♪.
LARRY: FORMER OBAMA TREASURY
SECRETARY LARRY SUMMERS WRITES
IN A NEW OP-ED THAT THE FED IS
CHARTING A COURSE TO STAGFLATION
AND RECESSION?
OKAY?
I AGREE WITH THAT.
I WANT TO MAKE A CORRECTION
THOUGH.
HE WAS OBAMA’S NEC DIRECTOR.
HE WAS ACTUALLY TREASURY
SECRETARY UNDER BILL CLINTON.
NOW, JOINING ME TO TALK ABOUT IT
ALL, WE HAVE ART LAFFER, FORMER
REAGAN ECONOMIC ADVISOR,
PRESIDENTIAL MEDAL OF FREEDOM
RECIPIENT, SCOTT GUGGENHEIM --
SCOTT MINERD, GUGGENHEIM.
THE FED DOES THIS PUNY ONE
QUARTER OF A PERCENTAGE POINT,
BLAH, BLAH.
SUMMERS WROTE A VERY GOOD
EDITORIAL.
I DON’T KNOW IF YOU CHAPS SAW IT
OR NOT.
I ACTUALLY RECOMMEND IT TO YOU.
I DON’T THINK YOU WOULD DISAGREE
WITH ANYTHING ABOUT IT, BUT
BASICALLY, ART, SUMMERS SAYS
STAGFLATION TURNS INTO
RECESSION.
WHAT DO YOU THINK?
>> HE WROTE A GREAT ARTICLE.
FOR LARRY SUMMERS, LARRY SUMMERS
IS A GOOD ECONOMY.
HE MAY NOT LIKE US ALL THAT
MUCH, LARRY, BUT HE IS A DAMN
GOOD ECONOMIST AND HE IS CALLING
THE CARDS STRAIGHT HERE.
I BELIEVE HE IS IS RIGHT AND
WHAT HE IS BASICALLY SAYING WHAT
I CAN TELL, NEED TO RAISE
INTEREST RATES HIGH ENOUGH IT
EXCEEDS INFLATION BY FOUR OR 5%
WHICH IS EXACTLY WHAT VOLCKER
DID ON JANUARY 20th, 1981.
THE PRIME INTEREST RATE WAS
21 1/2%, LARRY AND INFLATION WAS
IN THE MID-TEENS.
GIVING US 5% REAL INTEREST RATE
SUFFICIENTLY HIGH TO BRING DOWN
INFLATION OVER THE NEXT YEAR OR
TWO AND THAT’S WHAT’S NEEDED
RIGHT NOW AND POWELL IS JUST THE
WORST OF THE WORST AND HE IS
BEING SO CAUTIOUS IT WILL END UP
THE WAY LARRY SUMMERS SAID.
IT IS UNFORTUNATE BUT IT IS
TRUE.
LARRY: SCOTT, I KNOW FROM TIME
TO TIME YOU ADVISE THE FED, GOOD
THING THEY LISTEN TO YOU MORE,
ONE OF THE POINTS SUMMERS MADE
THE FED HASN’T INTERNALIZED THE
SCOPE OF THE PROBLEM.
THEY’RE STILL KIND OF THINKING,
WELL, WE WERE UNDERSHOOTING THE
TARGET, SO NOW WE CAN OVERSHOOT
THE TARGET.
THEY’RE OVERSHOOTING TARGET BY 8
PERCENTAGE POINTS, THIS IN THE
REAL WORLD GOING TO BE A VERY
DIFFICULT PROPOSITION TO BREAK
THE BACK, NOT ONLY OF ACTUAL
INFLATION, SCOTT, BUT OF
INFLATION EXPECTATIONS WHICH I
THINK ARE MORE AND MORE EMBEDDED
INTO THE ECONOMY?
>> WELL, IT IS INTERESTING,
LARRY, I WAS INVOLVED IN THOSE
DISCUSSIONS ABOUT THIS INFLATION
AVERAGING CONCEPT WHICH I FOUND
VERY NEBULOUS AND IF YOU WANT TO
GO WITH INFLATION AVERAGING YOU
KNOW, THE DEBATE WAS ALWAYS
AROUND, WELL WHAT AVERAGING OVER
WHAT PERIOD?
IF YOU GO BACK FOR THE LAST 10
YEARS THE 8% RATE OF
INFLATION,AWAY OVERSHOOTING THE
10-YEAR AVERAGE AT THIS POINT.
SO YOU’RE RIGHT AND YOUR COMMENT
ABOUT STAGFLATION IS I THINK
ABSOLUTELY RIGHT TOO.
AND STAGFLATION AS ART WELL
KNOWS THE ONLY WAY IT ULTIMATELY
ENDS IS TO INDUCE A RECESSION
WHICH IS WHAT THE MARKET NOW HAS
STARTED PRICING FOR WHEN YOU
LOOK AT THE SHAPE OF THE YIELD
CURVE.
YOU KNOW, I THINK THAT THE FED
IS TOTALLY MISGUIDED.
I THINK THEY’RE EMBRACING A
POLICY FROM THE 1970S OF
TARGETING SHORT-TERM RATES,
BELIEVING THEY HAVE SOME MAGIC
IDEA OF WHERE SHORT-TERM RATES
SHOULD BE AND RATHER THAN JUST
YOU KNOW, LET’S GET BACK TO THE
BUSINESS OF PAUL VOLCKER, WHICH
IS WE’LL MANAGE BANK RESERVES,
WE’LL MANAGE THE SIZE OF THE
BALANCE SHEET, WE’LL STOP IT
FROM GROWING AND, WE’RE GOING TO
ACCEPT THE NEW HIGHER PRICE
LEVEL BECAUSE WE’RE NOT GOING TO
PUSH THE ECONOMY INTO DEFLATION
BUT LET’S LET THE MARKET SET THE
RIGHT PRICE AND GET RID OF
INFLATION RATHER THAN POLICY
THEORIES.
LARRY: THAT IS THE THING.
POWELL, I DON’T KNOW EVERYTHING
HE SAID TODAY BUT POWELL IN THE
PAST, THE RECENT PAST DISDAINED
IDEA OF QUANTITY OF MONEY, SIZE
OF THEIR PORTFOLIO, ALL THAT
STUFF.
HE THINKS IT IS SOMETHING THAT
WAS 40 YEARS OLD.
ARTHUR, ONE MORE POINT, ONE MORE
POINT SUMMERS MADE, THERE ARE NO
RULES ANYMORE.
IN OTHER WORDS THEY USED TO HAVE
A 2% INFLATION RULE.
NOW DOWN THROUGH THE YEARS YOU
KNOW, WE’VE LOOKED AT A
COMMODITY PRICE RULE.
IF YOU LOOKED AT COMMODITY PRIZE
RULE, THEN THE FED FUNDS RATE
SHOULD BE ABOUT 10% TODAY OR
MORE.
COMMODITIES HAVE BEEN SOARING.
THEY DON’T USE THE TAYLOR RULE.
THEY DON’T EVEN PUBLISH TAYLOR
RULE IS NOT EXACT BUT TAYLOR
RULE IS 9 1/2 FED FUNDS RATE.
ONE QUARTER PERCENT, VERSUS
9 1/2%.
THEY ARE RUDDERLESS, ARTHUR.
THIS TIME PEOPLE ARE TELLING US
THEY WERE TOUGHER THAN WE
THOUGHT.
I DON’T KNOW WHAT THAT MEANS.
THERE IS NO RULES.
THERE IS NO EPBENCHMARK, THERE
IS NO NOTHING, ART LAFFER.
>> WELL I THINK POWELL IS A
ECONOMIST, PLAYED ONE IN A MOVIE
ONCE.
JUST JOKING, LARRY.
HE DOESN’T UNDERSTAND THIS
STUFF.
IT IS JUST RIDICULOUS, WHAT HE
IS DOING HOPING UPON HOPE, WHAT
THEY ALL ARE DOING, PLEASE LET
IT COME OUT -- THEY THINK RANDOM
SET OF EVENTS AND THERE IS NO
MODEL UNDERLYING.
LARRY SUMMERS IS POINTING THAT
OUT VERY CLEARLY.
MY THOUGHT THE 10-YEAR BOND
YIELD SHOULD BE SOMEWHERE IN THE
RANGE OF 14, 13%, SOMETHING LIKE
THAT.
PRIME INTEREST RATE SHOULD BE
VERY HIGH AS WELL.
ALL TO MAKE REAL RATES HIGH SO
PEOPLE BRING BACK DOWN, WHAT
SCOTT SAID IS TOTALLY CORRECT.
YOU SHOULD LET THESE BALANCE
SHEETS ROLL OFF AND ALL THE
GOVERNMENT SECURITIES ROLL OFF.
LET MARKETS SEEK THEIR OWN
LEVELS BUT THESE GUYS ARE NOT
AND THE LONGER THEY HOLD THE
RATES LOW.
THE LONGER THEY BUY MORTGAGE
SECURITIES, THE LONGER THEY
EXPAND THE MONEY SUPPLY THE
WORSE IT IS GOING TO GET.
LARRY: SCOTT, WE’RE RUNNING OUT
OF TIME LIKE WE ALWAYS DO, BUT
YOU’LL SEE, SCOTT, WALL STREET,
THE STOCK MARKET, NO ONE IS IN
TUNE.
WE ARE, WE AND SUMMERS AND I
RECKON JASON FURMAN, PEOPLE WITH
JOHN COCHRAN I WILL PUT IN WITH
OUR GROUP, THEY’RE NOT LISTENING
TO US.
THE WALL STREET IS NOT LISTENING
TO US.
THE FED IS NOT LISTENING TO US.
THAT IS ANOTHER REASON, SCOTT I
THINK IT WILL END VERY
UNHAPPILY.
>> YOU KNOW, LARRY, I HAVE A
SCENARIO WHICH IS EVENTUALLY
SOMETHING WILL GIVE HERE AND, IT
WILL BE SELL-OFF IN THE STOCK
MARKET, IT WILL BE SOMETHING,
AND THE FED WILL RESORT TO THE
OLD PLAYBOOK WHICH IS FLOOD THE
SYSTEM WITH LIQUIDITY AND
ULTIMATELY I THINK WE’LL BE IN A
WORSE PLACE THAN WE ARE TODAY
BECAUSE NOBODY THAT I CAN
IDENTIFY HAS A CLUE OF WHAT
THEY’RE DOING RIGHT NOW.
LARRY: YEAH.
YOU KNOW, I HATE TO SOUND --
>> HERE, HERE.
HERE, HERE.
LARRY: I HATE TO SOUND SO
PESSIMISTIC THIS.
IS FIXABLE PROBLEM.
WE LEARNED FROM THE PAST.
CAN I JUST ON THE WAY OUT,
SOUNDER MONEY, STRONG RELIABLE
KING DOLLAR, LOWER MARGINAL TAX
RATES, DEREGULATION AND RIGHT
NOW THAT WOULD INCLUDE DRILL,
DRILL, DRILL.
YOU KNOW, ARTHUR, YOU HAD IT
RIGHT 40 YEARS AGO.
YOU HAD IT RIGHT 40 YEARS AGO.
WE’RE ALL YOUR FOLLOWERS.
THEY’RE NOT LISTENING.
UNFORTUNATELY THE MIDDLE CLASS,
WORKING FOLKS WHO WILL PAY THE
PRICE FROM THIS BLOODY INFLATION
TAX JUST LIKE THEY ALWAYS DO.
I GOT TO GO.
I’M SORRY.