Inflation! (with Norbert Michel)

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0:00:08.0 Trevor Burrus: Welcome to Free Thoughts. I’m Trevor Burrus. Joining me today is Norbert Michel, Vice President and Director of the Cato Institute’s Center for Monetary and Financial Alternatives. Welcome to Free Thoughts, Norbert.

0:00:19.1 Norbert Michel: Hey, Trevor. Thank you for having me on.

0:00:22.0 Trevor Burrus: Well, recent numbers have come out actually this morning. And once again, it looks like inflation is at a level that we haven’t seen in at least 40 years. So how bad is it now?

0:00:34.3 Norbert Michel: It’s not good. [chuckle] I mean, you know, it’s… And it’s not necessarily completely trending down the way we would like it to yet, which I think is a bigger issue really. Given the sort of economic turmoil that we’ve gone through with regard to the pandemic and the shutdowns, I don’t… I mean, it’s not altogether surprising what’s happened. And for the last… I don’t know. It seems like maybe even the last 12 months we’ve had… Each CPI report comes out and we say, “Well, this is the worst we’ve had since 1981,” or, “This is the worst we’ve had since 1982,” or something like that. And the trend has been a little bit up and down, but kinda just rising to flat maybe, in the recent one bit. The one point… So the monthly changes was 1.3% versus last month’s 1%. So that’s not the right direction. And I think that that’s probably more important than the fact that it’s a 9% annualized rate now. ‘Cause that’s been elevated and that’s kind of what’s happened. And the month to month to month to month trend is probably a little bit more important right now given that the Fed’s started tightening.

0:02:03.1 Trevor Burrus: So you mean that, just to clarify, that the rate is not going down over the months, and each… By at least some predictive models, it should have gone down, given what the Fed has done?

0:02:15.9 Norbert Michel: Yeah, you would have, A, certainly would have loved to have seen the trend come down by now. [chuckle] But I mean, that’s… That could partly be because they started tightening a little bit late. I think… But I honestly do think that even if they had started tightening a little bit earlier, the number probably wouldn’t be too different right now. It’s probably, I’m just gonna say, elevated for a little bit.

0:02:40.2 Trevor Burrus: Well, let’s get to that, because there’s multiple causes here you pointed out. You said that given the economic shock of the pandemic, we would expect this.

0:02:49.0 Norbert Michel: Yeah.

0:02:49.2 Trevor Burrus: Why? Was it because of the spending bills, or… Why would we expect the prices to go up?

0:02:55.2 Norbert Michel: So both, the spending bills and the supply problems. And now supply problems is a really big catch-​all, but you have all kinds of different supply chain issues going on. Some of them were worsened by the shutdowns. They magnify each other, labour problems magnify them, and in the opposite direction, probably. So what we have is essentially the inability to produce as much as we would want of a lot of different goods. And you layer on top of that a large dose of fiscal stimulus. You’re increasing the demand and increasing the amount of people who are gonna be bidding up the same constrained resources. So you’re going to get inflation. It’s just a question of exactly when and exactly how much. And we’re starting to get an idea of that now. [chuckle]

0:03:55.8 Trevor Burrus: Well, that makes them… That makes a different type of phenomenon, though. The monetary phenomenon. The quote… If anyone knows a quote about inflation, it is Milton Friedman’s “Inflation is always and everywhere a monetary phenomenon.” But he wouldn’t also say price increases in general is not always and everywhere a monetary phenomenon, that’s clear from just, you know, looking at Pokemon cards or whatever a thing happens, they’ll go up in price. Inflation is different than just price increases, correct?

0:04:25.3 Norbert Michel: That’s right. We can’t… One fatal mistake that we make… By “we” I just mean people in the profession and journalists in general, people in general, we look at something like gas prices, just gas prices, and we say, “Oh, it’s inflation.” Well, that may or may not be true. And the fact that just gas prices go up by itself, that’s not inflation. You need the entire price level to go up to be inflation, so that’s… That’s true. Beyond that, Friedman said something very specific, and it gets twisted. And Friedman was no dummy. [chuckle] And he didn’t mean a lot of the things that people say that that little quote meant. [chuckle]

0:05:11.5 Trevor Burrus: There’s a second part to it, which I don’t know if you know by heart, but you can give the gist of.

0:05:16.9 Norbert Michel: Sure. The gist of it is that he was very careful to clarify exactly what he meant by saying inflation is always a monetary phenomenon in the sense that it is caused by a higher grade of… A higher growth rate in money relative to output. So it has something to do with how much we can produce and how fast we can produce it. So I like to think of… And this is a classic supply side problem piece to this whole story. And I like to use a hurricane as an example. I’m from New Orleans, very familiar with hurricanes coming through the Gulf of Mexico, there’s lots of oil rigs out there. [chuckle] You get a really bad hurricane and it basically shuts down all of that oil production for quite a while. And if it’s bad enough, it even shuts down some of the refining production that we have all around the Mississippi Valley. So that is a classic supply shock meaning that we’re not gonna be able to produce as much oil, and we’re not gonna be able to produce as much gasoline as we thought we were. And it makes no sense to blame the Fed for that. You’re going to get higher prices, but you’re gonna get higher prices because production shut down. You don’t have enough. And so people are gonna start bidding up what is left. And it’s not the Fed’s fault.

0:06:43.3 Trevor Burrus: Well, let’s take a step back then, because you mentioned the CPI… Can you clarify what the CPI is and how we use that to measure inflation. And then also, if you would, the criticisms of the CPI, ’cause there’s quite a few that it’s not…

0:07:00.3 Norbert Michel: Oh yeah.

0:07:00.9 Trevor Burrus: It’s not a very good measure, but it’s like what we use nevertheless…

0:07:04.0 Norbert Michel: Sure… No, no… So the CPI would be the consumer price index that the Bureau of Labor Statistics puts out. It is one measure of the overall price level. An alternative measure would be the personal consumption expenditure index, which, PCE index. They are not exactly the same. They do measure some slightly different things in slightly different ways. So you get slightly different numbers. There’s a lot of research that shows that the CPI is probably a little bit biased in terms of upward inflation, so it makes inflation look a little worse than it really is.

0:07:45.9 Norbert Michel: That’s not necessarily such a big deal on a month-​to-​month basis, but it is a big deal on a long-​term basis. So when you look at something like making cost of living adjustments for inflation to Social Security over a 20-​year period, you’re talking about a really large impact. Without getting into all the weeds, the basic shortcomings are… The problem, so to speak, is that there are lots of biases in there, you have to do a lot of estimating, you have to do a lot of artful adjustments to try to get at the entire price level, what is the whole price level doing.

0:08:30.7 Trevor Burrus: So to clarify, the Bureau of Labor Statistics, I assume that they have people who go out and look at the price around the country…

0:08:40.1 Norbert Michel: Yes. That’s right.

0:08:40.9 Trevor Burrus: Like… Of a basket of goods is what they are often…

0:08:43.1 Norbert Michel: That’s right.

0:08:44.7 Trevor Burrus: Described as. So what does a dozen eggs cost in Seattle, in Des Moines and in New Orleans, for example. And they do some sort of stuff to put that together, and they do that on a monthly basis, or however often they put it out. It’s something like that, right? A basket of goods…

0:09:00.8 Norbert Michel: That’s right.

0:09:01.1 Trevor Burrus: Chosen in a certain way. Very weighted, if I remember correctly, toward food stuffs and more essentials. It’s not big screen televisions. It’s more food stuffs and gas and things like that. Correct?

0:09:12.9 Norbert Michel: Well, they’re all in there. So all the food items… So they do something called the consumer expenditure survey to put this together. And there are, I think, well over 1000 individual categories of goods that we buy, goods and services that we buy. And there are lots of different specific food items. So it’s not just dairy products, it’s all the different kinds. It’s not just meat, it’s all the different kinds. But there are also TVs in there, and there are also electronic… Other electronic equipment. All kinds of recreational goods… Just… They’re trying to be as comprehensive as they can.

0:09:57.7 Norbert Michel: The problem comes in… Well, one problem comes in with something like… Think of it as a… We’ll call it a quality adjustment. So computers are in there, and prior to 1984-​ish, nobody had personal computers in their homes. And then after that we started getting more… Well, now, the computers that we have now versus the computers that we had in, say, even 1995 or 1999, are very different. Flat screen, higher power, better processors. So they may cost less, they may even cost a little bit more nominally, but you’re not really comparing the same exact good anymore. So the same thing with phones, things like that. And even television… It’s like… Just… The Smart TV isn’t the same as the one that I grew up with in the 1970s that had a credenza.

0:11:06.2 Trevor Burrus: A clicker. A literal clicker. Yes.

0:11:08.9 Norbert Michel: Yeah. Yes.

0:11:09.1 Trevor Burrus: Well, also I remember as late as 2000, early 2000s, a 50-​inch television was probably $2500 in 2000 money. And now they’re on blow out at Costco for 300 bucks. So it’s hard to measure in that way what the inflation level is.

0:11:31.0 Norbert Michel: Yeah. No. It’s tricky. And keeping in mind, you’re trying to get sort of a measure that you can look at through time to see what is happening to the price level. So it’s not that we can dismiss these things about the different quality in these products and the different use that you get for your dollar, the different value that you get for your dollar. So these things do have to be accounted for in some way, and it’s not an exact science.

0:12:03.8 Norbert Michel: And then when you get into something like housing, well, a house isn’t a consumer product, but the shelter service, so to speak, that we pay for is. So you have to account for that. Well, there’s no market for that. If you’re renting you could use the rental price, but if you’re not renting then you have to go to something else. So it’s a mess. If you’re gonna try to be comprehensive you end up with a lot of statistical techniques, and it’s not an exact science. It’s not as simple as going to the supermarkets in the different cities and taking a bunch of samples. So the BLS does the CPI one way, the Census Bureau does the PCE a different way, and… Basically, most economists would say that the PCE is probably a better measure. So that’s, you know, those are kind of what we deal with. And incidentally, the new PCE numbers won’t be out for a little while yet. But those trends do look better. And, of course, the Fed has always said that they prefer the PCE. Of course, that means that most people that hate the Fed, bash the Fed and say, “Well, of course, you pick the PCE.”

0:13:31.5 Trevor Burrus: So going back to the cause, it does seem since before some of these inflation numbers were coming out, we were hearing about all these problems associated with pandemic era production supply shocks, including, you know, pork, pork products, eggs, obviously computer chips, that was a big one, causing just a huge amount of problems to get things that we expect to be on the shelves. And then of course, if we’re good economists, we know we have to let the price go up to do better rationing of meeting supply and demand together. But so, you know, taking what I’m sure is President Biden’s position, which is that this isn’t his fault, he got him to be president in a very singular time, after, in the waning days of a pandemic where that caused economic disruptions that people haven’t seen for a century, and so that the main reason for the prices going up are the supply shocks and not the monetary phenomenon. Is there something to that argument?

0:14:33.6 Norbert Michel: There’s something to it, I would add that he is responsible for some of the fiscal part. And also responsible for some of the shutdown part, and not coming up with a better, more rational policy on that side. But I mean, those are arguments that, you know, reasonable people can have, I’m sure. But there’s definitely something to that this is not all on his policies. Yes. That is more than fair. There’s a lot of blame to go around. And I think most of it… I think most of it is on the fiscal side and across both administrations, you know, but I mean, most of this did happen under the previous one. So much of it did, I don’t want to say most, but much of it did. On the Fed side, I think the biggest thing that you could fault them for is bad timing. You know, I think there are good reasons for them to have started tightening either just prior to or just after the new year, January. I know George Selgin that works with us at Cato, you know, he would say in probably November, December. I would say in January. I mean, I don’t think there’s that much of a difference. And the Fed waited until March. So probably could have started a little sooner. But you know, that’s not a heavy criticism.

0:16:05.7 Trevor Burrus: What would they be watching? I mean, they’d be watching the CPI and trying to find things that are leading indicators, I guess, ’cause they’re often… They seem to be often behind the curve, because the indicators they’re looking at are actually lagging indicators, like unemployment rate and things like this. But what were you looking at that said you should have got it in January probably?

0:16:28.9 Norbert Michel: I’m sure they were looking at all kinds of stuff, I don’t know. But what we were looking at, George and I both, we were looking at total nominal spending in the economy. And we were saying, Look, you if you want to avoid having to deal with the supply side stuff, the right way of doing it is just looking at total spending, because that’s a better measure of demand. And if you look at the pre pandemic trend of total spending, total output in the economy, if you will, you get a nice trendline going up, and then you get the pandemic and it drops. And then you can see when it got back to trend. And in around November, it was basically, depending on how you did the trend, it was basically at or just above the pre pandemic trend. So the demand had clearly come back and then if it continues to go up over and above the pre pandemic trend, well, then you have to attribute a lot of that to the demand side stuff. So the monetary policy can do something about that. That’s exactly what it…

0:17:42.3 Trevor Burrus: And by demand side, you mean that people people having essentially too much easy money or too much money in their pockets to chase after fewer goods? The classic formulation of inflation?

0:17:52.8 Norbert Michel: Yes. So more spending, more demand more spending, prices rise, that kind of thing. So it’s just classic inflation story on that side. So yeah, so you can see some of that starting to manifest, and I think that your… And it’s true also that we still haven’t gotten rid of all the supply problems that we have. So, you can make a good case for…

0:18:17.6 Trevor Burrus: Yeah, it took me 18 months to get a PlayStation 5. So we definitely have not gotten rid of…

[overlapping conversation]

0:18:21.2 Norbert Michel: See. Exactly.

[laughter]

0:18:26.9 Norbert Michel: That’s exactly right. No, it’s still happens. Like I wanted to get a weight bench, particular weight bench. I still can’t get it. So, yeah, they’re not clear, it’s just not… It hasn’t all cleared, so I think what I… So we were looking at the demand side and saying it’s probably best to start tightening now, still want to be careful, don’t want to go crazy and tighten too much. But it would probably be better to start now sooner rather than later so that you don’t have to tighten as much later if inflation does keep going. And they never listen to me, so that’s fine. [chuckle] So they didn’t and now you’re having these abnormally high rate target increases, right? So instead of just like a quarter point, they’re doing three quarters of a point. Now there’s even talk of maybe a full point, you know, a full one percentage point tightening.

0:19:24.3 Trevor Burrus: Would that be unprecedented in terms of how big of a… At least recent?

0:19:29.7 Norbert Michel: Very unusual. I don’t know if it would be completely unprecedented, I have to check, but it would be very unusual for sure.

0:19:37.4 Trevor Burrus: In that history lesson, let’s get into the history a bit. We talk a lot about this late ’70s, we… I mean, people in our profession and people on TV, this late ’70s stagflation, inflation error that we had. And up until 1981, all these measures go back, all of them seem to say, you know, highest since 1981, highest since 1981. What happened in that last part of the ’70s up until 1981, and what did the Fed do then to rectify?

0:20:12.3 Norbert Michel: The Fed pretty much lost control of inflation. I mean, that’s the sort of lay person way of saying it. The average inflation rate was just in double digits for a long period of time. They… No matter what they tried to do, even with fiscal help, they were just… They couldn’t get it under control. And you had… Under Volcker, you had a massive, massive commitment to tightening and a really massive tightening. A lot of people would say that it induced the recession, I suppose that’s fine. But regardless, there was a massive tightening, there was a recession, pretty severe recession in the early ’80s, because they had to do that in order to get inflation back under control and to get people to realize the monetary authority is actually serious about fighting inflation. Because it appeared after about a decade or so that maybe they weren’t. [chuckle] So to have any credibility, they had to do that… They had to do something drastic, and that’s what we got.

0:21:25.1 Trevor Burrus: So you… They probably knew that a recession would result and it was the better of the two options.

0:21:31.3 Norbert Michel: I believe that’s accurate, yeah. I would say that’s accurate.

0:21:34.9 Trevor Burrus: I mean, in the free market sense, and I know that there’s talk of… I think it’s what, July 29th is when we have the next quarter’s numbers and whether or not we will be in a recession, but in the free market sense, recessions aren’t necessarily bad, correct?

0:21:51.4 Norbert Michel: I don’t wanna say whether they’re good or bad, but I mean, it’s not… There’s nothing in the free market that says you can never have a downturn and you always have to have a growing economy. So…

0:22:05.8 Trevor Burrus: I mean, part of the idea here is that if there is a misallocation of resources, we need some adjustments to reallocate, correct? I mean…

0:22:12.4 Norbert Michel: Yeah. No, that’s fair. Right.

0:22:14.6 Trevor Burrus: And if that happens over two quarters, then we could… We call that a recession, but it’s just an adjustment on one level, unless it’s artificial or fake in some way.

0:22:21.3 Norbert Michel: Yeah, it doesn’t have to be bad. That’s right. And it could become… Everything could be done more efficiently, more effectively, in the economic sense more efficiently, and so it’s not necessarily a terrible thing. And a lot of them are just mild.

0:22:41.9 Trevor Burrus: Oh, yeah. The lot of them are mild. So what’s the connection between the Fed’s behaviour and what they’re doing now and the fear of a recession?

0:22:49.4 Norbert Michel: When we say that the Fed’s tightening, basically what they’re trying to do is tamp down on the overall flow of credit in the economy. And that’s really all they can do. So, the fear is that they will have to clamp down so hard on the overall flow of credit in the economy that it will induce a recession. Nobody will be able to get credit to basically do anything if you wanna go extreme, right? But companies that need short-​term loans for working capital won’t be able to get them, so they won’t buy as much inventory and so on down the line. And that kind of recession could be bad, so that’s the fear.

0:23:32.9 Trevor Burrus: Of course, to clarify what the Fed does for… Maybe we just wanna insert this here, is adjust the interest rates that banks pay on what they get from bigger banks, essentially. I’m very much dumbing this down, but that’s essentially what only they can really do, correct?

0:23:50.9 Norbert Michel: Yeah, and that’s it. No, they can try to affect credit market conditions such that banks source of funds are more… Is more expensive. Or banks find it more expensive to fund their operations. And if they find it more expensive to fund their operations, they’re gonna charge you more, and if they’ll charge you more, you’re gonna borrow less. And that’s pretty much it. [chuckle] And they can’t necessarily do that, the Fed can’t on a targeted basis, you know? So they can’t say, Well… And I don’t think we would want them to, but they’re not gonna say, “Well, gas prices are up, so we’re gonna go find out who’s borrowing and using those funds to buy gas, and we’re gonna clamp down on that.” They can’t do that. So, they can do it on an aggregate basis, they can just try to look at the entire system and make it more difficult to make loans across the entire country.

0:24:50.9 Trevor Burrus: Libertarians like to bitch about the Fed, of course, as a major…

[chuckle]

0:24:55.4 Norbert Michel: Yeah.

0:24:55.9 Trevor Burrus: Pastime. [chuckle] But it also seems like in 1981 maybe they did the right thing…

0:25:06.3 Norbert Michel: Yeah.

0:25:06.4 Trevor Burrus: Clamping down, and since then we’ve had historically low inflation until recently, keeping it at about 2%, so it seems like they’ve… They’ve done a pretty good job, even though we can complain about them in the abstract and be like, well, you know it’s… However, that is, we know it’s fiat currency, and we need to have a gold standard and stuff, but I find it interesting that there’s always libertarians predicting monetary collapse. There’s about… In the Cato basement there, you can go look at all these old books that are predicting the collapse of money, 1986, 1987, so. And I think if we’re being honest, the Fed hasn’t been a complete failure, right? I mean, they’ve done okay.

0:25:52.6 Norbert Michel: Yeah, no, that’s fair. I mean, just on pure monetary policy grounds, especially starting with Volcker and that, we’ll call it The Great Moderation period, yeah. And I think where they got into trouble around the ’08 crisis, was the stuff that they were doing that really wasn’t pure monetary policy. And in my mind, that’s still more important. That’s a bigger issue than just the pure monetary policy portion. And even on the pure monetary policy portion right now, I don’t… I think it’s very hard to fault them for what they’re doing given of course the framework that we have and the mandate that they have, I don’t think you can… You can’t criticize them the way you could have in the ’60s and ’70s, so yeah. If you look at The Great Moderation period, it’s one of the more prosperous periods in our nation’s history, so yeah. You gotta at least, if you’re gonna blame them for all the other stuff, you have to at least admit that that was a good period, and nobody running the Fed during that period was running the Fed in 1913 and the 1930s. So, it goes with everything else, it comes with… It is the fiscal agent of the government, and you can’t just look at the Fed in a vacuum.

0:27:19.0 Trevor Burrus: In the traditional story too, inflation is caused by printing money. Now, we don’t so much print most of the money as just change digital ledgers. But printing money and then, in the classic Weimar or recently in Zimbabwe or Venezuela, it be the money itself, the pieces of paper become worth more for fuel, for burning as fuel or wallpaper or something than actually is as currency. Does that seem… That’s the kind of thing where, again, libertarians start saying, “Oh, you’re past a four trillion dollar spending bill, or you passed another thing, and you have this deficit,” that this is essentially the same thing that’s gonna happen to us as Weimar eventually because of the level of spending we have. Is that really a concern? Do you think that America would get to a Weimar level of inflation, given the size of our economy and our influence abroad, is it really that realistic of concern?

0:28:22.8 Norbert Michel: I mean, given the hard work that the Fed has done to get any credibility in inflation fighting prior to this period, and given the sort of commitment that they already are making to try to get it back under control, I’m not super concerned about something like that right now. I don’t wanna take it off the table and say, “Just don’t ever worry about it.” The reasons that I would give for worrying about it though, are much different than what I think most people who criticize the Fed, in our circles, do anyway. And it’s kind of what you alluded to, so like the printing money thing. And I don’t blame them directly, I blame them indirectly but again, they are the fiscal agent of the US Treasury. And what they have done is they have set up a framework partly in an innocent way that makes it much easier to accommodate fiscal policy and to still legitimately say what we’re doing is not going to affect inflation. And that’s the large balance sheet stuff, that’s the QE stuff. Some people… Depending on how you do it, you may call it fiscal QE.

0:29:44.9 Norbert Michel: And when you compare or when you look at that along with the entitlement spending problems that we know are coming, and you see the pressures that they’re getting from mostly people on the left in Congress to do things like the Green New Deal, or massive UBI programs or whatever that might be, yeah, then that does become worrisome, because you could very quickly fall into that trap, if that’s what you’re doing, because really and truly, that’s what drove the Weimar stuff. It’s a fiscal thing, it’s not just this independent central bank saying, “Oh, we’re gonna print more money to manage the economy.” There is absolutely positively a fiscal component, a borrowing component, a government-​driven component to being able to buy what they want.

0:30:45.8 Trevor Burrus: True. Yes, a lot of this is what they wanna buy, but I think I remember it must have been ’86, ’87-​ish, you might know better the exact, but when we hit a billion dollar deficit in one year, and it was a big deal. And again, the same type of chicken littles were coming out and saying, “You know what, we can… This can’t go on that long. Pretty soon you’re talking about real money.” Those kind of people. Well, now we’ve obliterated this by orders of magnitude. And is this just chickens coming home to roost now that we’re actually seeing what people are predicted, or if we’re being honest, were a lot of the chicken littles in the ’80s a little bit too afraid of deficit spending and their models didn’t end up being correct in terms of the inflation they would expect to come from that?

0:31:40.6 Norbert Michel: I suspect. I suspect some of them were. I don’t know that any of the models would have envisioned this sort of situation. Somewhere in there… And my dates might be off, I’m not sure now if it was during Nixon, Carter or early Reagan… Changed the whole Social Security formula. So your benefits weren’t just tied to inflation, they were… And it wasn’t just the poverty benefit… Anti-​poverty benefit… It was tied to how much you earned. Well, that blew that system out of the water. And it did so for the future generation… And if you have… I guess what I’m saying is… You didn’t have… And a lot of those models weren’t accounting for that. A lot of those Chicken Littles weren’t really accounting for that. Some of them might have been, but I don’t think most of them were. And then if you look forward now… And I’m not saying the sky is falling right now. I am saying it is something that we should address because it is a problem. And now you have a situation where it’s even easier for the Federal Reserve to be used as a pawn by the Treasury, even if they don’t want to. It’s there. They’ve put in a mechanism where they don’t really have the political cover that they used to have, and everybody knows it. So there’s a problem there. There’s a big problem there.

0:33:19.9 Trevor Burrus: Is this an independence thing… You said being used as… An independence issue of the Fed? Because you said being used as a pawn, but… They don’t work for Congress… So I guess if you run the Fed or you’re on the Board of… The Fed board, you need to… If they pass a 4 trillion dollar spending bill, you need to figure out kind of where that money is coming from in some sense… So you mentioned a little bit… So what were they doing… What have they been doing different than they used to do when they just sort of said, “Alright, this is just a big deficit thing now”? What are they doing that helps Congress and it’s drunken spending ways out?

0:34:01.2 Norbert Michel: So it’s a little technical, but it’s the way they operate. It’s the framework that they operate under. It is… It has to do with interest on reserves and the payment of interest on reserves. This was something that they never used to do. And they had to get the authority to do it right around the ’08 crisis. And they had been working to get that authority for reasons completely unrelated. So they did kind of bumble into this. But now when you have the Fed go out and buy a bunch of assets, things like Treasury debt, they can’t legitimately tell Congress any longer, “Hey, we can’t buy all that stuff because we have an inflation mandate. And if we buy all that stuff and create all these reserves we’re going to make it… We’re gonna knock inflation through the roof.”

0:34:53.1 Norbert Michel: They can no longer legitimately do that because they can pay interest on those reserves in order to keep them in check. Therefore, they don’t have that cover anymore and Congress can just say, “Pay them more interest. Pay higher interest.” Now that still becomes a political problem, obviously. [chuckle] But that’s what it does. That throws them in the middle of this political storm, whereas previously, they could simply go back to the mandate and say, “You guys can do whatever you wanna do. It’s on you. It’s not on us. We have a mandate. We have to maintain price stability. We can’t buy all that stuff that you guys just borrowed and maintain price stability.” Well, they can’t say that anymore.

0:35:40.4 Trevor Burrus: So are there things… You are somewhat… On the current inflation, it’s complex and it’s not just a monetary source of the inflation, but are there things coming in the next decade or so to be concerned with in terms of some sort of fiscal effect? Predictable things coming that could really shake things up and cause serious problems, and whether or not I should be buying more crypto or hoarding gold or whatever? Norbert, I’m really just asking, what should I be doing for… I should be going into a lot of debt… ‘Cause then the inflation will help me out. Right?

0:36:21.5 Norbert Michel: Yeah… No, I mean… From the governing a country standpoint the thing to worry about is this sort of massive off-​balance sheet debt that we know is coming due unless Medicare and Social Security are changed, drastically. And the easy way or the… Actually… The easy… The normal way of dealing with that would be to borrow more money, for the Treasury to sell more treasury debt. And if there is too much of that then you are in a situation where you have a banana republic, sort of printing money to pay its debts.

0:37:08.4 Norbert Michel: It’s very difficult to say exactly how much is too much, exactly when you reach the point where it’s too much. That’s not easy to say. But given how much we have right now and how controversial it is at the moment, and politically, what it’s going to look like to start paying large banks, from the government to large banks transferring billions and billions of dollars a year, we sort of have a problem that we might wanna start addressing sooner rather than later. Because if we wait too long for those trust fund deficits to hit, and we have no choice but to make large increases in our borrowings, treasury borrowings, then your one way out of that problem is to create inflation, which as we know right now, kind of controversial, kind of problematic. Not exactly fun.

0:38:09.4 Norbert Michel: And so the other way of doing it would be to have the Fed buy it up and try not to create inflation, but that would mean that they’re gonna have to pay those large banks billions and billions of dollars a year. And at some point, I don’t know that it matters, because if the payments get high enough, then there’s a profit equation going on there, right? So some of that money is gonna leak out, and we’re not talking about an ironclad system. We’re talking about something that has not been tried in that high interest rate, high inflation environment. It’s the opposite of the approach that we’re used to in terms of where we used to have a Fed, believe it or not, a Fed that was less invasive, less expansive, a little bit more passive. The banking system was done in a scarce reserve regime, so the idea really was for the Fed to be as hands off as possible. But we’re way past that, and I don’t know that anybody’s… Well, some people do, but I don’t know that the general public has a full understanding of that, exactly how different that is. ‘Cause it’s worked so far, but it’s worked in that low inflation environment, which we’re leaving, [chuckle] so we’re entering new territory. If we’re gonna be honest, it’s not easy to predict even to an even greater degree now, how this is gonna end up.

0:39:47.4 Trevor Burrus: So there are no fiscal things that we would need to take a hard look at, the bill that’s coming due for Social Security and Medicare and actually do the hard political choices that this requires. Is that sort of the number one thing, do we need to do something to harness or constrain the Fed’s abilities to do these new sort of working with Congress and helping Congress, and it’s spending the… What are the short term things, the sort of the good government, good things we can do to try and maybe mitigate this in the near term?

0:40:28.0 Norbert Michel: The good government things that we can do are to address the entitlement issue to both Social Security and Medicare, and come up with a credible way of addressing or fixing those problems, lowering the spending component of that, getting more market-​based in that sense. And with the Fed, changing their mandate. And look, it’s Congress, Congress gives them their marching orders. Congress can tell them they have to shrink the balance sheet. Congress can tell them they have to go back to a reserve regime. Congress can tell them we’re not gonna target prices anymore. And Congress should do these things.

0:41:17.1 Norbert Michel: When you say short-​term on the Fed side, I’m worried because it takes forever to get anything like that done with the Fed, and obviously we’ve been fighting for generation… Well, I don’t know for generations, but we’ve been fighting… Multiple administrations have decided that they don’t wanna touch any of the entitlement stuff, but those are really the things that need to be done, that and restraint, restraint from doing something like a Green New Deal, an industrial bank, all that kind of stuff, right? That’s just gonna magnify the other problems that we have. It really is, at the end of the day, it comes down to as simple as it’s fantasy to think that you can just print a bunch of money and spend it on whatever you want and get more real resources that way and not have any negative consequences. And we have to face up to that.

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0:42:30.7 Trevor Burrus: Thanks for listening. If you enjoy Free Thoughts, make sure to rate and review us in Apple Podcasts or in your favourite podcast app. Free Thoughts is produced by Landry Ayres. If you’d like to learn more about Libertarianism, visit us on the web at lib​er​tar​i​an​ism​.org.