Let’s flashback to the 1970’s, a really interesting use-case for economists to explain what the central bank deals with today, the fear of inflation!
If you know anyone who was alive during that time, they probably remember the long lines in gas stations! This is because Nixon, in 1971, made oil price increases illegal (Effectively, a price ceiling) and also cut the link of Gold to the dollar, in an attempt to control inflation. The spending on the Vietnam War and Johnson's “Great Society”, a government spending initiative to reduce poverty levels, was thought to be the root of even-higher inflation.
From the 1970’s to the 1980’s, more than 50% of Americans thought that inflation or general price increases was the single biggest problem facing the economy. Contrast to today, when you mention inflation, some people have been looking for it for the past decade or so! That’s because inflation has remained low. Despite the printing of money in the 2008 financial crisis, inflation has largely stayed around 2%. The doomsday warnings of economists who have long-studied Monetarism (ie. the link of excessive money printing and inflation), have been ignored.
Every economic policy for a while now, are rooted on the premise that inflation will be low. It is the reason our central bank has been buying up billions of dollars worth of bonds and are cutting interest rates to near-zero. Records being broken in 2020 for how much the government is spending on both monetary and fiscal policy.
How does 2021 expect to unfold? How can the Fed defend against the blow-up of prices?
News [00:00:05] Inflation, inflation, inflation, inflation, inflation, inflation,.
Jed Tabernero [00:00:11] So you're Robin Hood Dashboard's got a little red on it. Well, we might know why Fed Chairman Jerome Powell, while on a Wall Street Journal conference mentioned this. We think we're likely to see inflation move up during the course of this year. Businesses will be potentially hit by a lot of demand as the economy recovers, which is a good thing. But you could see bottlenecks, you could see prices moving up where we're inclined to see those as as transient. Transient, that means, well, maybe this is just happening temporarily. What I'm worried about when I hear that kind of talk, every grade inflation is made by a central bank that dismisses it as due to transient factors. And so at a certain point,
Larry Summers [00:01:06] when you start having a transition factor every month, then you've got a permanent faster going over going overall.
Jed Tabernero [00:01:15] Inflation basically means things are getting more expensive. Your three dollar toco might be six dollars after the pandemic is over. The issue with what he mentioned was that he followed it up with, well, I'm not going to do anything about it. Traditionally, the Fed exists to control inflation. It's a part of their mandate. Yet this time, the Fed just basically explained that they won't be raising interest rates to try to curb inflation. Is the Fed right? Is this a transient event or is it something that might turn into a far worse economic event? But really, what is inflation like, how does it really work and how do you protect yourself from it? Welcome to TCHC, where we unpack the ever changing technology economy
Adrian Grobelny [00:02:24] hangout with Jed, Shikher and Adrian as we tackle the industries of tomorrow.
Larry Summers [00:02:30] This is things have changed.
Adrian Grobelny [00:02:39] So in our last inflation episode, we didn't just cover inflation on the surface, we wanted to dove into a particular industry that has affected all of us the most, and that's the food industry. You know, through covid, our spending habits have changed. But one thing that's been consistent is the purchase of food and those caviar Doordash deliveries that were, you know, making to get through this pandemic
Jed Tabernero [00:03:06] at the same company. Now they are the same company.
Adrian Grobelny [00:03:10] And so today we wanted to touch on inflation again because things are starting to pivot and change a little bit. We've had massive amounts of stimulus. Things are starting to look like they're going to go back to normal as vaccines roll out. And there's a lot of uncertainty in the direction of the economy or in a kind of a a point where. There's really two ways the economy can go, either it bounces back and fully recovers and we start to see crazy amounts of inflation. Or we start to ease back into a normal economy and things getting back to normal as everyone is vaccinated, businesses open and we, you know, try to get some slim amount of normalcy. So currently, the US is still missing 10 million jobs. What does that mean? That means that there's 10 million people still looking for jobs and they haven't been filled up yet. So we shouldn't be worrying about inflation, right? I mean, 10 million jobs missing, there's still many people earning less than what they were already heavily impacted. Industries like the service industry are still trying to get a bearing into how they're going to keep moving forward.
Jed Tabernero [00:04:29] So in a traditional sense, right, what Adrian is describing, like why would 10 million jobs missing mean that we shouldn't worry about inflation? That's because of the Phillips curve. Right. In a very traditional sense, you think, OK, if there's high unemployment, there's low inflation period, which because of high unemployment, the thought there is because there's a scarcity of available workers, it's harder to get them for a specific amount, for a specific price. So prices for those wages will decrease because there's clearly little demand for these workers right now. Now, the fear is if we fill all those jobs with low unemployment right now, the fear is that there's a lot of demand for these employers and there's not enough supply for them.
Shikher Bhandary [00:05:23] They have to fight for them. They have to fight. The companies have to fight for talented employees.
Jed Tabernero [00:05:31] They've got to fight for talent. So wage prices will go up, right. Companies will start paying higher wages for each employee. What's critical to understand that relationship and even the Phillips curve is the relationship of supply and demand. Right. So if there's if there's too much supply in the market and there's very little demand, prices will drop inversely. There's very little supply in the market and there's a lot of demand. Prices will definitely rise. Think about it. As you know, one of Chicago's stupid high products. Right? Think about one of those. There's so much demand for those little products. They could go for around one hundred two hundred dollars per shoe. Really like the actual price that they want them. You know, they want to be out there. But because there's so much frickin demand and so little supply that price shoots up, they drop everything. They literally creates inflation for these type of of products. Right.
Adrian Grobelny [00:06:26] It all goes comes down to the trickle down effect. You know, if there's more people earning money and more people in the market working full time jobs, that means their incomes are higher. And if they have higher incomes, that means they're spending more and they're spending more. They're driving the economy. Things are going along smoothly.
Shikher Bhandary [00:06:44] So it's good to have a certain amount of that right, because it means the economy is moving like people are spending people that are engaging with the economy,
Adrian Grobelny [00:06:53] trade, having transactions are happening.
Shikher Bhandary [00:06:56] But the what happens when there is a supply demand mismatch, like what the pandemic created
Adrian Grobelny [00:07:03] were, you know, like suddenly
Shikher Bhandary [00:07:06] there's all this pent up savings that we spoke about. And now once the vaccine rolls out, everyone wants to go out and
Adrian Grobelny [00:07:14] spend go out.
Shikher Bhandary [00:07:15] We spoke about that trip to Hawaii, that trip to Paris. Everyone wants or wants to spend. Those are reasons that, like for the people in the highest age age bracket. So the boomers and above. They have seen a crazy uptick in airline tickets that they have booked since vaccine rollout started in February. And this is across the world, so you're seeing these guys already decide, hey, we sat at home for four years. Let's go out. And just
Jed Tabernero [00:07:51] people are sick of it. People are sick of this lockdown.
Adrian Grobelny [00:07:54] Do you guys remember when we had that supply shock and oil? There were 20 tankers off the coast of California. Oil prices went negative. That's, you know, partially due to covid and the shocks and the supply and demand of oil, uncertainty of what people are going to be consuming in terms of oil and transportation, travel.
Shikher Bhandary [00:08:16] What's crazy is that when did that happen like April and May when when covid just hit. So it's one that's like an extreme side, extreme end of the pendulum swing. And now it's coming back and we're seeing like almost twenty five percent increases in oil prices since Jan. So you're seeing people are moving around. They are doing these road trips. They are flying out, obviously, fuel costs, this sudden explosion in demand that's not only restricted to like oil, but it's also it's, you know, like the lumber lumber. We spoke about the housing issue where there's just not enough houses and construction projects are like tenias like there is. Ten month wait in construction projects right now, because, you know, the raw materials aren't there. Same with semiconductors, which will cover later where the whole world went digital. And suddenly, if software is eating the world, the chips are the teeth. Right. So without the teeth, you cannot have software eating up the world. So what happened when everyone went to was everyone, you think, using the cloud. But it's actually some sobering, like Utah, Nevada or someplace. It's just like a, you know, a mass storage in one of these isolated locations. So ultimately, it's the chips and no one can manufacture the chips, the chips. It's caused glass to not manufacture to transportation delays.
Jed Tabernero [00:09:49] Right. Because we expected so think about it early. Twenty, twenty. Right. When we started seeing things shut down and countries shut down, you know, businesses started shutting down to OK. And because businesses started shutting down, suddenly the supply for a certain amount of goods started decreasing. Of course, if there's not enough demand for your good, what are you going to do? You're not going to produce much of it anymore. Right. So maybe prior to that, you know, fucking I don't know, maybe handkerchiefs used in restaurants. Right. Maybe they're producing millions of those a day, but then all the restaurants closed, OK? And when all the restaurants closed, they couldn't produce the same amount of napkins as before. And they start reducing, reducing, reducing what they're producing in those factories. Right. And then another way to understand that is when you reduce that capacity, a lot of these supply chains are very feeble. OK, so when they're making these products, they have certain contracts for how much they expect to be producing at this time. And then they reduce those estimates and they don't lease out the same amount of spaces that they need to be able to produce this product X, Y, Z. That becomes a totally different calculation. Right. They're not prepared for this.
Shikher Bhandary [00:11:03] Also, like the world manufacturing in general, everyone's just optimized on demand and supply. So it's like everyone's lean. And when there is a shock that happens, you don't have the capacity to fill things. So you're like an extreme constraint to like to to meet demand. And that's the shortages that we saw earlier this year as well across the world.
Adrian Grobelny [00:11:28] So we've we've touched on how rising oil prices, shortages and raw materials and transportation delays and issues and bottlenecks are creating worries that inflation is going to come back. Well, there's another factor tied to that. Not only do we have all these variables going on, we're about to get one point nine trillion dollars and stimulus to help get get us through the pandemic.
Jed Tabernero [00:11:53] The more popular inflationary pressure is government spending, like when inflation started becoming the number one enemy of America in the 1970s. It was because of government spending on Vietnam, on all these social programs and whatnot, like government spending is a huge thing where economists go like, OK, hold up, that's going to cause inflation. Let's not do that. That's exactly what you know. Michael Burry, guy who was highlighted in the Big Short movie, if you've watched that and is is saying about the one point nine trillion dollar stimulus right now. Right. Is that there is a huge possibility that putting this much money in the economy, raising M-2 levels, is going to cause inflation to come back, you know, heavily. So that's one of the things that that is a worry on economy side when you think about, you know, government spending,.
Shikher Bhandary [00:12:46] The bill is quite staggering, one point nine trillion. You can't put like, you know, you can't even imagine that dollar amount. It's just got like 15 digits in it. But there are yeah, there are some good things in it. The fact that, you know, they're doing the child child care and stuff where they're going to cut child poverty by 50 percent. That's like, OK, that's so there are parts of that where of that package. When you unpack it, you're like, OK, we can see how. If we spend a trillion dollars on military shit, why not a one point nine trillion to make sure that your you have, you know, good health services for the people in such a deadly during such a deadly pandemic. And then, you know, small businesses, obviously states and schools get a lot of support. So and a lot of support to the vaccines and testing as well. Basically, this whole rollout is being fueled with that one trillion. Right. There are good aspects to it, but it's still such a huge dollar amount that it's like it's been taking a beating for a while now. The dollar against the basket of currencies that it's compared to, you know,
Jed Tabernero [00:14:06] as we're talking about inflation and where it's happening in the economy, why it's different this time. And, you know, the possibility of this becoming a really terrible event for twenty, twenty one. Why is inflation bad anyway? Right. We're talking about all this consumer spending, right. We're talking about all these jobs coming back potentially when it
Shikher Bhandary [00:14:27] seems positive.
Jed Tabernero [00:14:28] Yes, it seems positive prices rise. But if you see everybody else making money, like, what's the issue? So maybe, maybe we can go into why inflation is so bad. Well, the very first reason that comes to mind, you know, we talk about supply chain shocks, right? We're thinking about, OK, you know, if food prices rise, maybe I spend a little bit more on food. You know, if
Jed Tabernero [00:14:50] if the price of my shoes rise, I spend a little more on shoes. Right. But if we think about it, like from a business perspective, if you were if you were a huge scale business. And you were greatly affected by the recession or sorry, by covid, which actually is a recession, and then you would be trying to optimize for how you can produce exact amounts to be able to sell to your customers. Right. And I think one thing that inflation makes it very difficult is planning, right? That's one of the things. So for us to be able to avoid certain, you know, supply and demand mismatches to cause the inflation itself, we need to be able to tell what's happening in the next few months. And because it's so unpredictable, like literally every country and every state in the US has a different plan, right. To roll out vaccines, to really, you know, to go back to normal and whatnot. High inflation definitely makes planning difficult.
Adrian Grobelny [00:15:50] Uncertain inflation causes consumers to not know how much prices are going to be in the future, how much buying power they will have to purchase cars, homes, whatever big purchases they're going to make.
Shikher Bhandary [00:16:01] If you look at the whole supply chain, small event, and I don't know the source like, say, China has a big impact on the final product with regards to cost, quality, whatever. Right now, a global pandemic which are starting to like transportation and storage costs are up and oil is now increasing. So now that all gets. Put on to the consumers, so say Adrian's favorite taco shop is not for dollar tacos rather than three dollars, you know, things like that starts to happen and you realize, OK, I can purchase less with the same amount of money so my five dollars can purchase. My six dollars can purchase just one taco instead of two tacos a year ago.
Adrian Grobelny [00:16:56] I think one thing that our listeners should be wary of is, you know, we're going through tough times. People are being a little bit more conservative, putting money aside, saving, making sure they have that buffer for however many months. But you know what? This new rise of inflation, saving money isn't going to be the best place to put your money in. Savings rates are really low and inflation is just going to eat up your buying power of the money that you have put aside. So that's something that I think people need to be aware of.
Shikher Bhandary [00:17:28] Are you in there indirectly asking people to go YOLO long gone, like being stop and shit, bro, this is not that this is not that kind of Podcast dude.
Adrian Grobelny [00:17:39] I said no such thing.
Shikher Bhandary [00:17:42] So we have seen inflation pressures impacting us, but it hasn't been that crazy. Thousand eight happened the whole financial recession, and we had a similar like stimulus package back then, like how much was it? Eight hundred nine hundred billion, which seemed like a lot back then. Now we're printing like trillions like it's nothing but but it didn't really hit us. And that's an interesting aspect where people are like, OK, hang on, something's happening with that, where we are missing the boat. And that boat is the biggest boat in our economy right now, where four companies, five companies own 90 percent of the wealth, which is basically fang your Facebook, Amazon, Apple, Netflix, Google, blah, blah, blah. But what what do we mean by that? Well, technology, if you seen like a graph of the things that have actually. Deflated in value, right? We were just having a chat with prior to this call, like when I grew up in India, Bangalore, when the first 32 inch Samsung TVs came out. My family went out and bought it, and Costa just it was a thousand dollars. This was 10 years ago. Now, a sixty six inch TV is two fifty dollars. So you can see, like what technology and like just improving on scale can do to you, you know, your radios, your transistors, your Moore's Law, everything is like it. Technology has moved the ball so quickly over the last 20 years that things that have been touched by technology have really depreciated.
Adrian Grobelny [00:19:39] Are you saying that technology is our scapegoat out of inflation? That's our solution.
Shikher Bhandary [00:19:44] It won't solve everything, but even if the supply demand mismatch exists. Right. We have these incredibly complex Emelle algorithms and algorithms that predict with edge cases what could potentially happen and bake it into your model. So now say I'm a producer of avocados and I use this software to optimize what's coming out at the end, optimize how much to manufacture to meet the demand. Now, with that algorithm algorithm, I'm like, OK, I can manufacture one hundred and five percent of what we actually manufacture because that five percent is baked in. And if that does not sell. We can repurpose it into something else, like a good example is like flight tickets, right? Airlines always overbook flights. Why have you ever been on a flight where they're like, oh, there are more people on this flight than there needs to be so we can put you on the next flight and give you a thousand bucks? Technology has enabled so many such and such a clean operation with baking in. Like just random events in the in the market. It hasn't impacted our lives a whole lot, but the pandemic was a ridiculous black swan event, right? So that caused a whole lot. But even then, it wasn't really felt like. We are seeing crazy prices now increase like Soy, Corn, we spoke about that, but. You would imagine that the world is locked down for a year and a half. And you would think things have gone crazy, crazy, but right, but it has not. So that's an interesting insight to think about.
Jed Tabernero [00:21:49] We saw the general cash in the economy, M-2. We saw it grow to three trillion in six months. Ridiculous, right? That's how much we grew in six months. So, you know, what do we do? We're all scared. You know, prices go up, whatever. Maybe we invest in gold and something like that. What can governments do? Well, fiscal policy is out of the question. They can't spend their way out of this one. In fact, that's an additional you know, that's an additional inflationary pressure. Monetary policy, monetary policies, whole job. You know, what is monetary policy? That's the Fed, right. Their whole job is to try to control inflation. So what can they do to curb inflation, given how much we've spent their whole strategy on when inflation goes up and now they have a two percent target, they're OK with going a little bit about two percent. What can they do? Well, they hike rates, right? They hike interest rates, so. Every time we've seen a hike in interest rates, there's an upcoming deflationary pressure, money starts becoming expensive again. So as you're thinking about, you know, what am I going to do in the next few months if inflation does happen? You know, one is savings isn't really good. Spending might not be amazing. Investing in something that's deflationary might be helpful.
Shikher Bhandary [00:23:19] Hey, thanks so much for listening to our show this week. You could subscribe to us and if you're feeling generous, well, you could even leave us a review. Trust me, it goes a long, long way. You could also follow THC @THC_POD on Twitter and LinkedIn. This is things have changed.