Trillion Dollar Triage

Slate Money talks the war in the Ukraine, what’s really going on with inflation, and Nick Timiraos’s new book.

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Audio Length: 00:59:01

This week, Felix Salmon and Emily Peck are joined by Wall Street Journal reporter, Nick Timiraos. They discuss the evolving crisis in the Ukraine and what impact (if any) sanctions would have on Russia, all the problems with inflation and how the fed deals with inflation, and Timiraos’s upcoming book, Trillion Dollar Triage.

In the Plus segment: Money markets and the feds as firefighters.

Transcript:

S1: Hello and welcome to the trillion dollar Triage episode of Slate Money. Your guide to the business and finance news of, Oh my god, what a week this has been. I am Felix Salmon of Axios. I’m here with Emily Peck of Axios. Hello, and we are joined this week by the perfect guest for this week. If you are going to listen to one money podcast in a week where war broke out in Europe, it should be. It should be this one because we have with us. Nick Timiraos from The Wall Street Journal.

S2: Welcome, Nick. Thanks for having me. Felix and Emily.

S1: Nick, introduce yourself. You have a book out.

S2: Yes, I cover the Federal Reserve for The Wall Street Journal, and I’ve ridden Trillion Dollar Triage, which is a book about how the Fed and really Congress and the US government responded decisively to the economic shock of March 2020 to prevent a second Great Depression.

S1: I remember the committee to save the world. What was that like 1998? Something like that. And now we have it all over again with Janet Yellen, Steve Minchin and of course, Jay Powell the hero of your book. We’re going to talk about the book. We’re going to talk about inflation. How bad it is. We’re going to talk about how the Fed deals with it, what the Fed’s going to do, how it’s going to do it. But mostly, of course, we have to talk about Russia invading Ukraine and all of the implications of that. We even have a slate plus segment on the money markets which manage to seize up in 2020, much as they did in 2008. There’s a lot of nutting out about monetary policy here, but trust me, it’s a good one. Stay tuned. It’s all coming up on slate money. Obviously, the thing we need to start with is Ukraine, which is at war, there is a major war going on in Eastern Europe right now. Noah Smith says it’s the end of basically 70 years worth of at least people paying lip service to the principles of international law and cooperation in this kind of thing. Seems like a pretty big deal. We should talk about it. Emily, you’re at the nerve hub of Axios, which is covering this from every single angle. So what’s the what’s the big picture from where you are?

S3: Well, I mean, the big picture from where I am, we’re mostly focused on the economic impacts, which obviously lives are at stake here. Russia has invaded Ukraine from all sides. I think the death toll is up to like 170 as we’re recording

S1: what the Ukrainians have come out and said that they’ve killed like 3000 Russians in the first 36 hours, which is probably an exaggeration. But even if it’s 10 times the reality like this is huge death toll in like a completely inexplicable war, which makes no sense to anyone unprovoked.

S3: Yeah. This is Putin’s folly. Essentially, what we were looking at at Axios is the market’s reaction. The sanctions basically. On Thursday, Biden, with the rest of the Western world, tried to cut Russia’s economy off from everyone else, from the US banking system, from Western Europe, except that all

S1: the bits that matter, they carved out these two massive exceptions for energy and for agriculture, which is the overwhelming majority of all of Russia’s exports. And they’re like, Yeah, we’re going to cut you off, except for we’re going to continue to pay you for all of your energy and agricultural exports, which kind of seems Nick Clegg. It’s defeating the purpose. Do you think these sanctions matter?

S2: Well, they matter. I mean, you raise a good point. I think the challenge right now is is you don’t want to aggravate a pretty serious inflation problem and, you know, declining real incomes in Europe with, you know, overdoing it. So let’s take this as a starting place and see, once we get through the winter weather, there’s probably more room to escalate from here. There was also some question I was reading about, you know, whether they were expecting just an invasion of the eastern part of Ukraine or full scale assault in the first round of sanctions may have been calibrated for, you know, less provocation than what we got. So let’s see how things play out over the next week here.

S3: Yeah, I mean, the key to the sanctions is the the coordination with Europe. And I think there was a lot of pushback about on on energy sanctions from Europe, which is already seeing higher energy costs right now as we all are. And you saw, like today on Friday, gas prices going down a bit because they didn’t go that far yet. But I think the administration has said they might.

S1: This is the American administration, which, you know, needs to get consensus on this and specifically, it needs to get the Germans on board. And this is the big one of the big sort of geopolitical decisions. Here is how much do you care about standing up for Ukraine and the principles of international law? Versus how much do you care about energy prices domestically? Because if Europe were to cut off Russia from being able to sell energy to Europe, that would 100 percent hurt Russia. But it would also 100 percent Europe, and it would send energy prices in Europe, which are already at incredible historic highs much, much higher. We don’t know how much, but it would really hurt virtually every single person in Europe and around the world because, you know, all of these things are commodities, and on some level they’re fungible. And if natural gas prices go up in one part of the world, they go go up everywhere else in the world. So that’s, you know, it’s interesting to see how much pain economic pain is the world willing to impose on itself in order to punish the Russians.

S3: Yeah, that’s exactly. That’s exactly it. We know that the U.S. and allies aren’t willing to actually put boots on the ground, and Ukraine, like Biden, has said, we’re not going in there. So then the question is like, what kind of punishment are you going to do and how much of the cost of that punishment are we going to take on ourselves and kind of looks like right now? Not a lot. Like, there’s a lot of tough talk and the sanctions will hurt Russia. And the Russian markets were like destroyed on Thursday, at least, and Friday still looking really bad. But like the West really doesn’t seem willing to take on much of the the hurt here.

S1: Nick, we have a Fed meeting coming up and obviously this is going to be topic number one. They’re going. Say, like we are now in a world at war. How much is that going to affect the American economy? How much is the Fed going to care about that from an economic point of view?

S2: I don’t think this represents a hit to to growth apart from, you know, whatever effects it may have on commodity prices, energy prices you take, whatever the impact is going to be for Europe, it’s going to be something less than that for the U.S. But you know, this couldn’t come at a worse time for the Fed, right? Because this is a negative supply shock. And we, you know, if you look at kind of economic theory, central banking textbooks say you’re supposed to look past these negative supply shocks. They’re a one off. You don’t want to step in to, you know, crush demand if you’re going to have a temporary period of higher prices at the pump. But of course, the Fed just tried ignoring a one off last year with all of the pandemic driven supply shocks. And it seems that didn’t work very well because you now have inflation with the Fed’s gauge this morning, as at six percent, five percent for core inflation. So I think the challenge here for the Fed is really how much longer can you deal with these sorts of escalating prices? The Fed really doesn’t want to see them seep into inflation expectations if the Fed saw evidence that inflation expectations were becoming unanchored. This is the idea that inflation is determined by what businesses and consumers expect it to be in the future. So if it were begin to really drag up future expectations of inflation, that’s a problem. That’s kind of the red siren for the Fed. You don’t see that right now, right? Longer term inflation expectations have moved up, but they’re at the levels that the Fed would be comfortable with. The problem is what happens if you get into the middle of this year. The Fed had been expecting inflation to fall from, say, five or six percent, down to the three percent range by the end of the year. And what if it looks like you’re just not going to get there? You’re going to go with a four and a half or four percent and then you have a second year of labor saying, Gee, maybe I should be demanding five or 10 percent wage increase. That’s, you know, that begins to get baked in. And so I don’t love the comparisons to the 1970s. I think they’re overdone. But you look at the 1973 oil embargo that was a negative supply shock on top of a period in which inflation was already rising. And so you could see why this would raise concern.

S1: Let me just stick on inflation for a minute. We’re going to talk a bit more about inflation, but you mentioned the Fed’s preferred measures of inflation. And famously, when the Fed looks at inflation, it strips out energy prices. Its energy is this very volatile commodity. We don’t have a lot of control over it. So let’s look at what’s happening to what they call core inflation, which excludes energy. Politically speaking, in terms of the Fed’s mandate for stable prices in terms of Europe’s appetite for imposing particularly harsh sanctions on Russia in terms of the effect on election results, you know, when when gas prices are high, energy prices are really, really a big deal there, like the one of the most, the probably the most salient price in the economy. They’re up enormously with this war. They’re going. It looks all of the indications are that they could go up a lot more, especially if the sanctions got tightened further. At what point does the Fed really have to start caring about about energy prices? Or will it just never know?

S2: They have to care about energy prices? Exactly for the reason you lay out that it’s it’s the one thing people pay the most attention to because they put gas in their car every week. They’re buying eggs and bread every week. The Fed looks through it, not because they don’t think it matters, not because they don’t also put gas in their cars and purchase bread and eggs and milk every week. It’s because core inflation has traditionally been a better predictor of future headline inflation than current headline inflation is. But to your question, I think this is a situation where you have to pay attention to higher food and energy prices because it’s when inflation expectations start to react to food and energy prices that you get into a danger zone for a central bank. So, you know, the problem right now is we’re coming off of a year with very high inflation relative to where we’ve been. And you don’t want to risk having it get baked in to expectations of future inflation.

S3: Neil called it stagflation today. He said, right now we’re in a period of boom inflation, which I had not heard before, which is the economy is running really hot, prices are going up, but like everything else, is like kind of good and fun growing. And but now with the Ukraine war, there is going to be a decline like Nick said, and there’s supply shock, which means less stuff, less growth. At the same time, there’s still inflation. So that gets you to stagflation, which I guess is declining economic growth at the same time that prices are going up, which is like a huge bummer and has echoes of the 70s, right?

S2: That seems like a bigger risk for Europe, right than the U.S. I mean, I’m not sure that US consumers, you know, seeing what terrible images we’re going to see over the next days and weeks, it’s not going to change our decisions about whether to buy that bigger house or get in the car that we haven’t been able to get for the last eight months, notwithstanding, you know, potentially higher gas prices.

S3: Is this the point where I can complain about my oil bill or that’s for later?

S1: You can totally complain about your oil bill. Was it high?

S3: It’s double what it was last year. Double, it’s approaching a thousand dollars. That’s crazy. I don’t know. I imagine I’m not the only one with that, with that high of a bill. Right?

S1: Is that feeding into other expenditures? Like, are you saying, Well, I spent so much on oil, I can’t spend so much on.

S3: I mean, I’m very fortunate and lucky and like feels weird to complain about one’s oil bill when there’s a war going on. So please don’t send me hate mail. But yeah, I mean, twice a double the size of last year. It doesn’t. Yeah, it makes you think twice about other expenditures, for sure. It’s not like, oh, the price of eggs went up 50 cents. Like, I don’t know, most people probably don’t care about that, except that the at the lower income levels, but double your oil bill, that’s that’s a lot.

S1: So Nick, this is my question for you. If if people are spending so much more money on oil and gasoline and energy broadly, does that mean that they have less money to spend on everything else? And that means that demand goes down for everything else and the inflationary pressures elsewhere in the economy? Well, you might call core inflation start to abate a bit.

S2: It’s possible. But you know, let’s look at what’s happening with incomes, right? Because if more people are getting jobs, if more people are employed, if nominal incomes are rising, then you actually do have some mechanism to sustain higher prices. I’m sure there’s a point at which you know the phenomenon. You’re describing bites on the economy, but I’m not sure that we’re there yet.

S1: So tell me, I mean, since you’re the great central bank observer, tell me a little bit about that. That part, the sheer number of people out there earning money, having jobs, getting jobs, unemployment rate is very low, but also the employment rate is still, what, four million or so below pre-pandemic levels.

S2: It is if you look at the Prime Age employment ratio, so that’s 25 to 54 year olds, it’s actually quite close now to where it was before the pandemic. We’re back to 2018 2019 levels. It’s a little bit above 78 percent and it peaked above 79 percent. So, you know, there’s a little bit of room to make up there, but not a lot. And I think if you go back to last year and you look at the Fed’s pivot, you know, people keep saying, Well, why did the Fed change so abruptly? Did they finally just throw in the towel on their inflation forecasts? And I think that’s part of it, but only a part of it, the big change.

S1: So wait, wait, wait. So what are we talking about here? Which pivot? Which change of mind?

S2: Sure. When they changed from describing inflation as transitory to saying, You know what, let’s let’s move faster, we’re going to pull forward the end of our asset purchases, and that is really something they’re doing to put themselves in a place to raise interest rates in March. So they did that in November, between November and December. You know, Jay Powell came out and said, we probably need to end the asset purchases sooner. And the reason for that goes back to the employment market. There was a rapid recovery in hiring really in the second half of last year. If you look at the unemployment rate in June, when the Fed was starting to talk about tapering or reducing its asset purchases, the unemployment rate in the U.S. was at five point nine percent. It fell to three point nine percent in December. To put that in context, the last time you saw a two point decline in the U.S. unemployment rate to a level below four percent had only happened once before, and that was during the Korean War. So this was a dramatic tightening of the labor market. And yes, inflation was high. And yes, the October CPI report, which also came out in November, was alarmingly high. You let you layer that on top of the labor market, and that’s really what the Fed pays attention to. They put a lot of focus on the labor market because they think that’s where you see slack or a lack of it. And when the labor market tightens, that’s how their models really begin to say, all right, resource pressure could begin to tighten here. And and so that is really what helped move them away from this idea that inflation was transitory. The other point I’d make is that if you look at their projections that their December Fed meeting, even though they were no longer using the word transitory to describe inflation, they were still projecting this view that inflation would basically come down on its own. They were projecting that inflation would would fall to about three percent, a little bit below three percent at the end of this year and then down to two percent next year. And that’s all happening during a period when the unemployment rate is below the level they think is consistent with stable prices. So there was still this very transitory view to the inflation forecast, even though they weren’t using that word anymore. And I think the big question at the March meeting is, you know, to what extent do they really abandon that and signal, OK, policy needs to get restrictive. That is, we need to raise interest rates above what we estimate as some neutral equilibrium interest rate,

S1: which I mean, this is this is the famous thing which the wonks love to call star, and no one knows what it is. But like, if you had to guess, you know, what is the general fed consensus on that neutral interest rate? Where would you put it?

S2: Well, it’s confusing because the answer to your question is nominal neutral. They think it’s somewhere between two and three percent, right? That’s what they write down in those projections that we call the dot plot. But if you look at the fine print at the bottom of those projections, that’s consistent with a two percent inflation rate, right? So that would be a real neutral rate of zero to one percent. But if you think inflation is going to be at three percent at the end of the year, that means you need to get the Fed funds rate up to three percent. If you think that if that is, if you want rates to be at neutral and if you think inflation is going to be even higher, it means you have even more work to do so. There is really two different things you have to look at right now. It’s where do they see inflation going and over what period of time on top of, you know, what is their estimate of neutral?

S3: The next book makes it really clear, I think, makes a strong case that Jerome Powell was really well-suited to handle the crisis of 2020. He was like a political operator, really had all the connections in place to get to get stuff done and to turn a crisis around. But now, I wonder, is he suited for what’s happening now, which is unprecedented, crazy high inflation? Like, are his tools well-suited for the current moment?

S1: So I guess my question for you, Emily is like if you just looked at the current situation and ask yourself, what qualities would I want in a Fed chair given the current situation? Putting aside the question about whether Jay Powell has them or not, what kind of qualities do you think might be needed?

S3: Well, actually, I mean, he probably does have them. I think the chill qualities of not rushing to raise rates are are probably a good thing, although some would argue no, he should have done it already, too, like tame inflation. But from my perspective, chilling out watching the unemployment rate fall, like letting the economy run hot was good. So the quality is I would want from from Jay Powell are the ability to kind of ignore a lot of the noise and just kind of prioritize the human worker element over the inflation element.

S1: And what we definitely learn from reading this book is the. Apple’s ability to ignore noise even slash, especially when it’s coming out of the White House and you have Donald Trump raging against him on a daily basis is astonishingly well developed and pretty much unrivaled. It was water off a duck’s back. So I think in that sense, he’s he’s going to be quite good at ignoring all of the noise that is coming at him from all sides and trying to, you know, make the best decision he can on the day. But to your point, which I think is a super interesting question for Nick with hindsight, given the amount of inflation we now have given the inflation, it turns out not to have been temporary after all, transitory after all, was that in the eyes of Jay Powell or the Fed a mistake? Would they prefer now, with hindsight, to have started raising Elliott to have started tapering earlier, given their dual mandate is the amount of inflation, we have basically proved that they failed at their job.

S2: That’s a good question. You know, I think if you redo 2021, this is going to sound a little apologetic. But if you redo 2021, if the Fed had started raising rates and say, you know, may or June, what would a one percent increase in the funds rate last year have really changed inflation in 2021? I think the answer is probably no. Would it have left them in a better position for 2022 or 2023? Then the answer is probably yes. But you know, hindsight is 20 20 and they were making, you know, I think in macro, there are two different tribes right now. There are people who think the Fed is behind the curve and then there are people who think the Fed is behind the curve for sensible reasons. Right? I mean, everybody is pretty much in agreement that the Fed is behind here. And so if you go back to last year and people ask me why, how did the Fed get into this position, but I would say is that helps to understand the concern they had going into the crisis that animated their whole framework review, right? This was their lower for longer. They call it flexible average inflation targeting. They had developed a new framework really before the pandemic that said the lower bound which you talked about on your show a few weeks ago is going to be a problem. It’s going to be here are two percent inflation target that we adopted 10 years ago maybe didn’t properly account for it because we didn’t realize we were going to be spending as much time here. And when you’re stuck in the lower bound more often, then you’re always going to be swimming against the current of lower and lower inflation expectations. And we really don’t want to do that. So the pandemic hits, it interrupts this whole review they were doing. And then in the summer of 2020, after they get through the crisis, they come back and they return to it. And so I think the first challenge they had was they implemented this new framework that said, we want more inflation, not because we like higher inflation, but because we want to do it in the service of having a stronger labor market and getting there faster. And they had to demonstrate that this was credible, right? And they talked to Powell in the book and he says, you know, the way that we’re going to prove that it’s credible is we’re going to see inflation rise above two percent and say, Oh, isn’t that interesting? And we’re not going to light our hair on fire and do something about it. The problem, of course, is, you know, jump forward to March of 2021, when the Biden administration approves the $2 trillion fiscal package they were now trying to prove. This new framework was credible, and so they didn’t show any reaction really to the the fiscal stimulus layer. On top of that, some of the forecasting problems that not just the Fed, but most macro economists had last year the predictions that inflation be transitory, the view that it would take a long time for the labor market to heal. The view that you know, the vaccines are going to take us back to the economy we thought we had there weren’t going to be these variants that might keep schools closed for longer, keep labor supply depressed. So those are, I think, some of the mistakes they made last year. And then, you know, the other critique that some have a Powell, perhaps, is that they’ve been too sensitive or concerned about sparking the taper tantrum. So they move very carefully last year to telegraph the taper. They didn’t want to rerun the taper tantrum from 2013. I think part of that reflected, you know, not just concern the ten year Treasury might spike, but you look at what happened in 2013 with the taper tantrum. It was a very violent rush of cash out of emerging market economies. And last year wasn’t a time when you’re trying to get the whole world vaccinated that you really wanted to risk something like that. So. So add this all up. What happens in 2020? They’re trying to prove their credibility to the new framework, which means you maybe have to take more inflation risk. They don’t react to the fiscal stimulus. There are the forecasting errors on inflation and labor supply, and that’s where you end up in October or November of last year, where the unemployment. Rates dropping very quickly, and the Fed says Powell says, wait a minute, maybe we need to move this along a lot faster.

S1: So I want to zoom back a little bit here, because I think it’s worth asking a very fundamental question, which is it is the job of the Fed to try and keep inflation in check. It has one main tool at its disposal for doing that, which is overnight interest rates. Can you explain, especially in the present economy, how moving overnight interest rates up, however, many basis points or points will can should bring inflation down because those two things don’t seem to me at least to be obviously connected, it seems to be a relatively, you know, tenuous thing where you’re you’re twiddling one knob over here and trying to change something over there, which is caused by, if you say, like, supply constraints, Russia invading Ukraine and everything else.

S2: Yeah, the mechanism to slow the economy is to reduce hiring. Right? I mean, at the end of the day, interest rate increases will at some point begin to make it harder to get a job. You’re right, there will be fewer people employed. There will be less growth in incomes. That’s the that’s the mechanism.

S1: But walk me through it. I work for Axios. My my boss, Jim VandeHei is very keen on hiring people. He’s out there hiring aggressively right now, and then the Fed comes along and raises rates by 100 basis points. Why does that change his mind on how many people he wants to hire?

S2: What does the company have a lot of debt to service and does that debt roll over and do the borrowing costs for the company begin to say, wait a minute, the money we thought we were going to put into a new factory or a new team of of podcast producers? Maybe we can’t do that right now. I mean, I like to look at the housing market and what you’ve seen already. I mean, the Fed hasn’t lifted off yet, but effectively they have right because mortgage rates in the U.S. are a percentage point higher than they were at the end of last year. And that is because markets are forward looking. The Fed signaled that they were going to raise rates not just once but several times, and the market has taken that on. So at some point, the cost to purchase a home is going to go up and people buy the house not based on, you know, this house is a half million dollars or a million dollars they buy based on how much their monthly mortgage payment is. And so the interest rate is going to change that. And for some, it’s going to knock some amount of buyers out of the market. Now supplies are so constrained.

S1: Just just to be clear about this, you definitely buy this idea, and I have very smart friends who who definitely believe it too. I’m I’m agnostic, but you buy this idea that there is a pretty strong correlation between what the Fed does in terms of overnight rates and what happens to like long term mortgage rates. If the Fed starts increasing the Fed funds rate, then mortgage rates are going to go up more or less a similar amount.

S2: I don’t know. I think I’m I’m trying to explain the theory of the case. I’m not sure how bought in I am to it. I will say, I mean, they do have another tool right now besides the overnight interest rate, and that’s their balance sheet, right? That’s the nine trillion dollar asset portfolio. They’re buying mortgage-backed securities that’s supposed to to tighten the spread between the mortgage-backed securities and the 10 year Treasury. That reduces the, you know, you’re basically taking duration, you’re taking a form of rate risk out of the market when you buy longer dated assets like 10 year treasuries or 30 year Treasury bonds or mortgage backed securities. So, you know, doing less of that should I don’t I don’t know that, you know, I buy it fully into this hydraulic effect. But it, you know, if there’s if there are fewer buyers of mortgage backed securities because the Fed is buying fewer of them and soon may not be buying any and then may be putting more of them back into the market, someone else is going to have to come in and buy those. The prices will change and the rate will change too.

S3: Isn’t it just like the if the Fed makes money more expensive, people spend less money.

S2: I think the question right now and maybe this is, you know, we’re we’re Felix skepticism comes in is it’s not clear that, you know, one or two or three or four interest rate increases is going to do all that much, right? It may take more than that to really tighten borrowing conditions. And so I’m not suggesting that the first interest rate increase or the second interest rate increase is going to be all that meaningful. But that is the mechanism by which the Fed ultimately will slow demand. Maybe at first it, you know, we see fewer job openings, but there still will be excess demand for hiring. We just won’t have kind of the very, very elevated number we do right now. But at some point, you know, it should affect financial conditions. It could affect, you know, currency markets too, and especially if the U.S. is moving in a different direction from the ECB.

S1: So I think my my skepticism here and I’m not completely skeptical. I still believe in monetary policy to some degree. I don’t think the Fed is completely powerless, but the mechanism by which Fed actions feed into the economy and effect hiring and effect inflation is through, as you say, borrowing. So if the employer has a bunch of debt, especially if it’s short term debt and it’s having to pay a bunch of interest payments every month that it didn’t have to pay last month, then that’s money. It can’t pay on salaries that you know, things like mortgage mortgages, up debt and if they become more expensive than. You can’t afford as much house, and that kind of activity slows down, and it’s all the channel there is dead. Well, it’s

S2: also demand if there are if there were fewer people working to right, you’re slowing, you’re reducing aggregate demand or nominal incomes.

S1: Right. But but the mechanism by which you get fewer people working is that their employers are being forced to spend more on debt repayments and therefore have less money to spend on payroll. So it still is. The channel is still indebted employers and there is certainly no shortage of indebted employers out there. You know, we’ve got we’ve had a big boom in private equity and a bunch of, you know, public companies have been borrowing money to do stock buybacks and that kind of stuff. That means a large amount of debt out there. And so that and so in that sense, I I can see how that works in theory. But debt service is so low for most companies and for most individuals, with the exception of people who bought a house in the last few years. That, you know, it feels to me that debt service on its own isn’t like changing the amount of money that companies and individuals have to spend on debt service. Every month is going to take a long time to feed through into the economy because it’s just not as big as it used to be. It’s just not as it’s not as high up on your on your budget. And you know, companies have a lot of things they can do to be able to absorb a rise in debt service beyond, like having to stop hiring.

S2: I think that’s a really interesting argument because so often in my job, I hear people saying, Oh jeez, the Fed recklessly for the last 12 years encouraged so much, you know, profligacy. There’s so much debt out there that this is a house of cards, and they won’t even be able to raise interest rates by, you know, two percentage points because everything will just come to a screeching halt. Right. So that’s kind of the other side. I’m not I don’t necessarily agree with it, but I hear that argument all the time. If you look at that corporate debt as a share of GDP, it’s at a record high rate. It’s around 50 percent. It’s true that the household balance sheet is much better than it was before or after, of course, after the the financial crisis in 2008. So I don’t worry so much about, you know, problems from the mortgage side. Even credit cards, auto loans, things like that don’t seem terribly alarming. But on the corporate side, you know, you had been hearing even Jay Powell talk about this in 2019. He went out and gave a big speech about, you know, the concerns you were hearing about people and and leveraged loans and clothes and things like that. And you know, one critique of the pandemic response was, well, the Fed had to create all of these facilities to, you know, rescue the the monstrosities that they had created. I don’t make that argument in the book, but I understand some people think that’s what happened. Well, they

S1: kind of didn’t. I mean, I feel like they created a bunch of facilities and then the Fed did.

S2: Yeah, but it was kind of Draghi magic, whatever it takes, right? It was the promise the Fed promising to do this, and people said, Gee, if the Fed’s going to buy a Triple B corporate bond, then I’ll buy it right. I mean, that is what happened on March 23rd, 2020. And what I find interesting about that period is that there was a lot of criticism of what the Fed did there, right? You don’t hear it now because the the the criticism has moved on. We now have all this inflation. People generally regard that period, I think, as a success, the March April crisis. But there were a lot of people right after the CARES Act passed who were very unhappy. They said This is a corporate bailout that we should be, you know, punishing these companies that borrowed too much and they had zero revenue, right? Powell, you know, made a different argument, he said. Look, this is something that we’re going to use the the great fiscal power of the United States to try to get people through. We’re going to build a bridge. You know, I think the concerns there really are on the back end, as I say in the book. You know, it’s it’s a little bit hard to get upset with the firefighters for saving the house, for getting your furniture wet, but you have every right to be upset if there isn’t, you know, review of the sprinkler systems or the brush being cleared around the house after the conflagration. And you and you, you know, we’ve now had twice in 12 years a rescue of the money market, mutual funds, at least some of them. You had a rescue this time of of ETFs. And so if you don’t make the changes during the good times, then you do kind of create a moral hazard going forward.

S3: Yet I hear most of the blame, not not to the Fed spending money and encouraging people to buy or corporate debt, but those last stimulus checks from the from the Congress passed that Biden wanted the $4500. I hear the those blamed for inflation a lot more than I hear about anything else, really. And I wonder.

S1: Yeah. And come come, come down with it with the view from the mountaintop. Disaggregate inflation for us. How much of it is COVID supply shocks, how much of it is fiscal and how much risk

S2: there are going to be some great Ph.D. dissertations and NBER research papers and I look forward to. I mean, look, Canada’s inflation rate was five percent in January, right? Australia has inflation at 30 year highs. There is just a little bit lower. It’s at about three and a quarter percent. In Europe, it’s around

S1: UK is off off the charts. So.

S2: So this isn’t, you know, this isn’t a US only story with high inflation. And I think that sort of should color both how we read the pandemic response, but also our concern about what we do going forward. In some ways, that would actually be more comforting if you were only seeing high inflation in the U.S., because then you could have some confidence that eventually we would import the disinflation from the rest of the world. You know, a couple of questions I have. So was the pandemic response itself to blame and that, you know, on two fronts on the public health side, did we do enough to actually suppress the virus so that people could have comfort, that they could go out and engage in commerce or employment the way they would before without getting sick? And how much of that has kept people out of the labor market, you know, were things like politicizing the wearing of masks helpful? Probably not, right? And then you look at the difference between the U.S. response to creating that bridge to get people across to the other side of the pandemic, whatever that looks like with other countries, you know, in the US that we really relied on the unemployment system insurance system and on PPP. So we spent a lot of money to just keep households flush with cash. And if you look at some of these charts in aggregate, you know there was more money after the pandemic than there might have been if there had been no pandemic Europe. The charts look completely different. There were more of these furlough schemes, right? There was wage insurance, wage replacement, not for replacement, not at 125 percent of what you were making. And perhaps there is less scarring in those economies because you preserved the employee employer relationship and you maybe didn’t have as much, you know, job separation. So I still think the jury’s out on that. But you know, yes, the stimulus checks and Jason Furman, the former Obama administration economist, has made that point, put one log on the fire at a time and sort of putting all of the logs on the fire. That’s his critique, I think, of the of the American Rescue Plan and the stimulus checks.

S1: So tell me about Europe. You mentioned the ECB earlier. How’s the inflation situation looking in Europe and how has the European Central Bank reacting? And obviously, when it comes to things like monetary policy feeding into through the exchange rate channel, like if the if the Fed raises rates much more quickly than the Europeans do, then that makes the interest rate on dollars much higher than the interest rate on euros. And so you get this kind of strengthening dollar and that makes it harder to for Americans to export. It makes it cheaper for Europeans to export. And so, you know, you get all of those kind of channels to monetary policy. So a big part of monetary policy isn’t just the nominal where you set interest rates, but also the relative difference between your own interest rates and Europe’s. So where are Europe’s interest rates right now and how is inflation doing? And how are they looking at exactly the same problems that Jay Powell is looking at?

S2: Well, I think one of the differences between the U.S. and Europe is that if you look at what kind of output or demand or employment, they haven’t fully recovered, right? So the challenge the Fed was looking at in the middle of last year was, Gee, what if we are short of our employment goal? But we’re over on our inflation side and so our mandates are in conflict. And you know, Europe, the ECB doesn’t have a dual mandate, but to the extent you’re looking at an output gap or, you know, full employment, Europe’s probably not as close as we are on either of those. And so I think that makes things a little bit more difficult now that you do have this higher inflation in Europe, you saw Philip Lane, who’s the chief economist to the ECB, give a very interesting interview earlier this week to a German newspaper where he suggested they may have to raise interest rates sooner. Now this was a day or two before the war began. And I’m not sure that, you know, kind of what? All these high frequency developments, how? Now, the war has changed that. But you do see more alarm or concern, I think that may be the high inflation in Europe will require a policy response. You know, the other thing I pay some attention to is just where, you know, people talk about yields in the US being artificially depressed. The Fed has artificially depressed yields. And whether or not you agree with that, I I take some, you know, you look at where yields are in Europe and if you can get a negative yielding, you know, bond, does that make a two percent treasury in the U.S. a little bit more attractive? Even if you think the value should be, the yield should be higher, right? So to what extent has have these other economies kept maybe a ceiling on Treasury yields? And if the ECB does normalize policy faster and you do see higher yields in Europe, could that create more room for yields to rise in the U.S.? I think that will be. That could be an interesting question in the in the months or year ahead.

S3: I have a very basic and elementary question about inflation that I would like to raise because I think about it a lot and I thought about it again reading Neil’s piece today. But like, everyone hates inflation, no one likes price is going up. I just complained for five minutes about my oil bill, very unbecoming of me. But like the economy’s doing really well. Like, I’ve never read about the U.S. job market in my time as an adult. Being this good like you can get, everyone can get a job now you get a job and you get a job and companies are like desperate to hire. They’re doing all kinds of great stuff for workers that you very rarely see them do and like talking about employees while being like, What even is that like, is inflation really that bad? If it’s doing all these great things in the job market, it seems like it’s fine. Like we didn’t have it for a really long time. So we have more than we used to like so what does everyone just need to relax

S1: that you’re so Gen-X I swear to? This is an amazing that we Gen-Xers just have this tiny, tiny sort of atavistic memory of of 1970s, and it probably wasn’t that bad, but like we can half remember inflation, whereas like the millennials have never experienced inflation and they’re like, This is the most terrifying thing in the world. I don’t like run screaming any time you mentioned the Iowa and then the Boomers, I really remember inflation that was terrible. And so like, you get this kind of bubble thing that the young and the old both super afraid of inflation. And I think we Gen X is the only people who aren’t afraid of it.

S3: I see also we should make this a Gen-X podcast like we need to just make it official and slate money Gen X or something. I mean, Emily’s point.

S2: My colleague Josh Mitchell had a piece in the journal this week about why the boom hasn’t raised spirits, right? Why are people so unhappy when objectively, the economy looks good? And he quoted in the piece, and I thought this was interesting. Bill Galston, who’s at Brookings now, but he was the issues director for the Mondale campaign in 1983, and he said We haven’t been in a period of inflation politics for 40 years. Inflation isn’t just an economic phenomenon, it’s a psychological one in politics because it’s a psychological proxy for things. Being out of control and reining in inflation is seen as a sign of leadership because whoever it is is getting life back under control. And so maybe that speaks to some of the unhappiness that that people have right now. Yeah, I mean, you’re right, you can you can get a job, but you go to the grocery store and you go in and get, you know, cream cheese. And the whole section is even like the yucky or flavors that you never like to buy, right? They’re all gone, right? Or you go to the you go to the coffee shop. And that’s the sign says we’re closing noon today because of a staff shortage or because, you know, too many people are out with COVID. So it may just be that, you know, we we we want to have it all right. We want to have be able to get a job, get the great raise and also, you know, not have to deal with some of the Yakuza.

S3: Like the guy in that story. There was like some guy complaining about high prices, but he was like relatively affluent and he was complaining. Like, I think it was like you couldn’t get like a helmet or something for his motorcycle. It was just like, and then he was complaining about the price of a dozen eggs. And it’s kind of like me complaining about oil prices. It’s like he can afford the eggs if they’re 88 cents or a dollar. Forty nine, like it is very psychological and

S2: we want all the benefit of the low cost that the just in time supply chain enabled. But then when you know there’s a disruption, that’s that’s been part because we have these very finely tuned supply chains where we’re unhappy. So maybe you just can’t have spoiled.

S3: I mean, you can.

S1: But that was that was my early take on inflation. When inflation started picking up, I was like, This is wealth redistribution from the rich to the poor? This is basically, you know, the people who used to serve as ice cream, you know, and now getting paid $15 an hour instead of $9 an hour. And the ice cream becomes more expensive. But it’s good inflation because it means that we’re reducing inequality and we’re paying, you know, low earning hourly wage earners more money. And so, yeah, you know, we might feel a bit uncomfortable about it, but it’s it’s a good thing when it comes to like, well, actually, what’s happening is we’re paying Russia a whole bunch of billions of dollars for natural gas so they could invade Ukraine. That’s bad inflation. That’s like, no, no good can come of that, quite literally. All right. I’m going to ask you in slate class about I’m going to pick up on something you said about the twice in the past 12 years where we had a major money market crisis. And this is something I really want to ask you about, though that is coming up in Slate Plus. But before we get there, I think we need the numbers round Emily. Do you have a number?

S3: Yeah, I have had so many different numbers and then I just decided I’ll do this one two point eight percent. That is the percentage of workers who said they were retired in January 2021, who are now back in the labor force in January 20. The UN retiree is which I’m lowkey obsessed with on retirees. If you want, you can email me if you are an UN retiree. So and the COVID pushed a lot of older workers out of the job market for kind of obvious reasons. Maybe they were laid off. Maybe they don’t want to get sick and die by working or and stuff like that. And they also pushed down. COVID also pushed down the UN retirement rate, which apparently not everyone just retires and like walks off into the sunset. Some people retire and then they’re like, You know what? Maybe I want to work a hard target or Home Depot or like, do some consulting or whatever. But those rates kind of dropped and COVID. And now they’re they’re picking up. And that seems like kind of a good thing. Like, I don’t think it’s a matter of like old people feel really poor and have to go to work.

S1: I think the timing is is kind of awesome. We saw it a lot in the 90s, boom in the dotcom boom that so much. For jobs that people would come out of retirement and take a whole bunch of jobs and everyone.

S2: Certainly this is good. So Emily, are you going to? Are you going to call that the UN, the UN resignation, the mild UN resignation?

S3: I should have done that in my lead. I kind of thought about it and then I was like, You know what? I’m tired of the great acts like, I don’t. I’m not saying it, but maybe I should give the great un retirement.

S1: Not everything has to be great. My number is 481, which is one of those wonderful Zillow numbers, and it is the number of cities where, according to Zillow, the typical home value is now $1 million or greater.

S3: Wow. Hundred and eighty

S1: for 481 now, that definition of city is small. So like 75 of those cities are in like the broad like New York metropolitan area, but still it’s, you know, the place where you live, where the typical home is a million dollars. It is no longer. Well, of course, it’s a million dollars. You live in New York or San Francisco or, you know, Miami, it’s now across the country. You can find those places is very, very normal.

S3: Things have changed from when Nick and I first met and he was covering the housing crisis and was like running around to places where all the houses were empty and foreclosed upon. It’s crazy to think about that.

S2: We were writing about peak to trough declines of 67 percent in Las Vegas. I mean, you wouldn’t even believe it now.

S1: I’m pretty sure Las Vegas is on that list. I needed to look at that. Nick, what’s your number?

S2: My number is 65 percent, and that is the increase in the level of the average U.S. bank account balance for low income households since 2019. So the JPMorgan Chase Institute, you know, tracks this. They break it into quartiles, and so that’s the bottom 25 percent. Now granted, that is a large percentage increase for a low number. We’re talking about an average balance of under $1300, and it’s down from it was even higher was 125 percent last March. After those stimulus checks, the last stimulus checks went out. But still, I think that it speaks to the strength of the household balance sheet through the crisis that we’ve had. There was a New York Fed survey this past week. It’s has a relatively short history eight or nine years, but it showed income and spending growth expectations or at their highest level, so that survey and the probabilities of missed loan payments are near record lows. So, you know, I think this has helped like nobody likes the inflation that we have right now, obviously, but just a completely different type of recovery from what we saw 12 years ago.

S3: Yeah, it’s good. It’s good stuff.

S1: Can we finally put to bed one of the most annoying the memes in like populist financial journalism where people trot out the percentage of households that couldn’t make a $400 emergency purchase?

S3: Yes, yes. I would love to retire. What is up with that data point?

S1: It needs to be tortured dumb data point and never made any sense. But it makes even less sense right now, as Nick says, like the typical checking account for a member of the bottom 25 percent is $3800. So let’s just like stop talking about that $400 emergency, please. Nick, that’s task to you. Please don’t mention that $400 emergency number ever noted. Thank you for coming on the show. It’s been awesome having you. Thank you. We are, as I say, you’re going to be talking to you on sleepless about money markets. We love all of you guys emailing us slate money at Slate.com. Many thanks to Shannon Roth for producing. And we’ll be back next week with more slate money. OK, Nick, this is nerdy. So I kept it for the late last, but it’s something I was really interested in. We had the in the money markets seize up in 2008. We had the money markets seize up in 2020. And when I say the money markets I have, I do not mean necessarily, you know, the reserve fund money, money, money market, mutual funds, money market funds, that kind of thing. I basically mean a very technical, very large, very liquid market out there with financial institutions and banks and hedge funds. Borrowing and lending money often secured money like in the repo markets at terms between overnight and call it, 90 days. It’s a very, very liquid, but also like. Most of the time, no one ever thinks about that kind of market, and it’s very important that it works, and most of the time it works very smoothly and sometimes it does, doesn’t work at all. And what while the Fed mostly cares about employment and inflation, they also care about macro prudential just making sure that all of the tubes a well-oiled and and and the markets just cease to function. So can you explain why it is that whenever we have a crises crisis these days, these short term debt markets stop functioning and the Fed has to come in with emergency liquidity and try and be a firefighter?

S2: Yeah, really, really. You know, the title of my book Trillion Dollar Triage goes back to this period of time. You know, March 11th, the Fed sees that there are serious strains in the markets, and so they try one thing. This was in the repo market, a different type of short term lending market. And they say, we’re basically going to, you know, they said they would do a trillion and a half, but that really meant unlimited repo financing didn’t work. Money wasn’t getting through the pipes. So they came in that Friday, March 13th, and they said, All right, fine. We’ll buy Treasury securities direct and we only have authorization right now to do. You know, I think it was $60 billion. It was 60 billion minus whatever they had already bought that month. So they said well by $37 billion of treasuries today. That gets them through to the weekend. You had the big Fed meeting on Sunday, March 15th. They said they would buy $750 billion of assets, which sounded like a lot. And then you get to Wednesday, March 18th, which was probably the very worst day of this. And I remember, you know, we’re all we’re all like pretty much working from home at that point. That was the week things started to close. I wasn’t feeling great. I remember going to sleep earlier that night and then I was woken up at 11:30 because the Fed was doing this money market mutual fund facility, and I had to write a story about it. And yeah, you know, when the Fed is announcing emergency lending facilities at midnight, that’s probably a sign that there’s some urgency. And so that’s what was happening here was there was just there was a dash for dollars. There was a run. Everybody wanted cash. Everybody was selling whatever they could to get cash. And there was a concern that there would be such severe liquidations in these in these funds that there would be runs on them. And so Eric Rosengren, who was the president of the Boston Fed, is telling them he’s hearing from a lot of these asset managers and he’s telling the board, we need to do this now. We need to. And what’s interesting about Rosengren is, you know, he was the one who was unhappy after the last crisis, and he had written op ed in the Wall Street Journal saying, We really need to to fix this. And then the solutions that the FCC had come up with. He wrote a piece saying these are not adequate. In fact, all of the reforms that are being proposed are they’re going to do is they’re going to speed up the run because they are going to investors are going to see that these redemption gates are going to come down. There were different kind of mechanisms being deployed to try to try to prevent the run from happening. And Rosengren said, no, all you’re going to do is actually accelerate the run you’re just going to. Investors are going to see that these things are going to happen and they might not be able to get their money back. And so it’ll just move up the period of time at which they demand their money back. And he was right. I mean, that was pretty much what happened in that week of March. Now, obviously, it was for completely different reasons from, you know, a manmade crisis in 2007 and eight. But nevertheless, that was, you know, it was just a. And having gone through 2008, I don’t think people had a whole lot of tolerance at the Fed to say, Well, let’s let this go a little bit longer and see what happens. Right?

S1: So explain to me what the problem is like. The whole reason why we have a central bank. The whole reason why we have, you know, the FDIC is precisely because sometimes you need the government to just come in and backstop shit. And if every so often you have a major global catastrophe and there are weeks where the government needs to come in and backstop? Isn’t that like why the Fed exists? Why are people upset that the Fed had to do this? Isn’t that just its job?

S2: Well, you mentioned the FDIC. I mean, you do have deposit insurance that’s paid, right? So you’re paying for the sovereign guarantee of the of the account, and that doesn’t really happen in the money market space. There’s no, you know, you’re not paying something so that if you call so the

S1: the problem is that the people who are paying playing in the money markets, in the repo markets and stuff, whereas banks will write checks to the. See, every year, you know, to pay for that insurance. No one, no one is paying for this insurance that they have from that.

S2: There’s an implied guarantee, right? But you know, there’s no.

S1: But if we made the FDIC free, would that actually change anything? Would that be worse

S2: if you got rid of having to pay for the premium, the insurance premium? I don’t know. I mean, you would still have banks being regulated. You would still have somebody looking over. Well, would you? I mean, would there be an incentive to do even adequate regulation if if you know you didn’t have? I don’t know how the I don’t know how the market enforcement mechanism would work there.

S1: I just feel like there isn’t a market enforcement mechanism, I feel like the enforcement mechanism with the FDIC is the FDIC. It comes in and it breeds down your neck and it says you have to change this and then you change it.

S3: So you’re saying we need to do FDIC for these other kinds of of markets and accounts?

S1: I guess that’s my question. It’s like it’s like when people get upset the Fed. Jumps in and bails out the money markets. Have you seen now that we’ve had this twice? You know, we’ve gone through this twice. Have you seen a sort of fleshed out proposal by anyone that would create a system where there would be the fixes that problem insofar as it’s a problem?

S2: I’m sure there are white papers that have been drafted that have various recommendations for how to, you know, how to address this. There’s a great exchange. The great thing about covering the Fed is you can go back and read the transcripts they come out. After five years and during the debt limit standoff in 2011, they’re talking about their concern of a run, another sort of money market episode, right? If the government can’t pay, Treasury is on time. There could be some problems there. And and Bernanke basically says these things should not exist, but they do, and they should be regulated better, but they’re not. So this is kind of where we are right now. We have to accept the world as it is. And I think a lot of times, you know, that’s the issue the Fed faces as they don’t get to choose between some, you know, third course that doesn’t exist. They have to take what’s in front of them and deal with what you know with what’s given them at any at any moment. And the challenge here is a lot of times the firefighter in this case, the Fed isn’t also the regulator. You know, they’re not the S.E.C.. They don’t have the powers to regulate some of these things, but people expect them to be the lender of last resort in a crisis. And so you end up with sort of an arbitrage, you know, regulatory environment.

S1: So tell me about the regulatory arbitrage. Like what? Where is the moral hazard in this system? Who, who got away with what they shouldn’t have ideally been allowed to get away with?

S2: Well, I think it’s too soon to say because we want to see what actually.

S1: Well, I mean, talk to me about 2000.

S2: Let’s see. Let’s see what the Financial Stability Oversight Council or the various working groups that Janet Yellen has. Let’s see what they come up with. But you know, I’ll give an example. So the Fed bought ETFs in this crisis in 2020. They had never done that before, right? They were buying corporate bond funds and there are liquidity mismatches inherent in an ETF of a fund of illiquid assets. Right. And so if you don’t find a way to better regulate them or to make sure that you don’t have this problem again in the future, then the likes of BlackRock or other purveyors of these products, they, you know, you could argue that they have a free Fed put, right? And so it’s, you know, when you don’t want to worry about these things, when it’s raining and there’s a hole in the roof. But when the sun is shining, that’s the time to fix these things. And the critiques that people have, the unhappiness that people have about the Fed being irresponsible in 2020 will be more salient. Those critiques will be more salient if three or four or five years from now, we haven’t gone back and done an examination of why did we have to do this? And you know, you could make the case that a pandemic was the 100 year flood. And, you know, the Fed, the Fed,

S1: I wouldn’t I wouldn’t make that case at all. I’m just going to make the case that bonds, by their nature, are illiquid animals, that a company has one class of stock most of the day and it’s just out there and it trades and there’s billions and billions of dollars worth of that stock trading in a liquid manner every day, every minute. And you know, it has, I don’t know what, 300 different series of bonds, each of them with a different coupon, each of them with a different maturity, all of which like wind up coming to maturity, getting paid off and having to get reinvested the whole time the bid offer spreads much larger. There’s no like smooth electronic trading venue for them because there’s just too many of them. And that, by their nature, corporate bonds and any bonds basically that aren’t on the run treasuries are going to be much less liquid animals. And in times of crisis, the unlike the illiquid animals seize up in terms of in terms of their liquidity. That’s what that’s what a crisis is. And I kind of feel like that’s inevitable and there’s nothing anyone can do about it.

S2: Yeah, that may be true. But then I think you have to consider sort of what happens if there’s a backstop for this particular group of borrowers, but not for companies that don’t issue in the in the bond market, right for middle market companies or small businesses? I mean, you do you end up creating, you know, distortions in the economy. You’re basically encouraging people to get, you

S1: know, I think I think that

S2: in the crisis of the Fed is going to do corporate QE in the next downturn, then you know, the message is get big enough an issue in that market so that the Fed will be there to save your back. You know, you end up these are, you know, these are things people should be thinking about it at periods like right now where we’re not fighting a five alarm financial fire.

S1: Absolutely. And yeah, I remember a lot of alarms going off in the financial crisis in 2008 about this stuff called a BCP, which like, did we hear about CBCP this time around? No, we didn’t. It was a problem in 2008. I guess it wasn’t a problem in 2020. So like, some problems do get fixed.

S3: Props to the FDIC that I mean, next book is like everyone was crossing their fingers. There wouldn’t be bank runs and like, that’s just not a thing people do anymore. Everyone trusts that their money is going to be in the bank.

S1: Well, I mean, that’s partly because we doubled the deposit insurance during the financial crisis.

S3: Great. It’s great. Like, it just works really well. It’s it’s kind of amazing.

S2: We dropped so much money on the economy that we didn’t really have to see if the reforms of 2009 10 right because we made sure the heat never reached the banking system.

S1: Thanks, Nick.