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Will Stagflation Return To The U.S.? - YouTube
Channel: CNBC
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Investors are bracing for
sharp changes in financial
[4]
markets after nearly three
decades of calm.
[8]
Inflation has exploded in
advanced economies around
[11]
the world. As a result, it
might be harder to find a
[14]
job soon. Forecasters think
global growth is going to
[17]
stall.
[18]
American households are
pretty unhappy.
[20]
And when the households are
unhappy, they tend to spend
[23]
a little less.
[24]
We've had that yield curve
inversion.
[26]
That's something that we're
looking at.
[27]
But I wouldn't say that
recession is on the horizon.
[30]
The next six, 12 months or
so.
[31]
The top financial
authorities in the U.S.
[34]
hope this all blows over
quickly.
[36]
They're making lending more
expensive to control
[38]
inflation before it becomes
a self-fulfilling prophecy.
[41]
But the only tool that the
Fed really has to bring
[44]
inflation down is to let
interest rates rise to
[46]
whatever level it takes to
cause a recession, which
[48]
then breaks the back of
inflation.
[50]
Investors believe the
central bank will lift
[52]
interest rates to 2.5% or
higher in 2022.
[55]
This is what you have to do
slow down the economy in
[58]
order to take that steam
out of the system.
[60]
The steam of inflation,
which eventually can burn
[63]
you really badly.
[64]
The big risk is a repeat of
one of the worst chapters in
[67]
American history.
[68]
Escalating prices.
[70]
You know, the 1970s were a
really hard time.
[73]
Now we're in a new mistake
where inflation has lasted
[77]
longer and looks like it
could risk being around for
[80]
longer than they had hoped.
[82]
Can the Fed engineer its
soft landing or will
[85]
stagflation return to the
U.S.?
[89]
Stagflation describes the
dual threat of stagnant
[92]
economic growth and
persistent inflation.
[95]
It can happen when a
central bank tightens its
[97]
economy in an attempt to
keep prices in check.
[100]
But an unexpected shock
keeps those prices marching
[104]
upward. Inflation hit 8.5%
in March 2022.
[109]
That's the fastest monthly
change since 1981.
[112]
And if you ask anybody, rich
or poor, they're going to
[114]
say, Yeah, I'm definitely
seeing it.
[116]
My food costs, I'm
definitely seeing it when
[117]
I'm putting gas in my car.
[119]
Americans haven't seen
anything like stagflation
[122]
since the 1970s.
[123]
Central bankers call this
era the great inflation.
[126]
That was a decade of
persistent economic
[129]
mismanagement. For years
and years, the Federal
[133]
Reserve attempted not very
hard to control inflation
[137]
and in the end persuaded
itself that it couldn't
[140]
control inflation.
[141]
Meanwhile, fiscal policy
was stepping pretty hard on
[145]
the gas pedal, and that
kicked off around of the
[148]
economy persistently being
overheated.
[152]
As this financial crisis
unfolded, funding for public
[155]
services dried up.
[156]
Cities like New York fell
into disrepair and labor
[158]
unions went on strike.
[160]
Across the country, the
financial problems went
[162]
mainstream. As gasoline
prices ramped up.
[165]
We'd have to line up at the
gas station on alternate
[168]
days, depending on what
your license plate number
[170]
was, and you could get
gasoline.
[172]
And that really led to a
significant inflationary
[175]
spiral.
[177]
Richard Fisher led the
Federal Reserve Bank of
[179]
Dallas from 2005 to 2015.
[182]
Now the chairman of the
Federal Reserve then was a
[184]
man named Arthur Burns
before Arthur Burns.
[186]
They just looked at all the
data and then he stripped
[188]
out one or two variables
gasoline, which is variable
[192]
in price, that is fuel and
energy and then food.
[194]
But by the end, he was
stripping out almost
[196]
everything and he turned
out brilliant economists
[198]
that he was to probably be
the most disgraced Federal
[201]
Reserve chairman in
history.
[202]
1973 dramatized US
dependance on foreign oil.
[207]
He was also struck by some
exceedingly bad luck in the
[211]
form of the two oil price
shocks that were delivered
[215]
by OPEC.
[216]
The Organization of
Petroleum Exporting
[218]
Countries imposed its
boycott and within a year
[221]
raised prices more than
300%.
[225]
That, of course, sent shock
waves through the U.S.
[227]
economy in the form of
higher gasoline prices.
[230]
So you had rising inflation
at the same time that you
[234]
had the unemployment rate
going up, which was
[236]
stagflation. It was against
a backdrop of a lot of
[239]
policy mistakes.
[240]
Already inflationary
environment inflation had
[243]
tripled in the 1960s during
the Vietnam War, but also
[247]
was being forced.
[249]
And there are memos saying
that the changes that they
[252]
were making would actually
some of those policies would
[255]
result in double digit
inflation.
[257]
The Fed's warning to
Washington politicians came
[259]
true in 1974.
[261]
That year, prices across
all categories rose more
[264]
than 10%.
[266]
A new president stepped in
with a plea.
[269]
We must whip inflation right
now.
[273]
The president lost his fight
and prices kept rising.
[277]
Public trust in government
was on the decline.
[280]
When we try to beat
inflation with borrowed
[283]
money, we just make the
problem worse.
[285]
President Carter appointed
the economist Paul Volcker
[288]
to lead the Fed and asked
him to do whatever it took
[291]
to rein in prices after a
decade of explosive growth.
[294]
Mr. Volcker then began to
tighten monetary policy and
[297]
took those interest rates
all the way up to about 18%,
[300]
created a recession, which
was the only way to solve
[302]
the problem of
hyperinflation at the time.
[304]
He became immensely
unpopular.
[306]
There were countless death
threats against Mr.
[309]
Volcker.
[310]
The Fed uses its federal
funds rate to control the
[313]
cost of loans.
[314]
Under Volcker, the federal
funds rate shot to nearly
[317]
20%. High interest rates
discourage investment and
[321]
job creation.
[322]
The 1970s were really the
result of a two decade long
[326]
inflation, the inflation
that Paul Volcker broke the
[329]
back of in a very bloody
manner.
[331]
It was incredibly,
excruciatingly painful.
[334]
And what they have shown
central bankers, not only in
[337]
the United States, but
around the globe ever since,
[340]
is the central bankers can
control inflation.
[344]
And to an important extent,
we've been benefiting from
[347]
the economic dividends
associated with low and
[350]
stable inflation ever
since.
[352]
And all of that is thanks
to the leadership of Paul
[356]
Volcker.
[357]
Wages and prices often play
leapfrog.
[361]
Many things have changed in
the U.S.
[363]
since then. For example,
fewer workers have their pay
[366]
tied to changes in the
inflation rate.
[368]
As a result, wage growth
has stagnated for four
[370]
decades in America.
[371]
Workers at Amazon
warehouses, Starbucks cafes
[374]
and Apple retail stores are
fighting for new benefits.
[378]
Union membership is down
sharply since its heyday.
[382]
If more workers organize,
that could push wages up.
[385]
Investors also seem to
think this inflation is
[388]
different. In the 1970s.
[390]
That episode absolutely
spooked people enough to
[393]
send money flying out of
bond markets.
[395]
When was the last time
inflation was actually this
[397]
high? You're looking at the
early 1980s.
[400]
I think you're pushing
almost 13%.
[403]
And the ten year treasury
versus now, I think we're
[405]
looking at 2.6, 2.7.
[407]
Bond yield data can show how
much people expect prices to
[410]
keep rising. If the yield
rate is high, as it was in
[413]
the 1970s, it means
investors won't fork out
[416]
cash without the promise of
a big payday.
[418]
The Fed can distort these
markets for safe debt, and
[421]
they have for more than a
decade.
[423]
But that era is coming to
an end.
[425]
I would say that over the
next several months you're
[427]
going to see the Federal
Reserve stick to their calls
[430]
and say you might start
looking at reducing the
[432]
balance sheet. And that's
also going to have an impact
[434]
on the bond market, equity
market, as well as the
[438]
consumers and what they're
going to feel their wallets
[440]
as far as what they're
paying for.
[441]
Over time, the threat of
stagflation faded as
[444]
advanced economies relied
on cheaper labor abroad to
[447]
produce goods. An entire
generation of investors have
[450]
enjoyed consistent returns.
[451]
As a result, this upcoming
chapter could be different.
[454]
They need to tighten up on
the money supply and tighten
[457]
up on the stimulus that the
Fed gives to these very low
[460]
interest rates. And I
believe they will and keep
[463]
us from getting out of hand
for investors.
[465]
This is going to be, I
think, a bit of a shock, and
[467]
that's an understatement.
[468]
Investors don't have any
muscle memory of what it's
[471]
really like for the Fed to
actually fight inflation
[474]
versus preempting or just
adjusting rates to be in
[478]
sync with a stronger
economy.
[480]
Expectations of future
inflation are back on the
[482]
uptick. This puts the
central bank in a tough
[485]
position. Over the past two
financial crises, they
[487]
bought bonds at a scale
never before seen.
[489]
Now they're scaling that
stimulus back while hiking
[492]
interest rates. At the same
time.
[494]
What the worry is, is that
there's a lot of law of
[498]
unintended consequences
that kick in as the Fed
[501]
starts both raising short
term rates and then
[504]
amplifying those rate hikes
by reducing their holdings
[508]
of things like Treasury
bonds and mortgage backed
[511]
securities. And there is no
real roadmap to do this.
[518]
Energy prices could be the
source of inflation in
[520]
America for years to come.
[522]
Russia's war in Ukraine
sent gasoline prices up and
[525]
that is making other
products more expensive.
[527]
Well, let's think of a
grocery store you go into.
[530]
It has to be air
conditioned. Secondly, a lot
[533]
of frozen food that takes
energy and one begins to
[537]
build on the other.
[537]
In the 1970s, the
Organization of Petroleum
[540]
Exporting Countries
controlled global supply.
[542]
Opec's actions drove
gasoline prices sky high in
[545]
the past. Today, OPEC is a
partner to Russia, a major
[549]
exporter in its own right.
[550]
The U.S. and its allies
want to wean themselves off
[553]
of this supply.
[554]
During the 1970s, the U.S.
[556]
was a huge net importer of
oil.
[559]
We saw dramatic growth in
the volumes of energy
[562]
provided by oil and natural
gas.
[564]
When the world price of oil
went up, we were hit badly
[569]
in two ways.
[570]
Prices of domestic goods
like gasoline went through
[574]
the roof. And secondly, it
was like we were shipping
[578]
some of our income to for
foreign producers.
[581]
So it was an adverse shock.
[585]
It caused unemployment to
go up.
[588]
The big shift today is that
we produce about as much
[593]
oil as we consume on
average.
[596]
And so when the world price
of oil goes up as a
[601]
nation, we don't suffer
nearly to the same extent.
[606]
Many things remain unsettled
when it comes to the future,
[610]
but one thing is certain.
[612]
That clean energy transition
is not just coming, it is
[616]
here.
[617]
Researchers say climate
regulations will introduce
[620]
new risks to the market.
[621]
The financial industry
could end up favoring
[623]
sustainable assets and
penalizing polluters, but
[626]
demand for both products
will ebb and flow, taking
[628]
commodity prices along for
the ride.
[630]
The swings could lead to a
boom bust cycle that
[633]
regularly affects the
finances of households in
[635]
the states and abroad.
[637]
I would say that this next
decade might look different,
[640]
and with that I would
expect more volatility.
[643]
So what can regular people
do if rocky times are ahead?
[647]
If you're between the age of
18 and 25, the unemployment
[651]
rate in the United States
is 2%.
[653]
It gives workers enormous
bargaining power.
[656]
And this is what's known as
a wage price spiral.
[658]
And we're in the midst of
it right now.
[660]
And the Federal Reserve's
job is to quell that
[663]
pressure by tightening
monetary policy.
[665]
And they're just beginning.
[666]
We do have a labor market
that is finally allowed some
[669]
people to stand in the sun
and see their wages
[671]
increase. That said, that
sort of ease with which we
[675]
find jobs is not going to
be quite as easy.
[678]
This is a difficult period
of time, to be sure.
[681]
Inflation is higher today
than it has been for 40
[684]
years. But I think there
are some reasons for
[686]
optimism. For one thing,
the Federal Reserve has
[689]
credibility today, which it
did not have when Paul
[692]
Volcker took office.
[694]
That credibility turns out
to be a critically important
[697]
asset for a central bank
because inflation, to an
[701]
important degree is a
self-fulfilling prophecies.
[704]
I wouldn't want to be
scared, worried about all
[708]
this uncertainty of what
might unfold.
[710]
I would look at it as an
opportunity where I find
[712]
people get caught and
troubled.
[714]
Most is trying to live the
champagne lifestyle on this
[717]
beer budget, make sure that
every single dollar is
[719]
earmarked, whether it's
going to an investment
[720]
account, a checking
account. Rein it in that
[723]
cash for that rainy day
because that rainy day will
[725]
be coming.
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