaced all lost incomes in and then added a full fifteen percent to the nearly recovered household incomes in the first months eight months of this year, it's going to prove unable to ignite all but a
temporary surge in demand. Right, that's the let me, I want to I want to stop me there, because I mean, I think this is really like one of the key questions and post grade financial crisis inequality. There's this huge thing people talked about. This is like, Okay, there's a lot of household wealth, there's a lot of bunch of people making money, but by and large, the middle classes don't have it. It's skewed. The upper classes don't have
his high marginal propensity to consume. So even with all this money, so get don't get the demand today We've seen this big you you mentioned Okay, maybe income growth has it won't be sustained. But we have this huge housing boom. There's a lot of people feel like they're sitting on a lot of wealth related to their housing. They've had an incredible rally in the stock market. We have had some of the fastest wage growth that we've had in a long time, particularly at the low end.
This sort of the gap between the first quartile and the fourth quartile is the largest ever because like five point six at the lower end. And and you know, it's funny you mentioned the baby boomers. You have millennials probably entering their biggest consumption years, and the baby boomers, who uh you know now they're on star security, just
got their biggest cola increase ever. And so you know, people used to talk about union wages auto, you know, marching and locks up with colat well, and now they're on soar security and they just got like a five point nine percent increase. Why shouldn't I look at all of these factors coming together and say, wait a second, that doesn't sound so different Maybe too slightly different degree, but that doesn't sound so different to what you just described about the well. Not to pour water on it.
It is um. Baby boomers controlled nearly twenty of the nation's wealth by the time they turned thirty. Today they control about fift of the nation's wealth. That's me, right, that's people my age. At thirty, gen xers controlled just under six percent of wealth, and today millennials barely control four percent. My son is a millennial turned thirty this year and his generation controls barely four percent. That's four percent versus gen Z doesn't even rate to mention it.
So you know this, this is a very different situation than occurred in the nineteen seventies. The wealth is much more like if you want to create an analogy, is much more like Japan, right, where all the old people
have it and the young people have it. Now we might see some internet inter generational wealth transfer, although there's many papers and there's a lot of literature out on that that runs out that money relative to the extended ages that people are living today and says, you know, there's not gonna be a lot of that left over except at the very very top. Um, So you're gonna have a lot of sort of plutocratic families, uh, and not a lot of generational wealth transfer among the lower classes.
So yeah, that that that is not I mean, the answer is no, I don't. I don't see that as being company. So, you know, you talked about the monetarist interpretation of the nineteen seventies, and of course, um, you know, the most famous quote related to that has to be Milton Milton Friedman talking about how inflation is always an
everywhere monetary phenomenon. I guess that has lent itself to a characterization of inflation as too much money chasing too few goods, and so there's always this emphasis where it feels like there's always this emphasis on the idea of too much money. So central banks should be focused on somehow altering the supply of money, but it feels like there's never that much focus on the too few goods
aspect of the equation. So I guess I'm curious, how would you apply that framework to our current situation and what can central banks or the government actually due to boost supply. I'll get to supply in a second, but I do want to correct or at least redirect on the issue of money. What Freeman was talking about was the quantity of money, right, the amount of money out there.
He was measuring monetary aggregates. The mistake he made is assuming that transmission of money into the economy was relatively uniform. That's where the whole velocity issue came from. That I spoke of earlier now and and and he was living during an arrow where a much flatter society, Right, Jenny,
coefficients were far lower. The the issue of money quantity forms of monetarism, I think we're long ago discredited, right, So there's you know, counting the amount of we used to look at him M one money supply is a big indicator in business economics. Somebody looks at that anymore. We don't even publish him three anymore. At the federal reserve level, the the issue is um you know, the quantity of money part of Freeman, I think is on
by the wayside. The problem is that the transmission of money has really really changed substantially, and a lot of that has to do with the issues of income polarization. Obviously wealth polarization, but income polarization primarily getting money into the hands of people who will actually consume with it, which is where you get inflation from. Right. So the problem, I think at the political level, and to some extent at the academic level. As you said, some residual aspect
of people confusing the two. And I don't mean sometimes it's deliberate because it serves their their other agendas. But you know, at the end of the day, it's not about money. It's about getting the money into the hands of people who will spend it, usually traditionally through wage income or through you know, total income, including government transfers. But you know it, unfortunately during the course of the past thirty years, for years, has been progressively getting it
to them through borrowing. Right, You've created this enormous consumer lending apparatus, which has its own enormous downside. So you know that that is really the issue when it comes to the monitorist argument, is it kind of falls apart at that point when you start to say, all right, this is just about money chasing too few guys as far as the supply side is concerned. What you asked about, Um, yeah, that's that's really really important, and I think that where
that breaks down. I wrote a book in two thousand thirteen called The Age of Oversupply, which is really about the the issue of having this exogenous source of oversupply and we're all looking at China today on a regular basis, but it's the whole world, not just China. And we all look at at capacity in the US and we see capacity utilization very very low on an historical basis.
Here the supply chain logistical problems that's given rise to this, you know, reopening shortages, uh, and therefore the price inflation associated with it. It shouldn't be mistaken for sustainable demand pull inflation, and the supply push variety of inflation I think is very very unlikely. We we have enormous capacity. One of the one of the things I did in the paper to sort of illustrate the excess global capacity.
I spent a lot of time on US labor as well, but in US passy, but certainly on the on the other side, think about this as a thought exercise. You have this enormous increase in the price of shipping goods because initially ships were in the wrong position, you had crews in the wrong place, you have all sort of things, and now you have this huge backlog and and the
cost is dropping. I will say it's dropped significantly over the last few weeks, but you know, at one point it was five or six times when it was pre pandemic. So on a on an average container load, which is about two fifty dollars of goods, you saw the cost of shipping UH goods increased by three point six, three point seven something like that. At the same time, during the pandemic, the dollar got a lot weaker. Now it's gained some strength in recent weeks, but during the pandemic period,
the dollar got significantly weaker. If you put all those things together, prices should have gone up by of imports should have gone up by like, you know, eight to ten. That didn't happen. So that meant that someone somewhere was eating this price increase. And that's someone somewhere is obviously the factories outside the United States that we're producing goods in order to maintain or or grow in this case,
not just maintain production on a unit basis. That's a really incredible thought when you think about it, Right, you have all of this excess capacity, and they were willing to ship, you know, whatever they could net on a marginal basis because they could produce it, and why not
taking the income? You know that that I think is something that people really it's gonna take a while to study because it's very very recent, but that really jumped out of me, and that says nothing about where we were pre pandemic in terms of the quality of the jobs that we were having our people working, which was very much skewed to low wage, lower our surface positions. Yeah, something I don't know. It's kind of like that. There's something in how you describe that, and it's something I've
thought about and kind of a crude analogy. It's almost like there's like potential and kinetic energy. So it's like we might still have this like stock of overcapacity or stock of capacity that is not fully maxed out. But somehow in the actual the kinetic part, the getting getting the goods through the system seems to be where it, you know, it's breaking down and maybe at some point it hopefully it finds equilibrium. You started this conversation by
talking about this. We did something unusual during the pandemic, which was we replaced people's lost income. We spent a lot of money, and we essentially took what could have been a massive recession that lasted a long time ago, a potential depression, and the and and the actual recession ended up being about one and a half months I think we were like quickly back to growth because we spent so much. But that does raise the question, you know, we do have a FED. The FED actually seems a
little bit more devish than other global central banks. They announced this new framework. We'll see if they have the degree to which they hue to it. We have an administration that at least right now is trying to engage in serious investing. Like could the politics change? Like could we? I mean, this seems to be sort of like a
cord of the question. It's like, Okay, we had these like forty years of a politics or political economy in which wealth and wage income and income in general was like very like skewed or very polarized, to use your word. Could that Could we be on the cusp of a change, because we've certainly had some events in the last year that might suggest as such. Well, I certainly hope not, but I will say that there are some things going
on that are you know, fairly interesting. That again kind of like the seventies, are exogenous to the larger economic question and really pertain to unique circumstances. For example, the UK is under greater pressure of inflation simply because of the Brexit issue, right, they have created their own problems in that regard, in large part by design. They wanted to reflate their economy and reflate wage levels by cutting themselves off from European market supply of labor and goods.
So you know that is going to come back. And and uh and and whip saw after the pandemic. Pandemic effectively masked that effect. So as demand increases, they're going to they're going to face that again. Having nothing to do with the larger question. The whole issue with with OPEC and their reaction, especially ope exclusion with Russia, you know, again creates the oil issue that we're seeing right now. I don't think anyone believes we have an oil supply issue.
I mean in the U s alone, we have so many wells that were shut down. If you look at the rig counts building now that prices have gone into the eighties, you know it's massive. So you're gonna have a flood of oil a few months down the line. Um, there's no there's no capacity shortage of oil. This is a question of turning on the wells again. And in the in the case of Europe, resolving some of the
issues with OPEC. Once the price gets high enough, you can you can trust me, OPEC will say to the Russians, Okay, that's enough and uh and they're gonna they're gonna take you make hay while the sunshines in terms of taking this higher price. But you know, one of the one of the things that I think, you know, without complicating the issue too much and taking it back to the US, what we experienced as a result of this pandemic is still you know, the story is not fully told. We're
kind of still in the middle innings. We saw this huge injection uh into the economy, seven billion dollars in Q one this year. Right, we increase, we increase personally income by sevent in the three months of the first personal Muslin this year compared to the three months immediately preceding lockdown. And that's incredible. Right, for the first eight months of this year, we increase personal income with government transfers. All of these supplied bottlenecks, you know, we're made worst.
They were obviously pandemic related. You first had shutdowns in China and other manufacturers. And keep in mind that when you take out food and energy imports now are about fort of our total total consumption. Right, so you put it, put aside the trade balance and capital count deficit and all the other stuff. Just look at imports, non patroleum, non food imports, and you're talking about what we consume.
It's just a huge amount. So so when you when you look at it that way and you say, okay, you shut down the factories in China, and I am using China as a proxy, it's everywhere and uh, and you you then have problems with shipping and getting the goods here, and now we have problems with unloading them. And actually, if you actually really look under the under
the hood and see where the problems are. Now, the problems are literally moving what's been unloaded and stacked up at the ports out of the ports and across the country. People are saying, we have a truck or shortage. Well, we don't really have a trucker shortage. We have a system that was able to see surges in deliveries during September and October relating to the Christmas season that's when shipping peaks in this country. But now you have the
perfect storm. You have that crashing in to this pandemic reopening demand. Right, So you now have have just so exceeded the capacity of the system to actually absorb that flow that of course you're going to end up with these bottlenecks and they will clear. Uh. And and when that happens will be in the later earnings and we'll be able to earnings and we'll really be able to
to write the story. But as far it's it's way too early to look at this period with all of these unique circumstances and write a story about it, you know, other than to say, you know, when you were at the top of this where you talked about the use of the word transitory, you know, first defined transitory. Are you talking about months or or you know, a year. So we've done a bunch of supply shortage episodes at this point, so we've talked at length about them. But
I wanted to sort of get back to inflation. And I have a slightly I have a slightly weird question. Um, actually a two part question, and the first half it is weird. But why are we why are we aiming or why is the FED aiming for two inflation? Anyway?
Like why is that a desirable outcome for the economy and for society when it seems like everyone is up in arms at the moment about the mirror possibility of inflation going you know, slightly above two, Whereas you know, back after the financial crisis, when we had um deflation, it felt like people weren't necessarily as angry or as
focused on this topic. And then, secondly, how do you actually change the public narrative around inflation, Like how do you get people to start thinking about whether or not this is a good phenomenon or whether or not it's something that might be desirable from a total economy standpoint. Well,
that that's a good question. I think the two percent target, which is now not a lot two percent target, right, we have the new of formula of two percent over time length long period of time, and that you know that that's interesting that this is basically what the Fed has thought for decades they needed to hand the financial sector and the corporate sector as a way of ensuring them from an expectation standpoint of stability, right, because that
enables you to see investment. But here's the tricky part. What have what has happened during that period? Have we seen a surgeon investment because people were comforted with the stable you know, investment target and a fairly low investment target. Dancers. No, we've seen investment declimb massively. So clearly, either expectations aren't a big deal, or we really shouldn't be focused on the two percent target. Maybe we should be focused on
something else. So the Fed made some corrections in their assumptions, and maybe that's enough for maybe it's not. But my look is a little bit different. My take is that the U s economy did at one time and does best when it's run hot enough such that household incomes rise at a sustainable pace that's slightly in excess of prices for goods and services. That's when Americans feel best, right, and and that that's that's what really is a definition
of the improvement in the standard of living. If you're making if you're getting a little bit more wealthier each year, you don't want it to get out of hand because you don't want to create any kind of spiral up or down. Right, But certainly it's better to have a situation where you're you're creating actual incomes, not not consumption. People focus on consumption. They say, oh, retail sales are great,
consumption is great. It's not about consumption. It's about incomes because you know, if you force people to borrow in order to maintain their standard of living, you're eventually going to have a collapse. So that's really where the issue is, and I think the FED needs to really start thinking about that. We saw that condition for the last time in arguably the nineteen nineties, and served for an extended
period of time the nineteen sixties. It's in a it's a condition that is totally within our power to reproduce. In my opinion, the look inflation adjusted median incomes in the United States, by contrast, were flat or down from thousand sixteen, and in the aggregate from they're only up three tenths of one Brandon, I mean, this is not great. And and so what we've been doing, whether it's because of inflation targeting or all of the fiscal handwringing that's
been going on, it hasn't been working. You know, one of the we frequently have guests, and you know, I think Paul McCulley wrote the intro to your new paper, but we frequently have guessed in the school of thought that you know, basically, over the last several decades, the ft has tapped the brakes every time it looks like
things are going to get vaguely hot. And so you mentioned that this sort of like the ideal economy is one where it's just like we're just persistently running this sort of like high pressure, somewhat hot economy with the wages outpacing price growth a little bit, and we seem to have this sort of like policy regime in which
we don't even let it get there. It's like just the whiff of just the mention of warmth seems to be enough, and policy say have a slightly different view, and pre crisis even you know, things were not bad. Pre crisis things are it seemed pretty good, and even he was like, yeah, this isn't really hot. Though, what should the FED be doing such that we can and
how much is it the Feder? Maybe it should have been more physical on the phisical side to get back to some of those sixties or nineties conditions so that we just have some decent years in a row of income growth outpacing prices. I don't think you know, like the answer to my question, because at the end of the day, the FED is out of tools, right. The FED has tried for uh, you know the better part of twelve years two use the monetary toolbox. They hiked
in what like when I mean? I mean this gets to the question of like, okay, the fit maybe out of tools. But again, like they the argument is in retrospect, they hiked prematurely. That was arguably what jackson Hole last year was about, was about correcting this impulse that they have to hike before necessary, and that seemed to be the case that there are the multiple rate hikes in
which in retrospect probably were not necessary. There seems to be this this this thing that they do, and how much could they improve outcomes if they just sat on their hands longer, which seems to be a flexible average inflation targeting is about Yeah, well I think that that's that's precisely what they need to but it is it looks at the end of the day, it runs counter to one who is including myself, who is who is schooled in in the importance of central banking, which is,
you know, running this at zero, at a zero policy rate is effectively depriving not only the FED of tools, but also savers of any sort of return. And one of the one of the difficulties and all of this, and not to get too wonky on you, is that, you know, the classical economic expression of saving equal investment, which is what drives all economic policy making right, is to say, wow, we've got all this huge pool of savings, so it will be used for investment. Is something that
Cain's realized a long time ago. Is uh, you know, only only valid over the very long run, and we've created that long run has now become forever as far as I am concerned, and that that equation really needs to be ignored from the standpoint of policy making, just simply stuffing savings that then go out, you know, looking for returns in secondary investment trading bitcoin or real estate or you know, you name any of this stuff that has grown in price to levels that are not justifiable
by the utility the asset that they're investing in. That that creates such massive distortions in the economy. Uh, and of course deprived savers of any kind of meaningful return. So you know you've got you've got real complications there if you keep looking for that money to be invested
in capacity increasing and job increasing production. And you know, you stand around for for decades waiting for that to happen, and it doesn't happen, You've got to ask yourself a question why, and and the answer is that, you know, when you have this massive exogenous pool of labor and capital that is able to produce at a lower price, um, you, the private sector is going to go after that. And that's what it's done. Not to not to bring back an old argument, but and it is an old argument
I've been arguing for a dozen years. You know, the the only thing that we can do, given that we still live within the borders of nation states and you know, our individual nation states. You know, most Americans don't have the legal or practical ability to pick up stakes and work wherever else in the world may offer a better crackic prosperity. The fact is that the only other agent that's able to do that in our economy is the fiscal agent of the collective agent of government. And so
that's what the FED is looking at me. Bernanky was was unabashed, and mean, you know, the whole the whole notion of saying to the fiscal agent, look, you gotta you gotta go do something is critical. And that's why what's in front of Congress right now and is absolutely essential because that is what's going to enable if you look at it from a holistic standpoint, the fiscal agent will enable the FED to get off zero. And that's probably the most direct way of putting it to everybody.
The fiscal agent, if they spend money, if the govern it spends this money and injects it into the economy, will enable the FED to get off zero and resume refill its toolbox. So I just have one last question, Dan, and this has been very helpful, but you know, the way you set up the paper, and the paper isn't just about the seventies, but comparing this to the seventies, is that the only model? Though, like could we get
runaway inflation from some other things? So it's like, okay, this economy, even with everything we've seen, it's still just does not really resemble the seventies was still extreme incompilarity. We still do not the millennials do not have much economic buying power. There's still a lot of excess capacity, both on the energy side and on the international manufacturing side, once we sort out the supply chain issues. But is that the only way. Don't forget that, don't forget the
domestic manufacturers. Could there be another model or is it like, is it enough to shoot down the seventies and feel like, Okay, we're not we don't have to worry, Like, is that the only way to get sustained inflation? Well, I mean war works, right, Um, but you know, God willing, that's not where we're going. Uh. You know, there are other
ways of creating inflationary situations. Um, but the one that is that is out there the sort of boogeyman that's being waved around by even you know, even Senator Mansion, who's supposed to be on the Democratic side. He's talking about all of this spending because it involves money, you know,
resulting in in future inflation. And the irony, of course, is that this very unique price fight that's occurring in the post pandemic period, which I believe is in fact going to prove quite transitory, is is giving him and others, certainly on the Republican side, a great deal of ammunition. And that's unfortunate because if you look at the volume of spending involved both in the infrastructure bill and the Reconciliation package, Um, it's really not a lot of money.
I mean, it's spread out over an incredibly long period of time, and having that money flow into the economy on a sustained basis over that period of time does in fact create the ability to transmit it through incomes to households that are more likely to spend it and hopefully reflate not only their incomes, but reflate the economy on a sustained basis and do what I said before is the important thing, which is to run it hot enough such that household incomes rise at a sustainable pace,
slightly in excess of the prices for goods and services. Having said that, if we don't do that, I think we're right back to the same secular stagnation, the same oversupply conditions, the same underemployment of US labor that we were at prior to the pandemic. All of these dislocations that we're seeing right now, we'll pass through the system. Just look at the one thing that's sort of glaring right now is the number of people who have yet
to resume employment. Now you've got all sorts of people out there, you know, giving reasons for it, viral concerns, And until the schools reopened, everybody was saying Oh, it's people will not able to send their kids back to school. Well, they're all back to school and nothing's changed, so you have you know, on September six, you had ten million people receiving six hundred dollars a week in benefits. It's
a lot of money, and and they weren't working. Now they're not receiving those benefits anymore, and slowly, as they erode their savings and their other capacity, they will come back to work. People expected it to occur overnight, that's ridiculous. But they will be forced to find incomes. And when they when they are forced to find incomes, they will have to take up these jobs that are on off for most of which are low wage, low our jobs.
Um and in my mind, my view, we will be back to the same position we were before, with maybe some increase in hourly wages, which is a good thing. There was a podcast that was on on Bloomberg that John Authors was was hosting, and he made a big deal of the Atlanta Fed hourly wage tracker numbers that came out right after that podcast, and I went on to look at it and it was fascinating to me because you know, the headline number showed this huge boost
in hourly wages. But when you actually look at the system and go down into it, you find that all of it was led by sixteen to twenty four year olds, by people with low skills and people at the low end of the wage scale. When you see sixteen and the gap between the sixteen and twenty four and was astronomical. And so when you look at something like that, you realize, you know, Okay, so a bunch of kids called in for summer jobs, right, had had an enormous wage spike.
Who that's great, right, But you know that's going to fade immediately. And the problem is that we all get caught up in the what I call the paralysis of aggregates. But we all get caught up in these headlines looking at the aggregate data, and nobody looks under the hood to see what it was composed of. It's really important in this period to look at the composition of this
aggregate data. It tells you a lot. And I think if you really want to understand what's going to happen over the next few months, that's where we're getting the information from. Dan Alpert. Thank you so much for coming out on odline. Oh, it's my pleasure, but to talk to you guys. That was great, Dan, Thank you so much.
Thanks Dan. So something that I kept thinking about, um actually during that episode was actually a comment that Jeff Curry said on a recent episode where he point did out because I was just reading back to the transcript of that one, that every commodities boom that we've ever seen, like every sort of like has been associated in some level with a big sort of downward redistribution of wealth
and income. And so obviously, you know, Dan there was talking about the sixties leading to the seventies, the pre Great Financial Crisis boom associated with the huge expansion of wealth of the sort of like Chinese middle class, and so thinking about like Dan's point it um it dovetails very nicely with it that the only real way to like get a sort of sustained shift in a broader inflationary regime, whether we're talking about commodities or elsewhere otherwise,
really would have to be something that like shifts buying power meaningfully to the sort of lower and middle classes on a sustained basis. Yeah, well, Jeff's thesis was like very much focused on the idea of volumetric increase, which is something that like you're only ever going to get the scale if the purchasing is being done by like as large a group as possible, and that's generally going
to be load to middle income um. The other thing that that I was thinking about as Dan was talking was, you know, his characterization of the monetary policy transmission mechanism.
And this is something that like kind of annoys me and I see it a lot, but there seems to be this you know, the people who are calling for massive inflation and blaming it on the FED are the same ones who are kind of saying that, like the FED hasn't done much for many years, like the FED has failed to improve the economy or boost economic growth.
But at the same time they argue that there's going to be this massive inflationary spiral, which I don't know, it just feels like you can't really have both no
totally agree. You know. The other thing that I thought was super interesting is this his argument that there is lots of spare capacity right now, and it's a little bit different than some of the other arguments, which is that you know, his like there's spare capacity of China still according to him, there's a spare capacity in the US, which is interesting and it does make me wonder, like, Okay, if the logistics system ever like normalizes or finds a
way to like run smoothly at a sort of predictable pace, are we going to get like this big like sort of bust, which I guess is kind of what he's predicting in some way, that we get this sort of like quick resumption of the old the old trend. But you know, we're like sort of if we sort of have all these like al these dealers or like restocking inventory, etcetera, and eventually are we going to get to this point where actually there's plenty of spare capacity, we finally have
the system worked out to move it all. Are we gonna you know, be right back there like two percent inflation before? I know? It seems plausible? Yeah, it does. And I mean this is also sort of the bull width effect idea that we've been talking about supply chain episodes, um, the you that you know, people will order a bunch of stuff um to make up for supply shortages and then they end up with too much inventory and prices
could collapse very very quickly. So yeah, it feels like the risk is probably like volatility on either side of the equation at the moment. No, I mean, I think you're exactly right, like at some point, like you buy enough. Right. So I saw a tweet this weekend where someone was like, oh, I watched the bull whip effect happened right before my eyes because I saw someone order a whole case of New Zealand wine when they were told that there's not
much of it available Zealand. Well, exactly right. It's like, but eventually you don't need to keep buying New Zealand wine, so you're like, go to the wine store and you buy a case, but then you're not going to be buying a case for a long time and maybe ever again.
So I do think that, like, you know, it is a very interesting possibility that like, okay, we really are experiencing this effect, and there really is this capacity, maybe we would get this sort of really unexpected or underappreciated possibility of a sharp downward move again in prices, in a resumption of the old trent to um. All right, shall we leave with that. Let's leave it there. Okay. This has been another episode of the All Thoughts podcast.
I'm Tracy Alloway. You can follow me on Twitter at Tracy Halloway. And I'm Joe wiesn Thal. You can follow me on Twitter at The Stalwart. Follow our guests on Twitter. Dan Elpert, managing partner of Westwood Capital. He is at Daniel Albert. Follow our producer Laura Carlson. She's at Laura M. Carlson. Followed the Bloomberg head of podcast Francesca Levie at Francesca Today. And check out all of our podcasts at Bloomberg under the handle at podcasts. Thanks for listening to