The Fed actually acted this week. Is the Fed getting its arms around inflation finally.
I think the Fed's moving in the right direction. I think that's a good thing. Whether they're moving strongly enough and whether
it's going to be enough to bring inflation terribly under control I think is still very much in question. You know the
labor market is looking very very tight. The JOLTS data showed even a higher ratio of vacancies to unemployed than we'd had
before. And so I think there are still very real challenges ahead of us. I'm not sure the Fed needed to be quite as
prescriptive with respect to what it was going to do in the future as as it was. So I still think we're got a very difficult
challenge ahead of us and we're still in very turbulent waters. To that point Larry were you surprised when the chair Jay Powell
essentially took off the table 75 basis point rate hike. I was surprised that he took it off the table as firmly as he did. And
in the same couple of paragraphs started talking about core CPI having come down and hinted towards the possibility that at some
point they'd be able to move to 20 fives. Those things could happen. But I think the lesson of the last year and a half is
that we can't predict and therefore we mostly do damage to credibility when in official circles we make strong predictions.
New You're a noted historian of the economy of financial matters. If we look back at history the historical track record
of central banks being able to deal with this kind of inflation without going in recession is not particularly a happy one. Well
David I thought we'd learnt the lessons of the 1970s but it seems like at some point we forgot them again. In the 1970s of
course the Fed sought to tighten but would periodically lose heart and blink. And for more than a decade monetary policy
failed to get on top of an inflation problem. It's not exactly a perfect analogy but there are a couple of things that are really
striking to me. One is that this problem began with an era of monetary and fiscal policy which Larry of course pointed out in
February of last year. But then as happened in the seventies we get a geopolitical shock on top of that initial policy mistake.
And inflation expectations are then away and an anchor words. And in this sense I think the war in Ukraine is performing a
similar role to the war of 1973 in the Middle East which remember administered a shock not only to oil prices but also to
food prices. So in that sense I think the analogy is quite good. And I agree with Larry. I don't think the Fed has nearly done
enough and it has a hard road ahead. It's also going to come under pressure at some point to blink if we continue to see the
stock market selling off the bond market is in trouble. And we have a much more complex and large financial system than we had
in the 1970s with a much higher stock of debt. Therefore it's more sensitive to interest rate moves. So it's a long and I
think very rugged road ahead for the Fed. Larry Neal quite properly says we have the geopolitics of all of
this on top of what we've seen with a pandemic. And then of course with this inflation an extraordinary fiscal and monetary
stimulus. Talk about the geopolitics and where we are in geopolitics. After the fall of the Berlin Wall after Soviet
Union collapsed we thought we had a new Pax Americana. That's less than a reasonably short period of time. We're now actually
sort of in a post post-Cold War era. What does that look like in terms of the economy.
David let me just say first that I think Neal got it exactly right. One thing he said that I'm not so sure of is that the
economy is more sensitive to interest rates than it was in the 1970s. I think part of that complexity that we're seeing in the
economy means there is no longer the kind of credit rationing that there was in the 1970s. So I suspect that it may take even
more action from interest rates especially in light of the fact that higher interest rates now push up interest payments on
government debt more than they did which increases spending power. So that question on the relative sensitivity of interest
rates. I'm not sure of. Look I think we're in a different geopolitical era. You know at some point we'll call
it something rather than just calling it the post post-Cold War era. But I don't Cold War too. I mean we're kind of in Cold War
two thinks it's. Thinks it is a Cold War too. He may well turn out to be right in that judgment. I have a sense that it's going
to be more multipolar than Cold War one was. I think that the single most neglected fact of the last
decade was the thirty eight meetings that took place between Premier Xi and Premier Putin. That's more than in a decade. The
US president has ever met with any head of state from any other country and it's not like China and Russia are close to each
other. And so that kind of realignment is a big deal. What's also a big deal now and I think a much bigger deal than it was
during the Cold War is that there are these global security threats like climate change like proliferation like terrorism
that make the equation much more complicated than it was during the Cold War.
Obviously Russia looms large right at the moment. There is a war going on. After all in Ukraine and the world in various ways is
responding to that. But I dare say when it comes to the economy U.S. relations with China will be much more important going
forward. What is going on with China right now. Larry talked about the relationship with Russia but also in its economy
itself. As it continues to have lockdowns it continues has a lot of troubles. How bad off is the Chinese economy.
Well Dave let me start with the Cold War analogy. My point is that in this second Cold War China's the senior partner and
Russia's the junior partner. At the beginning of Cold War one it was the other way round but they were just as close at the
beginning of the first Cold War. And in this Cold War the hot war has broken out in Europe and Ukraine. In the first Cold War
it was Korea. So I think there's really quite a good an analogy here. The problem for China is that amidst this geopolitical
crisis they're still battling Covid. And after the hubris of claiming that they had solved the problem unlike ISE incompetent
Westerners they know faced nemesis in the form of the immigrant variant which their 0 code policy is really struggling to
contain. So if you look at mobility data in China it's not quite as bad as it was in early 2020 but it's pretty bad. And so the
Chinese economy is really in an extremely impeded state because of the strictures that they're having to impose not only in
Shanghai but multiple cities. What's interesting and I'd like to throw this at Larry actually is what does this mean for
inflation. My sense is that the reduction of Chinese demand for oil is probably on net good from the fourth vantage point of
those worried about monetary policy and inflation because it takes a little bit of the heat ISE of of demand for oil and
therefore the price of energy. And if that's your view like my guess is that China's going to be less big deal for inflation
then many people think because there are two effects there's the demand destruction for commodity effect that you mentioned and
there's the interfered with supply chains. The fact that others focus side I can't figure out which one's bigger. And since I
can't figure out which one's bigger I kind of suspect they're probably not that far from being inadequate being in equipoise.
I do think there's a chance that if China gets past this you're going to see some big surge in demand from China for oil before
you see the supply chains fix themselves completely. And I think that the effect of everybody trying to shorten their supply
chain is going to be permanently at least a little bit inflationary.