So, Larry, it was quite a week this week for economic numbers, certainly the
United States, we had the CPI numbers, we had the PPA numbers.
We also had retail sales numbers. And my what I took away from it is, you
know what? We're not close to a recession, that's
for sure. On the other hand, that inflation is not
coming down very fast. Do we need to rethink exactly what we're
doing as we try to approach inflation? David, here's how I think about it.
The Fed's been trying to put the brakes on and it doesn't look like the brakes
are getting much traction. And when your brakes don't get much
traction, two things happened. You can be moving too fast.
That's the inflation pressure and you can be setting yourself up for some kind
of collision or crash down the road. And both of those things, I think, are
real risks in this environment.
We clearly have an economy where demand is super strong.
The highest ratio of vacancies, unemployment we've ever seen, retail
sales on fire. The economy creating jobs faster right
now than population growth by a factor of five in the latest month.
If you look at the broadest measures of inflation, the median inflation
component at its highest rate in 40 years, running close to 7 percent.
A general broadening of price pressures. So that has got to cause real concern
about inflation. It's got to at least raise a question
about the paradigm. Market observers have had of how many 25
basis point increases before the long pause and move towards decrease.
It raises the possibility that we're not landing at a terminal rate sometime in
the next several months, or that we're going to have to go back to hitting the
brakes harder by more than 25 basis points.
At the same time, the Fed has to be very careful.
I don't think those who think inflation is slowing.
Therefore, it's obvious that we've got to hit the brakes very hard necessarily
are right. Because if you look at accumulations of
inventories, if you look at what's happened to the savings rate, if you
look at how many firms have built up their payrolls.
If you look at signs of a bit of euphoria coming back into some stock
markets, you'll also have the possibility of that wily coyote moment
that I've been referring to that could come not next month, but could come
sometime in the next few months. So, Larry, to oversimplify this, let me
give you a multiple choice quiz here. The Fed in March, 50 basis points rather
than 25 or stick at 25 and add another 25 or two down the road or do we just
not know? I think we all know the case for moving
slowly is that when you move slowly, you preserve the option not to do the last
move. Once you're sure that a move is
necessary. I don't think there's any great
advantage to delaying that move.
And so that's why I think there are more possibilities open at this point.
But I think the risk is that we're going to hit the brakes very, very hard.
And then when we hit the brakes very, very hard, that's going to kick in at
the same time that some of those negative cyclical dynamics about rising
savings and excess inventory and so forth are kicking in, and that could
produce the the dangerous drop off. So let's go for the Fed to the fiscal
side, for the monetary the fiscal side. We had a CBO report out that said
actually the debt situation is worse than we thought.
As we are now confronting a debt ceiling deadline sometime this summer, we're not
sure exactly when it is. How bad is the problem and what do you
look at as a macro economist to figure out how bad the problem is?
Because one of the issues is the more we have to service the debt, the less money
we have to spend on other things that might be investments in the economy.
Look, I think that CBO report is concerning.
And while there are lots of puts and takes, my guess is that the ultimate
debt trajectory may well run higher than CBO is say.
It assumes that Fed Funds is going to settle for the long term at two and a
half without there being a recession. That strikes me as having much more room
to be too low than to be too high. CBO does its job, which is predict
current policy. But my guess is that spending in the
national security area is going to have to rise.
Frequently over the next decade, given the threats that we are facing, CBO does
its job, it assumes current law, which is that all the tax cuts legislated in
2017 are going to phase out in 2025. But I'd be surprised if that was
actually true. And so you add all that up and I think
that where they're looking for debt to GDP ratios to go to 120 percent of
debt, an increase of about 20 percent over a decade.
My suspicion is it could easily be 30 percent over a decade.
And that in turn will push put pressure on interest rates, which will put
pressure on the increase the deficit.
And so you get a little bit of a vicious cycle.
I don't think this is an imminent emergency.
I don't think it's something that will be any kind of crisis if it is not dealt
with this year.
I think those who somehow use fiscal concern as an excuse to not raise the
debt limit are exacerbating all of the fiscal risks.
But I do think we've got to recognize that less
interest rates really revert to very low levels, which is certainly possible.
That is what happened in the era of secular stagnation that I think we are
going to have fiscal problems and fiscal challenges that we are going to have to
address. Finally, Larry, next week, the G 20
finance ministers and central bankers will be meeting over in India.
They've got a fair amount to address here.
So what you've raised on Wall Street before, for example, some of the debt
relief that needs to be given to some of the poorest countries in the world and
also what we're going to do with climate finance for some of those poorest
countries. What are you looking for in the G 20
meetings? I hope that we're going to see
continued good work along the lines of very powerful calls that Janet Yellen
has made for World Bank reform. I hope we're going to see some progress
on the debt issues. I think there's a need for careful
thinking about funding the ongoing economic challenges and the ultimate
reconstruction in Ukraine. And I think this issue of a global
economy where there's substantial inflationary pressure and
the brakes are having very uneven effects and how that's going to play out
is going to be an important area that ministers and the governors are going to
have to discuss. We haven't talked about it on the show,
David, but there's been a kind of possible Enron moment in India
and I imagine with India emerging as the world's largest
country. And the meeting taking place in India,
there's going to be a lot of curiosity from all present about how that's going
to play through it. What, if any, large or systemic
implications that's going to have for India?