 Want to talk a little bit about the economy? We saw the markets take a big hit today Generally markets are down quite a bit this month and quite a bit this year And I want to talk a little bit about that about the effects of inflation about the war about budget deficits and everything else on what is going on from an economic perspective and And What we can expect in terms of primarily inflation because I think that's the most interesting of all of these there isn't you There isn't you what do you call it substack that I am really Finding really fascinating. It's an economist. I think it's an economist. He's an economist. I think he's an economist Brian Kaplan who's who's a Free market economist. He's actually maybe he's a Anyway, I think he's an economist. Anyway, Brian Kaplan has written a lot of excellent books He is one of my favorite economists out there This is a new Substack that he has that I think is excellent on so many issues. I find myself agreeing with him he is Warning he is when push come to shove. He is an anarchist so that is a real problem, but on So many things He's right online and I don't know how much of an anarchist he really is One would have to push and shove to see but But he doesn't have The nihilism this total subjectivism In what I find irrationality that most anarchists seem to have so again I'm a fan. I've subscribed to substack and coach you to it's Brian Kaplan It's the subject is called bet on it Brian be our YAN Kaplan with the CC AP LA and Anyway, Brian earlier this week had a Really good substack on the economy. He called it the economy is very strange these days And I think there's a lot to what he says. I mean, I don't think I don't think it's that Unexpectedly strange. I don't think it's that weird when you take into account everything that he's been going on over the last few decades But if you just look at the stats It looks weird. It looks strange and let's start with the fact So we're gonna go over his right up here and I will comment on some of these observations that he makes Again, I encourage you to subscribe to the substack. Let's start with the fact there was seen the highest inflation that any of us Have seen since the early 1980s late 1970s Many of us were very young back then I of course I lived in Israel in the early 1980s where inflation was over a thousand percent said court was quite impressive And we survived that but in America, we have not seen inflation this high since the early 1980s Inflation now is that around 8.5% and inflation here. I mean 8.0 here, I mean CPI price inflation when a Freeman said Peter Schiff was right. Yeah, Peter Schiff at some point was going to be right Peter Schiff has been calling for inflation for the last 25 years and he's right finally At some point we were gonna have inflation that it was not that's not a big surprise It's it's can you identify when we're gonna have inflation? That's how you make money off of it and That I don't think anybody has been particularly good at So inflation said 8.5 which is a particularly high rate arguably For many people because CPI is the consumer price index Really depends on the basket of goods that you purchase The way they the way they measure inflation is they choose a basket of goods Like things that Americans buy and then they track the price increases of those things that typical Americans buy Some baskets of goods have higher inflation have gone up in price more than other baskets and goods This is part of the problem with using any kind of priced inflation number There are lots of them you'll find that the Fed releases a number of different inflation numbers. There's coinflation There's inflation. There's a variety of other You know There's producer price inflation and there's a variety of different measures of inflation There's inflation the way they used to measure it which would suggest much higher inflation today Other than the way we measure it today, but the fact is that inflation is high by any measure by any measure That you look at it. It's it's at 8.5. If you remember just a few months ago people were talking about transitory The Biden administration many economists were saying no, no, no. This is all a result of supply chains No This is inflation. This is prices going up. It's sustained I've I've said this for a long time now John Cochran has been at the forefront of this John Cochran another economist I like a lot has been at the forefront of this This is inflation in that prices are up and they're staying up and it's not just because of supply chain issues It's not inflation caused by quotes shortages Shortages resulting prices going up indeed as bank Kaplan will explain explains in this piece Based on the shortages prices should be going up even more the fact That you walk into a I walked into CVS in New York City When was it a week ago a week and a half ago and the shelves were literally empty empty That means that the prices of those goods were not high enough That is the fact that you're seeing empty shelves Suggests that companies are not raising prices fast enough that happened during covert that's happening right now Prices should be going up faster in those places where you get shortages The war on energy doesn't cause inflation That's the other thing all prices going up doesn't cause inflation because if the money supply is fixed and one products price goes up Then a demand for that product goes down and at the same time people Shift the substitutes which are cheaper So the mix of things that people buy changes the basket changes so This is part of the problem of this term of inflation because the basket of goods changes people people's purchasing habits change based on price levels and If oil goes up people buy less oil they start driving less They they might look for different substitutes They might do things differently, or they might just allocate a different amount if they're spending more on oil They have less to spend on other things their prices go down Inflation fundamentally is a monetary Phenomenal it is fundamentally a result of having more money in the system without Productivity and the number of goods actually going up what causes inflation is the printing of money What causes inflation is the massive creation of money Without the backing of more goods more production more productivity so The fact that a price goes up like oil might result in a price shock This is this is why it was all talked about supply chain shocks It might cause a price shock, but it should not cause sustained inflation sustained inflation is what happens When the Federal Reserve starts printing money when the federal government starts spending money like there's no tomorrow Which is what we've seen right So the first observation in terms of economics is In terms of the economy is that we have real inflation not Just supply shocks not just shortages, but real inflation But in addition to the inflation, we've got real shortages You cannot get all the stuff that you'd like to get at the market price Now this is cost partially because market prices are not adjusting upwards because I think there's a fear Because of Elizabeth one because of the culture because of the way we we think about prices the way we think about profits There's a fear to raise prices As you might know Elizabeth one is blaming the inflation on corporate greed Because before there was eight and a half percent inflation There was no corporate greed and then suddenly over the last few months There's been a lot of corporate greed so corporations have bumped up prices and that's why We have inflation. I mean, it's so bizarre. It's so silly and nonsensical It's almost not worth commenting on but Elizabeth one keeps repeating it just we've got inflation Some things are just unavailable. You cannot find windows in Puerto Rico Garage doors or heating all drums in some places Brian suggests. There's just things you can't get unemployment at the same time is At it's very close. That's 50 year low Even though we had the largest unemployment spike In 2020 in all of recorded history the sharpest drop in employment And yet unemployment as measured by the government is that a 50 year low right now At the same time, this is all the different things going on at the same time labor force participation Is still way below You know where it's been since Since really the 1970s Way below the maximum rate which was in the early 2000s late 1990s early 2000s and still quite a bit below what it was Before the pandemic So labor force participation has been declining Suddenly declined dramatically During the after the 2008 2009 recession it declined through the Obama presidency kind of stabilized under Trump didn't really rise a lot but stabilized took a huge beating during COVID and it's not recovered since then Labor force participation is the number of adults actually working Whereas unemployment is measured as based on the number of people looking for work So if you're not working But not looking for work You don't count as unemployed, which is kind of bizarre. So labor force participation is still not recovered Prime Age labor force participation Right is Nearly fully recovered Prime Age meaning 40s 50s young people are not participating in the workforce The labor force participation is really low Old people over 65 are not participating in the workforce Their labor participation rate is really low. It's all getting screwed up Sorry that my software here is all over the place. All right So what you get is all the people all the people are Retiring and not coming back to work younger people in their parents basement The only people really who have come back fully to work Adults over 30 over 35 Yeah over this period The amount of money in the economy the amount of money that the federal reserve Producers and pumps out the into the economy has grown dramatically not surprising inflation is up from You know during COVID that the amount of money in the economy is just a money supply M0 who's just gone through the roof, right and The Fed has just pumped out money It started to shrink a little bit the amount of money in the economy started to shrink a little bit But still nothing is compared to what they pumped out. Remember. This is a federal reserve run by a Republican drew on power Nominated to the job by Trump number of Republicans on the Federal Reserve Board voting for this and they have just been flooding flooding the system with money So it's a weird economy on the one hand It looks like the economy is growing and plenty of jobs more jobs than there are people the economy is doing What looks like really really well, it's really really strong job creation is really strong Inflation is really high an employment is really low But a lot of people are not participating in the workforce a lot of young people staying in their parents basement They're not going back to work They lost their job during COVID and they're not going back to work a lot of old people for whatever reason have Decided to retire early or retire earlier than they would have otherwise and not going back to work What's going on here? Well first look This is all a result of the insane growth of government over the last hundred years and The fact that government today has what you would consider unlimited power government today can do anything it wants Government today can print whatever money it's wants can distribute it to whoever who want whoever it wants to distribute it Can bail out whoever it's wants. There's no limit right now Constitutional legal legislative to the power that the government has taken upon itself and As a consequence when a crisis happens Like COVID the response of government has been to dramatically expand its mandate Write checks to everybody spend like there's no tomorrow mandates Government just went through the roof in terms of its growth in terms of its power in terms of its impact on our lives and Well, you know Trump started this with stimulus after stimulus after stimulus He told us to stay home and then they sent us checks to compensate for that and you could argue that maybe You know Trump's stimulus is would have been okay in terms of inflation if they'd stopped there But the fact is that they didn't stop that when Biden came into office He did another 1.9 trillion dollar stimulus now I strongly believe that if Trump had been reelected he would have done the same thing So I don't think there's a difference here. I mean indeed Trump was lobbying For an actual increase if you remember for 1400 per person in the stimulus bill to actually 2000 proposed since the Trump wanted actually to have an even bigger stimulus But they wanted a bigger and bigger and bigger stimulus. So physical policy government spending out of control Massive government overreach, but this is what you get when you give government the kind of power that they have They are going to try to buy votes They're gonna try to make you happy and the easiest way to make you happy is to send you a check at home Now what's interesting is that the American government does this on a grander biggest scale than anybody else So I'll everybody stimulated the economy everybody had massive physical stimulus during covert the US did more of it than anybody else if you look at If you look at inflation one of the ways to see that inflation is not just a supply chain is to look at inflation across the world If inflation was just the supply chain issue was just shortages Then you would expect inflation to be high everywhere because everywhere in the world is experiencing shortages for example Japan is an island is an island that it depends on importing many of its goods suddenly Somebody mentioned oil the oil shock all prices gone through the roof energy prices have gone through the roof It's all energy policy. Well, Japan inputs all its energy You'd expect Japanese inflation to be through the roof right now And yet Japan is experiencing almost no inflation Exactly for the reason I told you before energy prices might be up at other prices are down So overall inflation in Japan is about 1% in the United States. It's 8.5% The reason it's 8.5% in the US and one in Japan is because Japan Has not pumped huge amount of money through physical policy into the economy the way the United States Not just through physical through physical and monetary policy into the economy the way the US did during covert The same is true in Europe. Europe has inflation for the 5% not 8.5 Because their stimulus was significantly lower than ours so inflation is a Monitoring physical phenomena. It's a phenomena of deficits that the market believes cannot be paid and of Monetizing those deficits By the Federal Reserve just printing money the Fed basically printed money Like it was at war It printed money not To fulfill its goal of price stability it printed money to fulfill its goal of appeasing the politicians of Appeasing the political class of sustaining the US economy of bailing everybody out. And as a consequence as you probably know it bailed out Dozens and as we've talked about in the past it bailed out dozens and dozens of companies that should have gone bankrupt during COVID It bailed out many what we call zombie companies And one of the things we're going to see Is as we head into a session the zombie companies that should have gone bust in 2020 are going to go bust in 2023 You have to pay the Piper they have to be consequences to bad managers to going taking on too much debt To doing stupid things business wise The Fed bailed everybody out not too big to fail They bailed everybody out as they raise interest rates as we'll talk about Those businesses are going to collapse those businesses going to go under At the same time at the same time interest rates Because of the way the Fed has behaved because of the way it's bought up debt It's bought up bonds. It's expanded what they call expanded the balance sheet by buying up bonds Because of that Because it's been buying up all this debt we basically had negative interest rates negative interest rates that is You're basically paying people to borrow your money. I mean Think about the prime rate right now The prime rate now now is five percentage points below inflation. It's You're basically Losing money by lending the money out at prime rates So we have an environment of what in a free market would be an impossibility Something that could never happen Something that would never happen Which is negative interest rates? Interest rates are always supposed to be positive So in the United States they're positive But they see an interest rate should be made up of three components three components Here's a finance one-on-one lesson Interest rates should be composed of three components one inflation right so If I'm lending you ten dollars, I want to make sure that the ten dollars when I get the money back That I am compensated for the fact that over the next year that ten dollars is going to lose its purchasing power So if inflation's eight point five percent over the next year I want at least eight point five percent to compensate me for the loss of purchasing power So one component is inflation the second component is risk I'm not sure you can pay me back So I want to be compensated I want our profit because I'm lending out to a bunch of people some people I'm gonna lose them I'm gonna lose the loan. They're not gonna pay me back So I want to make sure that the people who do pay me back Pay me back a premium to compensate for the risk associated with some people not paying me back and the third is I want to be compensated for what's called the time value of money I want to be compensated for the fact that I cannot use the money today I want to be compensated for the fact that I cannot invest it in other things today I want to be compensated for the fact that I can't go buy ice cream with it today That's called the real interest rate. It's called the time value of money So the real interest rate is typically one two percent Then on top of that You have risk depends on the investment depends on the loan. Let's say it's a government loan We risk is zero the US government will pay back its loans We assume then that's zero and then you have inflation eight and a half percent So one-year interest rates right now should be eight and a half percent plus a real return of one to two percent So that's between nine and a half to ten and a half percent You won't find a US one-year treasury bill selling for ten and a half percent So somebody is buying it for let's say I haven't looked at what it is right now But let's say it's two percent three percent Basically, they're giving up They're losing money when they get the money back in a year. They will be able to buy less with it Now that's upside down economics That's completely insanity and the only way that is possible is because of artificial manipulation by the Federal Reserve So we have negative interest rates have had for years now negative interest rates. We have prices not adjusting We're wages. This is not the problem. We've heard over the last few years that wages are rising But wages are not rising enough to compensate for each one point five percent inflation So real wages in terms of the purchasing power of the dollar real wages over the last year have declined significantly dramatically So people are getting poorer even working people are getting poorer and young people are not going to work. I Don't know parents must be willing to subsidize their kids because of COVID Young people idle not all young people obviously, but enough young people idle now the response to this inflation is Going to be a Federal Reserve that increases interest rates and Start selling all those loans that they've been buying By selling those loans they're gonna drive up interest rates People are gonna buy them, but they're gonna want to pay less and less money for them the less they pay for them the higher their industry and The Fed is also driving them interest rates just by raising the bank lending rates and What you're gonna see is rising rates across the entire rates factor from short-term rates to long-term rates as interest rates rise. Let's say you have a Fire a variable rate mortgage Well as rates on mortgage rise you will have to start paying more and more and more money as your monthly mortgage payment Many of you didn't take out 30 year Loans as I advised you took out variable rates And therefore you're gonna have to pay more and more and more Interest some of you won't be able to afford that Some of you will default on your mortgages businesses That have loans with banks have loans with other financial institutions might have bonds in the marketplace as The rates start going up won't be able to refinance those loans If they if their variable rate loans won't be able to find it won't be able to have the cash to pay Interest payments on they're gonna default on those what happens when companies default on bonds and loans. What do we call that? We call that bankruptcy So companies are going to go bankrupt That's what a recession means The session means companies letting people off Companies cutting costs companies going bankrupt because they cannot usually it's caused by the fact that they cannot pay their debt obligations Now in a normal time You'd have that anyway, but what's gonna exacerbate at this time is the fact that the Federal Reserve has been bailing out all these companies for years now all these zombie companies are In a horrible condition to be able to pay back their debt The only reason they've sustained themselves is because of the Federal Reserve bailing them out buying up their bonds as This gets reversed Not only are the normal some normal companies gonna get into financial trouble But all these zombie companies are gonna get into financial trouble and that's where you get a recession So I think there's a good likelihood that we will get a recession There's a good likelihood that that recession won't happen this year. It'll happen in 2023. I think to that extent the Power Fed is trying to help Biden and the Democrats not get completely swamped In the 2022 midterm elections if a recession happens this year Democrats will be crushed They're gonna get crushed anyway, but with the recession. I'll be completely Crushed so that they're delaying everybody says why isn't the Fed acting fast I think they're not acting faster because they don't want a recession this year because it's an election year So much for the independence of the Federal Reserve, but that's true Republicans Democrats. It doesn't matter. They're always like this. Okay So We're heading towards a recession It's gonna be very hard to avoid We could very well get stagflation where we get both a recession and inflation I Think part of that is mitigated by the fact that Republicans are probably gonna win the House and Senate if they do I think the markets will view that very positively and the reason for that is Republican House Senate Democratic President Usually what you see is Spending as a percent of GDP decline or at least flatten out So the good news is I think I think that reverses itself if you get a Republican in the in the White House But we don't have to worry about that for another three years But at least for this year divided government is good divide government means lower spending That the markets will view as a good thing I think that will suppress inflation expectations And I think the Fed raising interest rates will work It will work to force the market into a recession, but I'll also work to crush inflation Bring it back down. So I expect we're heading towards a period of Inflation recession back to low inflation again all bets are off if Republicans have the House the Senate and the presidency And start spending like there's no tomorrow again Thank you for listening or watching the Iran book show if you'd like to support the show We make it as easy as possible for you to trade with me. You get value from listening. You get value from watching Show your appreciation. You can do that by going to Iran book show comm slash support I go to patreon subscribe star locals and just making a appropriate contribution on any one of those any one of those channels also if you'd like to see the Iran book show grow Please consider Sharing our content and of course subscribe Press that little bell button right down there on YouTube so that you get an announcement when we go live and for you Those of you who already subscribers and those of you who already supporters of the show Thank you. I very much appreciate it