 inflation and recession. Yeah, let's, you know, this is the big story of the day. It is, it is everywhere. This is the, this is the thing that with all the, everything else discussed, including politics, this is a much of what's going to happen in the world is economic. We're facing the world is facing real economic crisis stock markets might be going up right now, or down on any given day, but generally, we are facing significant crisis and I just thought we'd go over some numbers to kind of see where this came from, what's going on right now, you know, and, and, and what we can expect moving into the future and what we can expect next year. I mean, all of this is really a consequence of the existence of central banks, and the fact that central banks have no real limitations on the ability to print money. You know, the Federal Reserve basically has complete discretion over how much money prints when it prints it what it uses that money for. I mean, it has some boundaries, but often in times in times of crisis, those boundaries, even legal boundaries are brushed aside. We saw that in 2008 2009. We saw that again in 2020, whether whether the Federal Reserve just did whatever it needed to do whatever it thought it needed to do in order to quote save the economy. Even things that are clearly not in its mandate, even things that it's never done before, even things that most of us in the markets, and I think most people in politics assume that they couldn't and weren't allowed to do they still did. Federal Reserve central banks are this incredibly powerful central planning entity central planning organ of the government with the ability to print money with no limitation with no constraints. And this has been going on really since 1914 when the Federal Reserve was established. This is the Federal Reserve was a was a was a cause of the Great Depression have talked about this in the past cause of the Great Depression lasting as long as it did together with FDR and the cause of the great inflation 1970s and everything else that happened. But let's talk about modern history. The fact is that over the last 15 years the Federal Reserve of 14 years the Federal Reserve is reprinting money at an unbelievable rate. In 2008 the point I want to make here before before I give you a little bit of history, let me tell you why I'm doing this. The point I want to make here is that like all central planners like all central planners, the Federal Reserve fundamentally does not know what it's doing. The Federal Reserve cannot predict the future. The Federal Reserve cannot tell what its behavior will actually result in. It is miscalculated over and over and over again. It has caused massive amounts of damage in our economy, in our lives, in our world over and over and over again over decades. It has gotten more sophisticated. It has more models. It is the largest employer of PhDs in the world, I think. PhDs in economics. And yet it does not fundamentally know what it's doing. Because it cannot. Because central planning cannot work. Because you cannot force an economy. You cannot cross a market. You cannot dictate to people what their value should be. And that exactly is exactly what the Federal Reserve tries to do. It tries to manipulate us, incentivize us, dictate to us how and what we should behave in the marketplace. In terms of our savings, our consumption, our investment, our production, our time horizon, time horizon, how forward-looking we should be. All of that, all of that is influenced by their ability to manipulate money and interest rates. And the two are very related because they manipulate interest rates by manipulating money, by buying and selling money, in a sense, by printing and sucking out of the economy money or bonds, but at the end of the day it's money. And by manipulating that interest rate, they are destroying the ability of businessmen to plan properly. They're destroying the ability of savers to save into the future. They're destroying the abilities of consumers to figure out what they should buy now, what they should buy later, how much they should put aside, how much they should invest, what investments make sense, what invests don't make sense. And they turn financial markets to some extent into a type of casino. Now, because of the financial crisis in 2008-9, all the old rules of central banking and the Federal Reserve were thrown out the window. In 2010, the Federal Reserve formally introduced the idea of quantitative easing, QE, which is basically understrain money creation. And this was going to be a standard tool of the policy. Never in history has a central bank ever done anything like, as far as I know, anything like quantitative easing, not in the United States anyway. This was the idea that the bank would go out into the markets and buy government bonds, in other words monetize the debt, buy private bonds. Unusual, right? Now, government backed private bonds, which means mortgage-backed securities, thus making mortgages, mortgage interest rates, cheaper and cheaper and cheaper, so easy and easy and easy to people to get mortgages. Is it a shock then that demand for housing went up and prices kept going up and up and up, when the Fed was driving interest rates on mortgages down and down and down and down because the Fed was just buying up mortgage-backed securities. Hundreds of billions of dollars of them. And of course, during the financial crisis of 2020, not financial crisis, during the COVID crisis of 2020, the Fed started buying up all kinds of private bonds. Thus, in a sense, manipulating even private interest rates, interest rates that typically are determined by private markets based on real risk. Well, risk was out because the Fed was buying these bonds, driving those interest rates down. So that those interest rates didn't reflect real risk anymore. So what the Fed has done since the beginning of its existence, but really in spectacular fashion since 2008, is completely divorce interest rates. Really, in some sense, all interest rates divorce them from liquidity, from risk, from any real world anchor. And I get excited about this because you have, I don't think you have any kind of sense. I don't think any of us has a real sense of how evil and how bad and how disastrous this is to all of our lives because it is so disastrous for the very prospects of economic growth and economic success and entrepreneurial success. I mean, the fact that the economy has grown, the fact that we've had low unemployment in spite of this, just suggests, just gives you an inkling of what is possible, of how much economic growth we are leaving on the table in a sense in the graveyard, if you will. How rich are we actually could be without all this manipulation? But what the Fed does and what the Fed has done over the last 14 years has been destructive to economic planning, economic growth and our standard of living and quality of life. So in 2010, the Fed committed to add $600 billion of reserves into the banking system. Now, in other words, it's bought, you know, increases the money supply in a sense by $600 billion in 2012. It began adding $40 billion in reserves every month. They raised the number to $84 billion per month through 2013. In September 2019, when there were liquidity problems in the overnight markets, the Federal Reserve added reserves at a rate of $60 billion a month. Between November 2010 and March 2020, just before COVID hit, the Federal Reserve's balance sheet, this is the amount of like bonds it has on its balance sheet, the amount of bonds it owns. It went from less than $2.5 trillion to $4.1 trillion, almost doubling. So in a sense, they doubled the amount of money out there. They took in the bonds and they put out liquidity, they put out money. Most of that money sat on the balance sheet of banks. Luckily, you know, the money didn't circulate that much. The velocity of money was pretty low. It didn't cause inflation for a bunch of different reasons. Partially, the Fed keeping interest rates at zero prevented inflation because it made those bonds be the same as... Anyway, it's complicated, but they printed a lot of money. They lowered interest rates to zero, zero, which means that even if there was a little bit of inflation, 1%, real interest rates, real returns were negative and return on saving was non-existent. You could also argue that all this money, maybe, I mean, I've seen different arguments about this, but potentially also led to a massive asset price bubble. Suddenly low interest rates drive asset prices up. When interest rates are low, all assets, all income producing assets, all assets that have future value, the value today goes up. Stocks go up. Everything else held constant, just interest rates going up, stocks will go up, bonds will go up, real estate will go up, any rent producing property will go up. The lower the interest rate, the higher the value of assets, so by driving interest rates to zero, all assets rose. Beginning in March of 2020, the Federal Reserve went to a new level. In that year, 2020, government spending, this is under Trump. In that year, 2020, federal spending, government spending increased 50% to $6.5 trillion. And it remained at 6.5 or approximately 6.5 through the end of fiscal year 2021, so through the Biden administration, even as the pandemic receded. Federal expenditures remained 30% in 2022 above 2019 levels, so the government went on a massive spending spree in 2020, 2021 and 2022. The Fed provided much of the funding of that by monetizing all the debt, mortgage-backed securities again, lowering interest rates during 2020, so in spite of the pandemic, in spite of COVID, what happened to real estate prices? They went up because mortgage interest rates kept going down because the Fed was buying mortgage-backed securities and then they were buying bonds of all kinds at a rate of more than 120 billion per month. So the Federal Reserve balance sheet went, if you remember, it started out at under 2.5 in 2010, it went to 4.1 in 2020, early 2020, and it went to 9 trillion, more than doubled again by 2022, while keeping interest rates basically at zero. Now, this final, so what happened during this period? What happens with interest rates at zero? Well, if I can borrow money at a very, very low interest rate, particularly as asset prices are going up, I have every incentive in the world to borrow money and buy stocks, buy real estate, buy homes. Everybody borrowed money. Federal debt, which was 13.5 trillion and 88% of GDP in 2010 is now 31 trillion, much more than half, much more than double, sorry, and nearly 125% of GDP. Total debt of the non-financial sector, businesses, individuals, which was 247% of GDP in 2010 is now 262. That hasn't gone up as much as I would have expected. Notice how much government debt has gone up. Our debt as individuals, not gone up that much. Between 2010 and 2018, labor productivity increased at an average rate of 1.1%. It had increased at 2.3% from 92 to 2,000, also a period that followed a recession. Between 2010 and 2018, by the way, I'm getting much of this from an article by Thomas Honing, who was, I think, the Fed Chairman of the Kansas City Fed, formerly, so he provides a lot of these stats. So productivity declined. Weekly real earnings declined. Dollar Jones Industrial, on the contrast, shooting through the roof, price of homes, shooting through the roof, every asset goes up in value when interest rates go down. And of course, the ultimate consequence of all this is that in 2022, we are facing, for the first time in 40 years, real inflation, real price inflation. Prices, CPI, consumer prices, the prices you pay for the stuff that you buy, the stuff you need in order to live, has gone up by 9%, 8. something right now, peaked at 9%. I'm not sure it's peaked yet, we'll see. And the Fed in response is increasing interest rates. Because as you increase interest rates then, what happens to asset prices? Well, if when interest rates go down, asset prices go up, when you interest rates go up, asset prices go down. Stock market, way down. Housing prices on the way down. Any income producing asset, any asset that produces stuff in the future is going to be priced down as interest rates go up. Now, inflation mitigates this a little bit because your income is going to go up in the future with inflation, supposedly, rents for example. So that even though interest rates are going up, so is your income, that mitigates it a little bit. So industries that can raise prices are going to see their value decline slower than industries that have a harder time raising prices. But generally, what we're seeing right now is the Federal Reserve increasing interest rates with the hope of slowing down economic growth, with hope of reducing asset prices, with the hope of ultimately reducing inflation, reducing demand for goods, reducing the amount of money chasing goods, reducing businesses expectation about inflation and therefore businesses incentive to raise prices, and thus capping inflation and starting to moderate it down to 2%. And the idea is that if the Fed does it just right, if they increase interest rates just right, just to the right amount, just to the right level, then they will be able to decrease economic growth, they will be able to slow demand in the economy, they will be able to reduce price inflation just enough so that it comes down to what they view as an ideal 2%. I don't know where they get the 2% as ideal for, but an ideal stable 2%, they will be able to do this without a massive recession, without actually economic growth going negative, without millions and millions of people losing their jobs. Now they realize that unemployment is going to increase, but how much they think it's, oh maybe it will increase from now 3.7%, 6%. But this is called the soft landing. The soft landing is, can we reduce inflation, price inflation without really destroying the economy? Now they have two tools for this. One is the increasing interest rates, which we see, they let us know all the time. But in the background, what they're also doing is sucking money out of the economy. Remember before, they were putting money into the economy by buying bonds. When you buy a bond, you get a piece of paper and you send money out. Where does that money come from for the Fed? They print it, electronically printed. But the money goes out into the economy, a bond goes onto the balance sheet of the Fed. When they reverse that, they sell the bond into the market and the money comes back. As they sell the bond into the market, that drives interest rates up. Because buyers are not going to buy that bond unless they get compensated for it. So they're going to drive its price down, its yield up, the yield is the interest rate. So this is all working together. Driving up interest rates, selling bonds, shrinking the amount of money in the economy. All this, doing in a fine-tuned way, says not to cause an inflation. And this central plan is, they are going to get it just like they've got their models, they've got their equations, they've got their massive calculus, that they're running model simulations. They've got all the resources in the world. They can print money. So they are using the best minds, the most sophisticated algorithms to try to get it just right. One other element that I should note is that the government has to pay interest on all the debt that it's taken on. And that debt in 2019, the interest that the government paid every year on the debt in 2019 was $375 billion. Over the next year, it'll be more than double that. And as interest rates go up, the Fed has to pay higher and higher interest rates on the debt that it bothers, on the bonds that it's pulling out there. Soon we're going to reach a point where the federal government, a federal government has to pay $1 trillion every year just on interest, on the debt. $1 trillion. The budget used to be around $3 trillion. A third of every dollar of the federal government, a third of every dollar that you're paying in taxes is going to go just to pay interest on the debt. That's $31 trillion debt, $1 trillion in interest payments, and it's growing. So that $1 trillion is a low estimate that $31 trillion is not going to end. So how does this end? Well, what is the probability that the Fed gets it just right? What is the probability that the Fed is so good at what it does and has shown such, it's being brilliant, that it manages to raise interest rates suck money of the economy just at the right amount as to cause prices to come down, price inflation to go away, but not drive us into recession. Well, I personally think the probability of that is very close to zero. The Fed basically missed the 2008-2009 financial crisis. It didn't see it coming. It printed huge amounts of money, plugged it into the economy, but the economy barely recovered. Productivity barely went up. It kept facing these emergencies which required it to print more money. Emergencies it never predicted. All last year, people were saying, be careful, inflation is coming, and the Fed was like, nah, just transitory, no big deal, no problem. So it did nothing. The Fed has a terrible track record, as you would expect, of being able to predict what will happen in the future and be able to deal with it effectively. Two scenarios that are possible. One is that the Fed raises interest rates and is committed to crushing inflation and will raise it and raise them and raise them until price inflation comes tumbling down. In that case, I predict a significant deep and lengthy recession. How lengthy, who knows, how deep, who knows. But it might not be, you know, this economy has this amazing resilience and amazing ability to rebound. So maybe it won't be that long, maybe it won't be that deep, but there's going to be a recession next year and it's going to be significant and it's going to be substantial and it will basically have the potential to kill the Biden presidency, a presidency which is already teetering. The second possibility, and this would happen, this would probably be more likely to happen if there was kind of a Trump in the White House rather than a Biden. Biden is weak. But that the Fed raises interest rates, inflation comes down a little bit and the Fed says, okay, we've done our job and they stop. They actually start to decrease interest rates because it's pressure from the White House, there's an election coming up, we don't want a recession, so there's no recession. Inflation comes down, interest rates have gone up a little bit, there's no recession, interest rates start coming down because the Fed is easing and then inflation starts going up again. That's exactly what happened in the early 1970s and mid 1970s. Every time the Fed would raise interest rates, they wouldn't do it enough as to actually bring inflation down. They would stop before it got there because they didn't want the recession, they didn't want the pain and then they would start lowering interest rates, inflation would start up again and ultimately we got stagflation as a consequence until Paul Volcker basically raised interest rates as much as necessary in order to crush inflation. And of course it wasn't just Paul Volcker, it was the deregulation of the Jimmy Carter and Ronald Reagan. It was the tax reform under Ronald Reagan in 1982 or the tax changes, both increasing taxes and decreasing taxes. And it was the fact that it was Ronald Reagan in the White House and non-Jimmy Carter. All of that together is what ultimately brought inflation down. But none of that do we have right now. I think markets will generally view about public invictory in a week from now in the elections as a positive vis-a-vis inflation. But not a big positive because you're still going to have the problem with the Fed, you're still going to have the problem of a probable. Almost sudden recession and if not a recession then more inflation. So it's likely inflation is going to continue because the Fed won't do enough. And if the Fed does enough, you'll get a deep recession. And that's what we had. So the volatility in the market, not going away. A stock's bottomed out, unlikely. Is a recession fully priced? I don't think so. I don't see it. And nobody knows how deep the recession will be and nobody knows when it's going to happen. So we're still in for volatile times. We're still in for huge amounts of uncertainty economically. There are going to be layoffs. Unemployment is going to rise. I wouldn't be surprised if it goes up above 6%. So no job I think out there is completely safe. I think tech, you're going to see some real layoffs in tech, but you're going to see some real layoffs across the board. You're seeing a slowdown in tech already. Apple is seeing it. Facebook is seeing it. Google is seeing it. It's, we're facing, I think, a tough 2023. That's my prediction. I mean, I hope Republicans coming in to the House and the Senate behave like adults. I hope what they ultimately do is kind of deal with Biden administration to cut spending. I think that's the only thing that will help. They can assist in trying to mitigate the impact of inflation and trying to mitigate the impact of rising interest rates and trying to mitigate the fear. An ultimate fear of government default, of government inability to pay back the debt or the interest payment on the debt getting so large as to be a real challenge. My bigger concern is that the current crop of Republicans coming into the House and Senate don't care about economics. They have no interest in economics. They're not pro-free markets in particular. They're not pro-limiting government spending. They want to spend government money because they want it for their own causes, for their own ability to manipulate the world. They're not interested in bringing sanity to the economic sphere. So I'm worried. Thank you for listening or watching the Iran Brook 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 iranbrookshow.com. 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 those of you who are already subscribers and those of you who are already supporters of the show, thank you. I very much appreciate it.