So, Larry, I have to say, until Friday, I thought the big story was going to be
what Jay Powell had to say. And then those jobs numbers came in and
obviously the number of jobs is really impressive, but also the average hourly
wage. Wow.
Look, what we saw was a seven and a half percent annual rate wage increase for
the month, a six percent wage increase for the last three months and a 5
percent increase for the year. So it's high and it's rising and the
labor market is strong. And we're still in unprecedented
territory in terms of the gap between vacancies and jobs.
And I think that what that's got to tell you is that we have a long way to go to
getting inflation down where the Fed has said that it wants it to be.
We don't know where this is, how this is all going to play out.
But for my money, the best single measure of core underlying inflation is
to look at wages. It's interesting.
That's what Paul Krugman acknowledged today when he said that he was shaken in
his views by these numbers. And I think what this is telling us is
that the Fed's got a long way to go. So how is that going to happen?
I mean, we heard Jay Powell talk about the JOLTS numbers, for example.
So we've got a big gap between the people trying to get people to work and
the people actually working. So long as you have that, you've got
this pressure. He said we've got to get demand down so
that, in fact, we are not seeing as many people in the workforce.
But how things get done, it's not getting done yet.
It's not getting done yet. What that says is we're probably going
to need increases in interest rates. I suspect they're going to need more
increases in interest rates than the market is now judging or than they are
now. Say, look, every every time they revise
their forecast of inflation up and they regard revise their forecast of ultimate
unemployment up as well. And gosh, we've all been at the airport
and they say it's leaving at seven thirty and then they say it's leaving at
eight thirty and then they say it's leaving at nine thirty.
And when I see that happen, I think it's leaving at 11:00.
And it's something like that with these economic forecasts.
So I hope I'm wrong, but my sense is that inflation is going to be a little
more sustained than what people are looking for.
And my sense also is that it's much harder than many people think to achieve
a soft landing because there are all these mechanisms that kick in at a
certain point, consumers run out of their savings.
And then you have a wily coyote kind of moment where consumption falls off.
At a certain point, people start putting their houses on the market and then you
see house house prices falling and then other people rush to put them on the
market at a certain point. You see credit drying up and when credit
dries up, people can't pay back their old their old borrowing.
So there is this proposition we've talked about before on this show, David.
It's called Psalms Rule that says that when the unemployment rate goes up by
half a percent, it goes up by more than 2 percent.
And that's because once you get into a negative situation, there's an avalanche
aspect. And I think we have a real risk that
that's going to happen at some point. So to continue your airport analogy,
when is the plane going to leave? Because we heard Jay Powell this week
say don't pay as much attention to how fast we're going, because every jump to
the fact he was pretty screwy singing 50 basis wins.
That's only five. He said pay attention, the terminal
rate. I'm not sure the markets did that.
So where do you think the turnaround is now?
Look, I've been saying that relative to the five.
It's priced into the market a little below five.
I think that's got to be low or likely to be low because I always try to look
for possible errors and for seems almost impossible.
And sex is certainly a scenario we can write.
And that tells me that 5 is not a good best guess for where it's going to be in
terms of what will happen. I guess I think there's an old saying
that things happen faster than you think they will.
They don't happen as fast as you think they will.
And then they happen faster than you thought they could.
And I think that may be the way it is with the downturn.
I don't know when it's going to come, but when it kicks in, I suspect it will
be fairly forceful. I got e-mails, you know, Larry, this
week from a loyal viewer of Wall Street, in particular, a loyal viewer of yours
saying, I really love hearing for Larry Summers.
And he asked the question. He said, what's so magic about the 2
percent? I mean, why can't we live with 3 percent
or 4 percent for that matter? First of all, I think it's important to
understand that having failed for a while to hit 2 percent, it's kind of
problematic then to declare that it's no longer our goal, even if it was a
somewhat arbitrary goal in the first place.
Second, we've already backed away from the 2 percent.
In a sense, we've been four years, well above 2 percent and nobody's saying we
should swing below 2 percent. So it all averages out to be 2.
So in some sense we're already not really trying for a 2 percent average
inflation target. We're trying for a 2 percent minimum
inflation target and that's different than what we originally set out to.
So we've already ease. Third, if we settle in for a 3 percent
inflation target, then where do we think it's going to go?
Presumably there's going to be a low point of inflation in this cycle, David.
And from that low point, it will rise. So saying 3 percent as a target for what
we're disinflation to isn't saying 3 percent is an average for the next
cycle. So what I think we should do is stay
with the 2 percent target, recognize in as I think is surely right,
that that's going to be a low point, not an average.
But I think that's all right. There was news that went beyond the US
economy this week and it had to do with China.
We had demonstrations that began in the week.
They seem to be settling down a little bit because they're easing off on the
Covid restrictions. But it's pretty clear that the Chinese
economy is struggling, some in part because of those restrictions.
Give us a sense of what the risks are there for the global economy because of
what's going on in China right now. Look, it's possible that we're going to
gain a little strength because it's quite possible that they are going to
open up a bit in response to these protests and then the Chinese economy is
going to go faster. And when it goes faster, that will be an
impetus to commodity prices that will help parts of the global economy.
I think the challenge for them is that they've only got one fifth as many
intensive care units per person and a third as many nurses as we do per
person, and they don't have much immunity.
And so it could spread like wildfire and they could have a very scary situation.
And that's their tension, really. They can save the economy or they can
save their populations near perfect health.
But I don't think they're going to be able to do both.
And to your point, Larry, it seems to me that we can sit here and say you should
ease up some of your Covid restrictions. They have to be data dependent in their
own way. It depends on how many infections they
get. How many intensive care units are being
used today. They may have to adjust their approach.
They're surely going to have to adjust. They're surely going to have to tie
trait their approach over time. And I don't think it's going to be easy.
I do think sooner or later they're going to have to do this and they're not
gaining a lot by postponing it. So I think a managed exit from 0 Covid
is probably the right thing for them to do.
And I think the protesters have probably pushed them in that direction.
And that's probably a good thing for them and for the global economy.
But it's going to be a very rough patch. Finally, Larry, what is this potentially
mean for the rest, the economy, the global economy?
Because we had David Malpass on this week and he said he thinks there's going
to be recessions and a lot of countries around the world.
I think that's fair. I think that is fairly likely, not so
much because of what's happening in China.
But you've got big challenges in China. We've got a good chance of going into
recession. Europe's more difficult than we are.
Those are the three big poles of the global economy.
And if they all slow, others are going to slow along with them.
And of course, this is going to be a relatively high interest rate recession,
not like the low interest rate recessions we've seen in the past.
And that's also going to be problematic for emerging markets.
What does that say to the Bush administration?
I mean, they've got a new Congress coming in.
They're not going have a majority in the House.
If you were there, now you're back and one of your old jobs in the White House.
What is the best economic policy you could pursue given all the uncertainties
and the risks? Look, they've got to execute what
they've got in place. It's huge on infrastructure.
It's huge on science and technology. They've got to implement that as
effectively as they can. And they've got to lead the world in a
strong response to all these various global challenges.
But they've got their work cut out for them.
Can they invest in global health issues? Because you've always been very
concerned about that. Look, they get the biggest opportunity
today is to put money into pandemic prevention.
Another pandemic is likely to threat is likely to come within 15 years.
And unless we do more, we're not going to be more ready next time than we were
last time.