Bloomberg Wall Street Week: Inflation Special

with David Weston from Bloomberg Radio. Full speed ahead, one point nine trillion dollars, one hundred million vaccinations and strong new projections for growth. But is there a speed limit to how fast Weekend drive this economy? This is Bloomberg Wall Street Week. This week devoted to the eye word that is inflation. I'm David Weston, So where does this all lead to? Yields continue to climb, At what point does the FED need to step in? And if it does,

where does that leave the dollar? When it comes to understanding the intricate mechanism that is our financial system, there is no one, no one like Ray Dalio, founder of Bridgewater Associates. Ray is clear that he's not saying what the US should do. Indeed, he has written a book on how capitalism needs to be reformed. But Ray has a clear and certain view about the consequences of fiscal and monetary policy, whatever those policies may be. So we turned to him this week to get a sense of

where we may be headed. Think of the economy as being um, like an individual um and their pulses dropping. When the pulse is dropping, the doctors come running in with the stimulant, and they inject stimulant. Now that the economy is rebounding, he's um, and inflation pressures are rebounding UM, there's not the same pressure to administer that stimulation. When it happens, when it becomes a problem is first the

rising interest rates start hurting financial asset prices. First, typically they hurt bonds, then they pass through and hurt stocks because still interest rates affects stocks. And when that starts to affect stocks, that's one thing. Maybe the stock market can correct, Tenner and the federal reserve can tolerated. When it goes beyond that and starts to affect the economy, that's when you see the real tradeoff have to search

uh surface. So that's what that looks like. Okay, so let's play a little dickens here and ask about the ghost of Christmas future. At the very end, they say, is this what has to be? Or can I still change it somewhat? Can we change it somewhat? And could J Pale specifically change and change it, or for that matter,

the administrative government. Our basic situation is that we're spending a lot more money than we're earning, and so are that that gap exists, and a balance sheet means that we owe a lot more money, and that owing that money is somebody's financial assets, that bonds that they might sell. So you can't It's not an easy thing to change because what do you do? Spend less money? And if you spend less money, you give less checks out, or you can't get people to easily earn more money and

change that. So it's a difficult dilemma. And it's a particularly difficult dilemma that I think that you're going to see. Particularly the part is late this year and beyond that, because late this year you're probably gonna see, um everything be a problem. Um you're gonna probably see higher interest rates because growth will be stronger, inflation will be stronger, and that you'll see probably there won't be enough demand

on it. So the thing to watch out for is a signal if this happens, is that you see the need to buy bonds when the economy is strong and when inflation. If you take um, there's this year, and then there's beyond this year, there's um, and there's the next few years. Um. It's a problem because how we're going to spend money as a political issue a big political issue, and we're gonna have to spend There's gonna be too much spending, and so that will affect the

value of the dollar and or interest rates. Ray. As we speak, the Federal Reserve is buying something like billion dollars both in treasuries and mortgage bonds right now. How can you justify that When they came out and said we're gonna have six and a half GDP growth this year, well, um, there their position would be, um, that we are having a rebound from a depressed level and that we need

to have that rebound. And that also averages don't tell convey the condition of all people, and so the issues the stimulation is many times five to seven times the

amount of income lost through COVID, So that there's a distribution. Now, if you were to say, what's that distribution for, which is more of a political question, It is for um UH child enablement, it is for schools, it is for hospitals, it iss for UH for that so UM, the Federal Reserve would say, we're just going above their inflation targets, not by much. If you look at indicators like the break even inflation rate, it's about two and a half percent,

and they would say not yet. But the important thing to convey here on inflation is that there are two types of inflation. Okay, I just want to make this clear. We're used to one type of inflation, which is when the economy is too hot, um, there's a capacity constraint, and when demand presses up against existing capacity, prices rise, unemployment rates a loow, and so forth. There is a thing called a monetary inflation. That's when you can have

stag inflation. And that monetary inflation means that even when the economy weakens, inflation rates rise because there's too much inflation, and there's the move out of that thanks to rate vario Co chairman and co c i O of Bridgewater Associates. Coming up what one point nine trillion dollars and vaccinations mean for the real economy. We hear from Brian moynihan, chairman and CEO of Bank of America about what all this growth means for his customers and the prospect of inflation.

That's next on Wall Street Read on Bloomberg. This is Bloomberg Wall Street Weeks Inflation special. We've David weinsted from Bloomberg Radio. Everybody pretty much agrees that the vaccine is going into people's arms, and the one point nine trillion dollars going into the economy are going to trigger remarkable growth this year. The question is how much and how we can handle that much growth without triggering inflation, which is what we asked Bank of America Chairman and CEO

Ryan Wynihan. Our team has the US growth predicted Canadas Browning plat and the number one research platform for many of the last decade, In years since I've been CEO, they do a terrific job. They have the US growing at six and a half percent for one and around five, five and a half or twenty two. Now you have

to step back and think about that. That's an economy basically the same size that was coming into the middle to the end of eighteen, which was pretty good times in the US predicted to go three times a rate with an interest rate environment that is probably half or lower than it was. And I there's all the angst about the ten year moving to one sixty, but at that point it was two and a half moving towards three. I think in a FED funds rate was much higher

than is now. So think about the amount of accommodation, and then you add to one point nine trillion dollars stimulus on top of it, plus the stimulus is still on spent. So when you put that all together and then the stimulus frankly from people going back to work as economy opens, you know, the team is a six and a half percent and a huge economy. You know in the US growing faster in the world economies predicted

they've got five for the world. If you think about that, that is a pretty powerful engine that has already recovered about seven percent of where it was and now is growing at three times or eight. That's a pretty powerful prediction. And our team is quite convinced it's all there well, and that raises the question a lot of people are asking, is is it possible we may be overheating the economy

because we also have been increasing the money supply. I think it's up year over year the m two it's been held down the inflation because there hasn't been much reloscity because people are at home. What happens when they come out of home. In fact, some of those deposits you talked about that didn't spend all those stimulus texts, they haven't sitting there in their bank account. Are you

worried we could get inflation That would be troubling. Well, that's part of the discussion to see in the market. But let me just tell you what we're seeing our customer, very Stavid. It will help you think about that. If you think about last year up till March ninth or tenth, that was before any activities had taken the shutdown and we're all hearing about this virus and learning about it.

It was really the March fifteenth and out where people started taking at the government level and in the employee level of significant actions. If you look at that period of time twenty two thousand, twenty over nineteen grew you know, double digit, say ten percent. When you look at it one, we're now growing at six percent. And if you look at it for the month of March, for the first part of March here, it's actually growing above that's pretty unbelievable.

And what you're frankly seeing now is the chart the credit card charges, which had been depressed because there's a lot of travel entertainment, are back and actually growing year every year, growing year every year of time pre pandemic shutdown. And so you're gonna see massive your your comparisons as

you moved into April when everything was shut down. So the raity is the consumers at Bank of America, which is you know, fifty million people spending three trillion dollars plus a year, and all these different forms are spending more money than they did last year in growing at ten percent, and that was before the pandemic. That bodes well. And then if you look at the charges, you can see like on a credit card, the seniors and boomers are getting vaccinated. We're up fifty in charges over the

last few weeks. In terms of travel and related things. You're seeing the TSA statistics, so the types of things are happy now. By the way, grocery stores are down a little bit. Why because people shifted more to restaurants and that's all bodes well for normalization economy. So we see that very good. Does that overheat the economy? I think you've heard it from Chair Pow. In many cases they're willing to take the risk to get the you know,

the average inflation rate above two percent. There are people concerned in the market. We all have that concern because inflation. Inflation is tough to fight if it gets embedded in there. But our economists or have raised or projections from four percent to six percent really ninety days, and I think likewise other people will do so. And Brian, that's part of what I want to ask. You refer to the tenure yield of being over one point six now and historically,

as you point out, that's not that high. Goodness knows, but it went up very fast, and some people think it's on its way to go higher than that. Are you concerned about the rapidity with which it's going up? And by the way, where do you think it ends up? You know, our team basically thinks that it's gonna potentially go through two percent um, and we'll see, we'll see it, but it's it's the reason that's going up is because

people are seeing the economy recovery. In the end of the day, this is the healthcare crisis, and we had to win the war on the healthcare crisis. It's the first way I thought about it, and I thought about it ever since. If we have to win the war against the fires, and they have done that, and they haven't completed it yet, but we have the pieces in place.

The vaccines are game changer and being deployed a hundred million shots and arms, which is unbelievable, thirty million sitting on shelves that need to be deployed, and then many coming after it. So I think there's concern about that. I think it will play out a little bit, David,

and I think we have to watch it. But it went up, but it's still back to where it was, you know, only a few months before when it fell down into the sixty eight range, And so I think people have to be careful about these movements are just to get it back in line where it was, even at a very low level. If you don't look in the last decade and then go back from two thousand and seven backwards and try to count the number of days a tenure trade of below three percent, you won't

find a lot. And so as economy normalizes and growth rate comes up and we get above two percent, I think, you know, you'll see a little higher rate, but it's still be in a great grand scheme of things, one of the lowest rates we've seen in a long long time. What does it mean for Bank of America's business specifically? You and I have talked in the past. You are a traditional bank, You take deposits. The shape of yield

curve matters to you. It was flat for a long time, even inverted for a minute or two, and now it is really steepening quite a bit. What does that mean, for example, for net insterest margin? Your chief financial officer said he's pretty confident about that. Is it looking good

for Bank of America. Yeah. We we saw the trough in the third quarter of twenty and we still see that as a trought, and we see it coming back, and by the end of the year it's back to where sort it was pre pandemic, but it's much different. It's driven more by the sheer volume of deposits. Our team has done a great job and driving our deposit franchise across the rover trillion eight and deposits. So the loans are still down and what we're finally seeing as

the loans are stabilizing. This is one of the good pieces of news. We expected a month of March we will cross over to where we're producing more small business credit in that month than we did before the pandemic and that that's been a long haul. So that's you know, thirteen twelve, thirteen months, and so we're seeing some loan

demand coming in. With capital markets demand has been outstanding and huge as you've seen, but in terms of core middle market borrowers, they they're starting to it's flattened out and that's good. So R and I is affected buyer deposits, which are growing very strongly. Again, we'll grow because of all the stimulus coming in, but importantly is to get loan growth, and we're starting to see that stabilize and

that looks good for us going forward. The shape the O curve, you know, with short rates come up, that actually helps us a lot because we have a huge amount of non intersparing deposits that don't reprice but but that's life of being a great bank and being the ability to top deposit gathering bank in the United States thanks to Brian moynihan, Chairman and CEO of Back of America. Coming up the great Krugman Summers debate over the risk of inflation, we hear the doubbish side from Nobel Laureate

Paul Krugmann. That's next on Wall Street Week on Bloomberg z is Bloomberg Wall Street Weeks Inflation Special with David Weston from Bloomberg Radio. The question of what the one point nine trillion dollar fiscal injection will meet for VIEUS economy has generated something of a debate between two of our most respected economists, former Treasury Secretary Larry Summers of

Harvard and Nobel Laureate Paul Krugman. Each recognizes that the other has a point, but they have a decided difference in emphasis, with Larry concerned were underestimating the risk of inflation and Paul saying it's not as big a risk as Larry suggests. So we went to the sources themselves, and first, as Paul whether in part the problem is that we are very much an uncharted territory Okay, this

is a it's it's a lot of money. I mean even um, you know, uh, even for an economy the sives the US at one point n actually in here, at one point actually in there, and soon you're talking about real money, and it's a. UM. If it was designed as a fiscal stimulus, it would be a very very big fiscal stimulus. Now it's actually not really designed that way. Large parts of it are probably not going to have a very big, certainly short term multiplier effect

on the economy. So it is going to boost the economy. It's uh, we're going to you know, the consensus forecasts are for five and a half six percent growth over the course of this year. Some estimates are running higher than that. Um. Most of those estimates suggest that we're going to be pretty much at full employment by early next year, which is uh, which is a good thing. Does mean that it's not silly to think that there

might be some inflationary pressure. But it does not look at least as I read it, and I said, I think as the consensus of the Wall Street economists read it like it's a major inflationary threat. Well, and shared pou has said, yes, there will be some uptickings and prices, but it will be as he says, transitory. Yeah, how will you, as an economist look at the data decide whether it's transitory or more than transitory. Well, first of all,

we're gonna look at things. One of the concepts that has really really worked over the past fifteen years is core inflation. Uh. It's it's not the only thing to look at, but taking out food and energy and maybe some other things. Look at look at stuff that's obviously just supply bottlenecks. Um, the you know, wood prices are way up. That's not a sustained inflationary issue. That's because we've had a surge in demand. And uh, and we'll deal with It's we want to look at underlying measures

of inflation. You want to look at wages. Um. You want to just generally say, is this is this looking like the build up to the seventies? And um, you know, my guess is it's very unlikely to look like that. It's our kind of worst case scenario. The closest I can come to this and is something like the Korean War, which actually did lead to a one year spiking inflation, but then inflation quickly subsided back to uh to an underlying reative around two percent, and that's that's the worst case.

I don't think this is going to be nearly as inflationary as that the similars to the economy will come not just from one but also it looks like from the vaccines really kicking in a big way. I mean, we've had I think a suppression of demand, not just supply, because people have been getting checks and haven't been able to spend it the way they would have otherwise because they're locked up at home, the restaurants aren't open, they

can't go on flights. Does that give you some pause here that we could have a rapid uptake but real demand a lot of dollars searching the same number of services and goods really quickly. Yeah. So though the it's two sided. I mean, the pandemic has prevented people from spending in the way they uh, they would have normally, but it's also preventing some goods and services from being supplied in the way they would have. So on the one hand, uh, yeah, people will start eating in restaurants again.

On the other hand, restaurants will be able to start serving meals again. So there's a there's both the demand and the supply effect from the vaccines and on. On balance is probably somewhat inflationary because some of that increased spending will spill over to other stuff. But it's not nearly as much as just looking at the growth numbers is is not getting the whole story. We we are right now have an economy that that is depressed in part because of supply constraints that will go away as

the as facts ation spreads. So you've been in a fairly famous now debate with Larry Summers over the risk of inflation. And in the fairness to Larry, he's not saying it's a certain thing, it's just something he thinks it's a serious problem. We have. One of the issues, as I understand it, is how you look at it, what the model is you apply. As you said, this is not a typical situation of a downturn. This is special. It's more like a natural disaster or even a war.

I guess my question really is do we have a model that covers this? Do we know what the likely effect on inflation would be? Given that it is Sue generous, Well, no, this is it's very hard to come up with a historical parallel. Actually, one of the funny things I just want to say about the debate between me and Larry is that we conceptually have very similar views of the economy. We're just making some different judgments about the numbers. Uh

it really, I don't. I don't think you can take a look at at the way he's talking about it in the way I'm talking about and say that there's a fundamental difference in economic philosophy. There is really a judgment about the numbers and think that if I was going to make my case, I would say I would say I would look at the form of this one point nine trillion dollars and say that a lot of it is, in fact, although useful in important ways, is not going to be uh, pushing up demand all that

much in the short run. That was Paul Krugman, author of Arguing with Zombies. Coming up, we'll hear the other side of the debate from our special contributor Larry Summers of Harvard. That's next on Wall Street Week on Bloomberg. This is Bloomberg Well Street Weeks Inflation Special with David Weston from Bloomberg Radio. I don't think the right question is whether this package would overheat the economy. I think if we were passed as written, it would overheat the economy.

But will this shift the debate towards our doing more? Will this shift the debate UH to words doing more for those who have been left behind? And I think they're on the answers yes, But we are going to have to watch this economy very carefully. And I do think the conventional wisdom is underestimating the risks of hitting capacity. That was special contributor to Larry Summers here on Wall Street week back in January. Now two months later, the question is what has changed and whether the risk of

inflation is less or more than what Larry saw back then. David, I'm I'm much more concerned. UH markets have had their biggest increase in the ten year in a century, with only one UH exception showing that they've got a real concern. The fiscal policy outlook has dimmed from where it was as the full stimulus that was contemplated then has passed. People have declared that it's a new era in ways that suggests that large fiscal policy will continue for a

long time UH to come. The COVID recovery has accelerated, which is a very good thing but means more demand pressure. And the FED has stuck to its guns on no rate hikes for for years and years and continuing to grow its balance sheet. So it seems to me that what was kindling is now igniting, and I am much more worried that we will have either inflation or we will have a pretty dramatic fiscal monetary collision. Are we mishandling macroock and policy right now in the United States?

I think this is the least responsible macro economic policies we've had in the last forty years. I think fundamentally it's driven by in try insigence on the Democratic left and in transigence and completely unreasonable behavior in the whole of the Republican Party. It's driven us to the kind of political deals, uh that we're seeing, and their understandable, and I understand why reasonable people, given the tragic choices they have, might make these kinds of macro economic choices.

But I think we are running enormous risks. I would put the risks this way, David. I think there's about one third chance that inflation will significantly accelerate over the next several years and will be in a stagflationary situation like the one that materialized between nineteen sixty six and nineteen sixty nine, where inflation went from the range of

ones to the range of UH sixes. I think there's a one third chance that we won't see inflation, but that the reason we won't see it is that the Fed hits the brakes, hard markets get very unstable, the economy skids downwards close to recession. I think there's about a one third chance that the Fed and the Treasury will get what they're hoping for and will get rapid growth, which will moderate in a non inflationary way. But there are more risks in this moment that macro economic policy

itself will cause grave consequences. Then. I can remember there have been terribly serious moments in the past, but then macro economic policy was trying to stabilize things. Now there's the real risk that macro economic policy will be very much destabilizing things. You and Paul Krugman have had an extended debate, a constructive debate. I would say you agree on a fair amount of things, although you disagree on

the edges. One of the things that Paul Krugman says, is we don't have to worry about this inflation risk quite so much because it takes a long time. If you go back to the seventies, it took ten years to really have it developed, and therefore there's plenty of time for the FED to react. What's your response, He's

just wrong. Look at the nineteen sixty six to nineteen sixty nine period before there were any supply shocks, when William Machesney Martin was exuding much more concern about inflation than J. Powell is today, when the Guns and Butter of Lyndon Johnson was a very small fiscal expansion compared to what we're seeing today, and when inflation went up about four percentage points in uh A three three plus year period. It's just wrong to say that, and this idea.

I don't understand how people say that expectations are anchored, and they also say that we're an entirely new era of policy where the neoliberal era is over and a new progressive tide is behind us. If we're in an entirely new era of policy, that I'd expect people to reorient their expectations. So I don't really understand, Uh, the

logic of those who are serene right now. And to remind, markets have had as dramatic a first quarter as any time in the last century, except for night which was of course presaged um all the chaos of the end of the Carter years and then the terrible recession. So I don't know how sanguine Chair J. Pale is, but he has been saying. We heard from him yet again this week. We don't have to worry about this risk of inflation so much because there is slack in the

labor market. There is something like nine million people who don't have a job today who did have one before the pandemic. Does that give us a cushion against some of the downside here? I don't. I don't think so, and I don't understand why he finds that argument persuasive. Uh. The nine ten eleven, whatever it is million people that

he estimates represents about six of the workforce. They have lower wages than others, so they contribute less in just productivity terms, So it corresponds to a gap of about four percent in uh G d P. According to the Fed Zone forecast, that gap will be closed by the

end of this year. And we're gonna still have zero interest rates, We're still gonna have big budget deficits, We're gonna have all the savings that he thinks in Paul Krugman thing are going to be generated by this stimulus that's gonna get spent at some point, likely two and likely uh to overheat the economy. So look, nobody can predict these things with great confidence. But I'm very concerned

that the inflation risks are high. And frankly, I'm concerned that there are gonna be hundreds of PhD economists at the BED who are going to be devoting their efforts to explaining how any bad statistics are transient or distorted in uh the statistics. And so I'm very worried, given this new approach, that we're gonna be very slow in any necessary responses to inflation. Um, if it comes. How will the consequence of inflation express themselves to ordinary Americans.

I'm old enough to remember the eighties, and I remember the real concerned, funny concerned. I remember mortgage rates at eighteen and a half percent. I remember retiring is being really concerned about living on a fixed income. How will express itself this time? David look, we're not going to have eighteen percent mortgage rates. We're not going to go all the way back to the nineties seventies. I think it's important to be concerned, but it's also important to

keep concerns in perspective. That's said, here's one aspect that I'm struck by in the discussions of the statistics. The rental um, the owner occupied housing part of the index is something that's holding it way down and holding measured inflation down. And yet across America, house prices are going up faster than they have in a long time. And given what's happened to treasury yields, mortgage yields are on their way up, and refinancing opportunities are on their way

uh down. So I think for families thinking about the cost of owning a home in all the ways they would think about it, it's gonna be going up pretty fast over the next year. And so if somehow policymakers are taking consolation from some index that's showing some construction of owner housing is holding down inflation, I don't think that's gonna be a very comfortable thing. Thanks to a a special contributor, Larry Summers of Harvard. Finally, one more thought,

and the winner is Hungary. There's an awful lot of talk these days about inflation, about whether it's coming, about whether it will last, about whether we'll get out of control. For those of us old enough to remember the nineteen eighties, it's not surprising that we get nervous about our money growing less and less valuable. After all, some of us actually had mortgages at over eight interest, and the burden inflation places on savers and those unfixed incomes, and there

are more and more of us is very real. But when it comes to serious inflation hyper inflation, the United States has never been in the same league as some others. Think about the French Revolution when inflation reached one and forty three percent and that is a month, not a year, or the Weimar Republic when it got up to twenty thousand five a month, And note that just about every instance of hyper inflation came tied to a war or

other armed conflict. But the top prize goes to Hungary when, in the aftermath at World War Two, the Pengo fell by thirteen point six quadrillion percent every month. Not surprisingly, Hungry decided to ditch that currency altogether and moved to the floor end. So even as we and the Fed keep an eagle eye on those inflation expectations and the break evens, we can take some comfort and just how stable our currency really has been, at least so far.

That does it for this episode of Wall Street Week. I'm David Weston. This is Bloomberg. See you next week, m hm.