Inflating Away the Debt & The Wealth Effect (Lyn Alden)

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but it seems like they’re fighting
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deflation but probably more like
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deflation of assets right so they keep
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saying they can’t get the inflation they
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want they can’t get it well i think i
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think they’ve got it now
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i think it’s a little bit over their
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target at this point but
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um the d but then at the same time we’re
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seeing prices of everything going
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through the roof from
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used cars to use bicycles all the way to
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all types of financial assets and all
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those types of things
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um so the deflation that they’re afraid
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of is that really in the markets that’s
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what they’re worried about stocks
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dropping you know real estate dropping
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bonds
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crashing things like that yeah they were
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well they were pretty explicit uh you
know a decade ago
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when they uh point out that they wanted
to do the wealth effect so they
pretty much said they wanted to cause
asset price inflation uh you know they
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just you know
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described a little bit more plately uh
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and so that was their goal was to
basically
increase you know housing costs again
increase uh the stock market again
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uh and if you do a lot of monetary
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policy without doing a lot of fiscal
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policy that that’s
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that’s what you tend to get now we there
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were still disinflationary forces over
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the course that decade because for
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example
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uh you know about a decade ago you had a
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period of commodity over supply
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uh you had the slowdown in china and so
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we’ve been kind of working through this
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period of commodity over supply for a
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while we also of course have the rise of
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shale oil which was largely unprofitable
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but it still contributed
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to uh you know a ton of extra supply and
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therefore pretty low prices across the
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board
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and so we’ve been in that kind of
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disinflationary commodity environment
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but we had a target you know inflation
in asset prices inflation in health care
inflation and education inflation
and child care things like that where
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you had you know deflation in electronic
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goods you had deflation in commodities
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uh deflation due to technology and kind
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of offshoring things like that
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uh and so you know from their
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perspective uh you know they
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would prefer the say the inflation rate
to be higher than the treasury yields
right because that’s how you can you can
stop uh you know debt as a percentage of
gdp uh from from continuing to grow to
control if they
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have you know the potentially nominal
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gdp growing faster
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than the combination of debt issuance
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and as a percentage of gdp and interest
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rates
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uh but of course i mean that’s a really
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bad environment if you’re holding cash
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or bonds
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and so there’s no free lunch i mean
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someone somewhere is getting uh screwed
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over sometimes
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there are certain policy regimes where
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the debtors are getting screwed over
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and there are other times where the the
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you know the the
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people that own the debt that the
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creditors are getting screwed over and
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so
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in this environment of high leverage
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they they’re they’re trying to err on
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the side of essentially the the
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creditors getting
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uh you know screwed over uh but instead
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of kind of abrupt kind of nominal losses
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they’d prefer you know to basically just
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fail to keep up with inflation and
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that’s what you saw back in say the
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1970s and 1940s
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these inflationary decades ironically
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they tend to deleverage things because
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the bonds fail to keep up with inflation
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uh but you don’t want to be the ones
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holding those assets and that’s a pretty
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big pool of assets
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yeah definitely i guess that you kind of
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talked about that and that’s what i was
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trying to
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figure out is like what are they trying
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to optimize for because
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uh to your point you know electronics
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coming down and deflationary source
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things like that and
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for i guess it depends on which side as
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you said which side you’re on but it
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seems like that would be good things for
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most people if prices were coming down
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um asset prices i guess if you’re
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holding asset prices you want them to go
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up if you’re
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if you want to buy them you want them to
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be down right so i guess it depends but
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like overall it seems like if most
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people had their cost of living going
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down that would be a good thing and nasa
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prices going up
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uh at the same time that would be kind
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of a good thing so um i guess kind of
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the the question was uh are they really
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trying you know
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i guess they’re kind of targeting the
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cpi basket which is like this consumer
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price of goods
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basket but it seems like the big risk of
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deflation is in the markets like
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stocks could crash 50 80 percent the
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real estate could crash 50
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and that’s like a massive deflation hit
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so you think that’s what they’re trying
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to optimize for
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i mean even though they’re always
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talking about cpi pretty much i mean
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they’re trying to keep asset prices up
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they’re also
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you know they’re increasingly talking
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about kind of nominal gdp targeting
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uh you know again trying to have nominal
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gdp higher than uh
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some of those interest rates and some of
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the debt accumulation levels
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uh and of course you know the the
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perspective will depend on if you’re the
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the monetary
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authority or the fiscal authority so as
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consumers we generally would prefer
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uh you know price deflation uh while
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still having our jobs so we don’t want
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some some sort of economic contraction
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uh but we want technology and things
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like that to lower prices over time
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so that our money goes further and
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that’s you know that’s normally the best
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case scenario
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the only time that’s bad is if you have
a debt bubble right because then the the
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real value of your debt
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goes up relative to your incomes and
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things like that so if you if you had
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avoided that in the first place
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uh then that that deflation is really
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good but what policymakers are afraid of
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is that because we’ve had this you know
this kind of mix of lower interest rates
and
and you know different types of policy
mixes we’ve kind of encouraged this big
debt build up
and now you know they basically have to
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in their view inflate it away before
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they can they can kind of stabilize
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and so if you’re the federal reserve
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you’re trying to hold yields
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lower than the inflation rate you’re
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trying to be accommodative
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uh and kind of you know trying to
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balance between
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you know uh causing asset bubbles uh but
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then also you know not wanting to crash
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the market so that’s their perspective
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and if you’re fiscal policy makers
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mainly you want to get votes every two
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years or
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four years or whatever the case may be
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and you want to avoid you know rising
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populism you want to avoid
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uh you know things like that from their
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perspective and so you you know
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depending on which side
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you know where you work essentially if
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you’re if you’re the fed or if you’re in
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the
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congress you have kind of two different
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things you’re balancing yeah
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so the tools as you’re kind of laying
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them out the monetary or the fiscal
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monetary being like
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issuing more debt to the banks monetary
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or fiscal actually like putting money
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out of the streets into kind of people’s
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hands
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and um it seems like you know i mean i
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guess as a central bank
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uh what’s the quote if all you have is a
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hammer the whole world looks like a nail
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and they really only have a couple tools
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um and really it’s you know monetary
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tools and so that’s kind of like
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interest rates and
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and increasing the debt supply uh the
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money supply but
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with interest rates i mean they’re
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already almost down to zero
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uh nominally we can talk about real
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rates et cetera which i do want to get
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to
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but it seems like a lot of those tools
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they’re basically running out of right
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interest rates are down to zero
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debts at all time high economy is not
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growing so the debt to gdp is is tough
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to move
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i mean do you see that they’re like
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running out of tools i mean like how
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much further can this can be kicked down
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the road
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uh so for the federal reserve i do view
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them as as towards the end of their rope
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in terms of tools and so they really
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only have two tools that they mostly
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it’s interest rate manipulation
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and asset purchases or sales in some
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cases
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and they have some other tools around
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the margin like lending facilities and
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things like that but ultimately it comes
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down to
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controlling them controlling uh the
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price of money uh
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and uh buying assets now the fiscal
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authorities they
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they’re the ones that you know they can
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say send cash to people
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uh but then they you know they have to
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issue debt to do it uh
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and so you have kind of i’ve described
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it as like uh you know if you have like
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a movie where they’re gonna launch like
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a
06:56
nuclear missile like two generals have
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to put their keys in at the same time to
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so i viewed i view policy tools and
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fiscal tools uh kind of like the two
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keys there
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when it comes to generating inflation uh
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and so if you just have the
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monetary policy that’s not generally
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very inflationary on its own because you
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can’t directly get money to people
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right so the federal reserve can’t send
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money to people all they can do
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is control interest rates uh and they
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can increase the amount of bank reserves
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in the system but then those get stock
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banking system because banks aren’t
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doing loans uh and so
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you have reserves go up you
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re-capitalize the banks but doesn’t
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actually get out into the public
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on the other hand the fiscal authority
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can send money to whoever they want as
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long as they have a consensus
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but they have to issue bonds to do it
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and then therefore someone has to buy
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those bonds which sucks money out of the
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system
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but then if you combine the two and the
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treasury sends money to people they
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issue bonds
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which the federal reserve creates new
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base money and buys those bonds and
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holds them forever
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well then you’re just literally
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essentially creating new base money and
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directing it into the economy
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and that’s how you get say that the you
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know the 25 percent broad money supply
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year of year change that we had you know
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in 2020
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and so that tends to be a more
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inflationary environment especially if
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they were to sustain it for several
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years
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and so i think you know as we go forward
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obviously right now we’re having some
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base effects
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right so we’re in in say march april
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may june you’re comparing it to the 2020
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period which was like the
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kind of disinflationary crunch they had
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during the worst part of the lockdown
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and so we’re going to get some pretty
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high bass effects like we’re probably
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going to see
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uh you know even even official cpi we’re
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probably going to see it over three
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percent year-over-year
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uh but then the big question is going
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forward uh you know what are we going to
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do with
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are they going to do like an
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infrastructure build that also gets
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monetized
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are they going to do another round of
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aid things like that and some of those
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if they were to continue could be pretty
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uh inflationary to a certain extent
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especially because
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you know a lot of economists don’t
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incorporate say the current situation of
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commodity markets
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uh and so of course you know that kind
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of say 15-year cycle of commodity supply
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and commodity demand
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has a big impact on inflation and so
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when you’re in a period of commodity
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oversupply
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as it were for the past decade you know
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that tends to keep a lid on
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on most types of inflation whereas when
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you’re in a period of
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you know you say you haven’t done a lot
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of capex uh you know you haven’t kind of
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brought new minds uh
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to market you haven’t found like new new
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big uh you know we haven’t done the
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investment
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if you were to get that increase in
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commodity demand uh well then
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uh you know you have higher commodity
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prices and that’s what we’re seeing
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we’re starting to see that kind of show
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up in the market where
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many commodities are still below where
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they were 10 to 15 years ago with some
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exceptions like beef lumber
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gold touch new all-time highs most of
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them are still below their all-time
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highs but they’re starting to break out
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from their their big declining trend
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they had
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and so it does look like the 2020s could
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be a more inflationary decade with
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tighter commodity markets uh big big
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increases in the broad money supply
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and that money getting to people rather
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than just stuck in the banking system
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which of course can benefit some people
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but then you have that that that risk of
09:53
inflation
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where you you increase the broad money
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supply by a lot but you haven’t
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increased the the goods and services by
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an equal amount