The Daily Signal - Inflation Continues to Clobber Us. Can the Fed Help?

Episode Date: June 22, 2022

Americans continue to suffer from sky-high inflation. In an attempt to avert some of the worst consequences, Federal Reserve Chair Jerome Powell raised interest rates by .75%. But is this enough? And what else can the Biden administration be doing to curb inflation? Dave Brat, dean at the Liberty University School of Business and a former Virginia congressman, thinks this is a good start, but that officials must do more. Brat, whose doctorate is in economics, also says it's mostly the Fed's fault anyway for getting us into this situation in the first place. "The Fed's had 0% interest rate for 10 years and created this everything bubble," Brat says. "So now it's not just real estate, it's stocks, bonds, commodities. Everything's overvalued and it's going to pop. And that's a disaster. So the Fed's walking a tight rope." Brat joins "The Daily Signal Podcast" to discuss the intricate workings of the U.S. economy and what the Fed and the Biden administration can be doing to fix it. We also cover these stories: The director of the Texas Department of Public Safety tells state senators that law enforcement's response to the Uvalde school shooting was an "abject failure." Supreme Court Justice Sonia Sotomayor accuses the court's conservative members of eroding the barrier between church and state. Twitter’s board recommends to shareholders that they go ahead with selling the company to entrepreneur Elon Musk for $44 billion. Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

This is the Daily Signal podcast for Wednesday, June 22nd. I'm Virginia Allen. And I'm Doug Blair. Americans continue to suffer from sky high inflation. In an attempt to avert some of the worst consequences, Federal Reserve Chair Jerome Powell raised interest rates 0.75%. But is this enough? And what else can the administration be doing to curb inflation?

Dave Bratt, Dean at the Liberty University School of Business, and a former Virginia Congressman, joins the show today to discuss the intricate workings of the U.S. economy and what the Fed and administration can and should be doing to fix it. But before we get to Doug's conversation with Dave Bratt, let's hit our top news stories of the day. New details have emerged in the Yuvaldi, Texas shooting. At a special Texas Senate Committee hearing Tuesday,

the director of the Texas Department of Public Safety, Colonel Steve McCraugh, said the law enforcement response to the school shooting was an abject failure, per 11 News, Houston. Three minutes after the subject to. under the West Building, there was a sufficient number of armed officers wearing body armor to isolate, distract, and neutralize the subject. The only thing stopping a hallway of dedicated officers from in room 111 and 112 was the on-scene commander who decided to place the lives of officers before the lives of children.

McCraugh's comments were directed at the Uvaldi School District Police Chief, Peter Ardondo. McRaw says the chief of police waited for about an hour for a radio, guns, shields, a SWAT team, and even a key that was not needed to open an already unlocked door. Meanwhile, children and teachers lost their lives as the minutes ticked by. McCraugh says the failure of police to act quickly in Yuvaldi sets the law enforcement profession back a decade. In a dissenting opinion released Tuesday, Supreme Court Justice Sonia Sotomayor, accused the conservative members of the court of eroding the barrier between church and state. Sotomayor was referring to a decision to strike down a policy in Maine that prevented publicly funded tuition assistance from going to religious schools. The case dealt with a workaround to Maine law, which gave rural students the option to receive public assistance to attend certain private schools if a public school was too far away.

Before the recent decision from the court, the law determined religious schools did not qualify. In her descent, Sotomayor wrote, in just a few years, the court has upended constitutional doctrine, shifting from a rule that permits states to decline to fund religious organizations to one that requires states in many circumstances to subsidize religious indoctrination with taxpayer dollars. So is Elon Musk buying Twitter or not? Right now, it looks like the deal is moving forward. In the latest development, Twitter's board has recommended to shareholders that they go ahead with selling the company to Musk for $44 billion.

Twitter stock rose about 3% on Tuesday with the latest news of the deal. While Musk says he still plans to move forward with his purchase of Twitter, there are several things that need to be resolved first, such as the company identifying how many fake and spam accounts are on the platform. To be continued. That's all for headlines. Now stay tuned for my conversation with Dave Bratt, as we discuss the precarious state of the economy and what can be done to fix it.

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Start watching now at heritage.org slash YouTube, and don't forget to subscribe and share. My guest today is Dave Brat, Dean at the Liberty University School of Business, and a former Virginia Congressman. Dave, welcome to the show. Doug, thanks for having me on. Love Heritage and Daily Signal. Great, great stuff. Well, thank you so much for the compliment.

Let's talk about inflation. Good. Recently, it's not great, but recently Federal Reserve Chairman, Jerome Powell announced that he would be raising interest rates by nearly 1% in what reports have called an unprecedented move. For us who maybe have literally no idea what that means, what does that mean? Well, first of all, it's not true. But other than that, going back to Reagan and Volker when they had 15, 16% inflation after the late 70s oil shocks, Volker raised the interest rate five percentage points, 500 basis points in one sitting.

This 0.75 and the one ahead are moving in the right direction, but not big enough to heal inflation. And don't take my word for it. Go to Milton Friedman before the politics got silly, right? There's a lot of people telling lies and fibs these days in economics. And the economic literature has been fairly consistent in its messaging for about 40 years. And so now the latest guy is John Taylor. He took up the mantle after Friedman out at Stanford. and the famous Taylor Rule is named after him.

And so his guidance, and you can go, you know, go Google him and look up his YouTube's and whatever. But on the 0708 crisis, he showed we printed too much money in 2004-05, caused the crisis. Now the Fed's had 0% interest rate for 10 years and created this everything bubble, right? So now it's not just real estate. It's stocks, bonds, commodities, everything's overvalued and it's going to pop. and so that's a disaster. And so the Fed's walking a tightrope.

And so John Taylor, if you plug in, do the math on his Taylor rule, the federal funds rate right now should be 8%. Right? So the Fed should not increase it 1%. They should increase at 7%. But if you did that, you'd have an instant, you know, probably great depression, not recession, right? So we're going to have a recession for sure. And so that's the mechanics. If people want to get serious and go look at it.

It's not hard. It's not complex. Taylor writes very well. He's a great guy. Messages good out on YouTube and the kids, go get your kids to go learn about the economy. We're leaving them, which is just a disaster. So it sounds like what he's doing, what Powell's doing is positive. It's just not nearly enough.

Yeah. Well, yeah, that's true. But, you know, after they got us in the ditch. Right. Right. So they got, you know, 12 Fed banks and they got three or four floors of people. PhDs, hundreds at every Fed bank that know better, right? And so unfortunately, this goes back to Greenspan and Bernanke and there was a thing called the Greenspan put, which is new.

And so in the financial crisis, et cetera, when things blew up and we had banks too big to fail, the Fed comes in, the Federal Reserve comes in with the Greenspan put, which let the big banks know, hey, we got your back. We'll lower interest rates and provide liquidity. So you guys can go get levered up, right? Leverage, huge debt, way too much debt beyond the fundamentals, beyond business fundamentals. And if you fail, we'll bail you out. Well, the American people don't have anyone to bail them out when they fail, right? So the big banks get bailed out. And now everything's failing, right? The market's down again, you know, three, four percent again today, right? I was down below 30,000 for the first time in a long time, and the NASDAQ's down 4%, et cetera, right now.

Go out to FinViz and look it all up. And so, yeah, I mean, he's nudging it up, and there's forward guidance that everybody knows he's going to keep doing it, 0.5.5. But we've got, you know, 8 or 9% inflation. And in some sectors, right, food, you've got stuff going up 30, 40%, and so the problem is not the moves right now. the problem is they put us in the ditch and they should have known better. I mean, it sounds like you had a pretty dire prognostication there, though, where if the Fed was to increase interest rates up to 7 or 8 percent, we would instantaneously see some sort of great depression.

Right, right, because they put us in the ditch now, right? So it's not dire. It's like reality. Go look at FINBIS. Everybody just lost 25% of your retirement in the last few weeks. Congratulations. Good job, Fed. Right? So it is, it's dire. Yeah, it's a disaster. We don't have really functioning free markets anymore, right?

We've got functioning oligarchs and monopolies. Our big five tech firms in the U.S., the market cap of those five firms is bigger than all European firms combined. Right? And so I taught economics for 20 years, right? And to have a market means you got a bunch of firms on the supply curve and a bunch of people on the demand curve. We don't have that. We got one firm on a supply curve, you know, by sector. And this is political in nature, right? The federal government can control a few big firms.

The Fortune 500 right now are all woke. And all of the big five tech firms I just listed, whose market cap is also bigger than all firms in China combined, by the way, as well, to give you some sense. All of them are on the left, every one of them, right? So the old days of this Republican country club jet set is over. There's a populist awakening now that it's going to unite the interestingly old liberal Democrats, right, in the Republican base and the working class. All of a sudden, someone's going to have to come speak for them. And Trump did that, but now the move is even broader, right? Now you've got some of the left and the independents are breaking toward this new realignment.

And we'll see who comes to lead it. I want to kind of go back to what you said earlier about them driving us into this ditch. They got us into this ditch. Sounds like this was a long time ago. How long ago are we talking? 40, 50 years, right? If you go to Fred, which is the Federal Reserve Bank's data collection and Google real GDP per capita, which is the measure of human welfare, your income, that's been going steadily down for 50 years.

Why is that? Well, because productivity has also been going down for 50 years, right? And so the best guy in the country on that is at Northwestern University's name's Robert Gordon. And you can go look at him. Total factor productivity is the only variable that causes long run economic growth, long run. Right. So if you add capital to your economy, it'll cause growth. But then capital hits diminishing returns and the curve kind of flattens out.

The factor that jacks that whole curve up and has made us so rich is called total factor productivity. That's the innovative technological growth, the creativity, the ideas that sets the U.S. apart. China really doesn't have that, right? They don't have research triangles and Silicon Valley and all the MITs and all that kind of thing. And then the part that concerns the Fed is the real interest rate, if you go out to Fred, has been going down for 40 years as well. So that is constructed. That's intentional, right?

So the real interest rate is going down to zero and has been zero for 10 years. Well, sorry, folks, in economics, the interest rate is the price of money, right? The interest rate is the cost, the price you have to pay to borrow money, and money is the cost of capital. Right. So if you want to invest. So there should be an interest rate, right? It should be, you know, three or four percent, whatever the cost of capital is. And then on top of that, you get inflation, right?

You don't want that part, right? That increases the interest rate by even more above the cost of capital. And so we've been just living on a sugar high, right? The Fed has $9 trillion on its balance sheet. That's been stimulative. And then the Fed were $30 trillion in debt on the government side. That's stimulative. And then we had a $5 trillion budget package, which was stimulative.

And unfortunately, the Americans took those checks and had high savings rates back two years ago, but spent it all. So now if you go to Fred, the savings rate has plummeted. And Biden the other day said, look at American savings rates. They're up. They're right back down below. They were up to 20, 30 percent. Now they're below the average at 4 percent savings rate. So just a total nosedive. And if you go to these graphs, you'll see what's going on, right? Most of these things that are happening in the last couple of years have never happened. You'll see just kind of a flat line for 40 years. And then wham, the savings rate goes through the roof and then falls off a cliff.

And so it's worthwhile going out and look at the data. And you'll get some sense that something's not right right now. Right. I guess my question then is, is this just chickens coming home to roost after this 50 years? Or is the pandemic and certain decisions by the Biden administration really exacerbating this inflation problem? Yeah. No, the virus just revealed the weak. of our real economy.

Right? So we've made every classic mistake. We've used every trick in the book to make short-term profits, right? So all these Harvard MBA hotshots, the first thing you learn in finance is to diversify. And so I don't know what genius said, let's stick all of our chips for the entire world in Taiwan. Brilliant. I mean, not brilliant, right? Let's put all the pharmaceuticals in China.

Let's put all of this sector over here in one. Now that's collapsed, and all those supply chains are coming back from China, and China's starting to play hardball, and we're playing hardball with them. And so, yeah, we've taken every trick. We took low interest policy, government stimulus, and so the real economy, right, that's measured by K to 12 education quality. How's that? Right?

Okay? Yeah. You get in a sense? So that's your human capital. Are they ready for a productive market? No. Are the Chinese kids? Yeah.

Are the Indian kids? Yeah. U.S. kids, no. And then you got capital investment in free markets at work. No, weak. And then you got what I said, productivity, total factor productivity is zero. And so the real economy is weak. We've had every trick to juice it for 20 years.

And now the juice is gone. And we're going to face some very painful. music for 10 to 20 years, I'd say. The biggest thing I think affecting Americans right now is that their wages aren't keeping up with inflation, right? Where Americans are still making the same amount of money that they were, but inflation is just kicking them in the pants because it's just impacting their wallet. Why are we seeing that discrepancy between what Americans are earning and what their money

is worth? Yeah. That's a good question, right? And so we've had tight labor markets, right? So the minimum wage is, you know, seven, eight, nine, ten. But now restaurant workers are getting 12 because the labor markets are tight. But even that doesn't keep up with this inflation of 10 percent you're getting at, right? So that drives the real wages down.

And so, but what's coming up now is a recession. So now those old wage rates that 12 are going to go back down to eight, nine. because firms are going to be laying people off. And so that's the real piece that's come and do. And why is it that real wages are going down just because you have inflation? And that's what inflation does. It eats away. And for you conspiracy theorists out there, you can see if I'm right or not on this.

I think I am. But what the Fed is really constructing right now is they're going to run continuous 4% to 5% inflation ongoing. You heard it here first on the Daily Signal. But why? You check it down, right? Because that eats away at the $30 trillion in debt, right? So the $30 trillion is locked. You owe $30 trillion.

But if those $30 trillion dollars become weaker, weaker, every year with 5% inflation, the government has to pay back less debt. Right? So it's just like if you invest money, there's a nice virtuous cycle going up. Your interest rate compounds money so you get rich if you hold it there for 50 years and retire. Same thing with a debt. If they run 5% inflation, they're paying back the same old debt like your mortgage, right?

It stays $100,000 or whatever it is, and you're paying it back with cheaper dollars. But with that assumption, doesn't that mean that we're paying the debt back? It seems like that's not really a concern of many in Congresses to pay our national debt back. Oh, no. No, there's Santa Claus. No, it's just Santa Claus. And the Republicans are not that much better. We had Paul Ryan spent his whole life.

Great fiscal hawk. But then he gets in there and we have a $1.1 trillion deficit under Republican leadership. You know, they know we've trained in the American people. They've lost the old Protestant work ethic thing, which says you've got to eat your spinach. And you've got to work hard. And you've got to invest in your kids and human capital and education. You've got to study hard, work long hours. That seems unattractive right now, right?

everyone wants to be on the Kardashians right now and do social messaging, right? And sorry, you can do that, but that's called consumption. Right, right. That's not production. How much does that federal debt play into what we're seeing then right now? Well, it hasn't, right? And everybody has always known we're going to pay the price. But right now it does play into it because the interest rate's going up.

So the government has only had to pay 0% or 0.5% or 0%. interest on the 30 trillion debt. Well, just to do a round number, right? So you got 30 trillion a debt. Say you've got to pay 10% interest on it. That's $3 trillion a year in interest payments. That's the size of the government budget. The entire budget is $3 trillion.

Right. Right. And then we spend four because we go a trillion in deficit every year. Sure. And so that's why all of a sudden the debt is in play. And for people who are really want to get into this stuff, this also applies even worse to China. China is going through some massive structural reforms.

They don't have a free market economy. So the central government, right, you got Keynesian economics, right, C plus I plus G plus net exports. Our consumption is 70%. Their personal consumption is 40%. Their investment is 40%. Our investment is 10 or 20%. That's where they're growing at 10%. They were.

Now they're zero. Now they're in recession and shrinking. And so now they got some massive problems. They're going to have to shift the government spending at the local level, 20% maybe over to the consumer. But that's going to cause political upheaval. Those local elites don't want to give up their power. It's the exact same stuff that they're going through. Their 40% investment has peaked.

There's only so many high-speed trains and infrastructure and skyscrapers you can build. So they're done. They're maxed out. And do they want to keep going into debt? They're more debt than we are. Right. And the answer is no, Gigi Ping knows. He was going after.

He put these three red lines on the real estate sector that are kind of like our regs to keep them from getting too levered up, too much in debt in the private sector. And that, who, that had huge implications. Right. So now that we've discussed a couple of different possibilities in terms of a recession. It sounds like you're saying we're not in a recession yet, but we will be. Are you saying that one of a recession? I think we're in it. I think you don't know until the data comes out, you know, months later.

And so the definition of recession is just negative growth for two quarters. And so I think we're in the midst of that right now. But we won't know for a few more months when the data comes out. So if this continues to go in that type of direction, what will we be seeing? What behaviors will consumers start to do? Are we thinking it will look like 2008? Or are we thinking it'll look like the Great Depression? I'd say, 08, but the duration will be longer.

That was kind of a financial shock. This one, the real economy, has run out of bullets. Okay. Right. And so we've used every trick and cheated. So now the unemployment rate's going to go up. And the only thing that can fix the unemployment rate is a working market that's humming, right? Like an engine that's hitting on all fours to rehire the people.

And I just do not see that coming about. out, right? Because when you run out of the fiscal stimulus and the monetary stimulus, and now you're just going to see the real economy have to perform, we've been cheating it for too long, and I think we've got a decade of pain. And Japan, right, did the same thing, right? And they lost two decades of zero percent growth. And they're very smart, hardworking, industrious, but they centralized, Right. Banking and manufacturing under one roof, disaster. Now, as we begin to wrap up here, I have sort of two questions about maybe what we can do as a country in terms of the administration and then what realistically will happen. So President Biden has kind of tried to blame every single other organization but himself for this.

He's blamed the Russians. He's blamed the oil companies, yada, yada, yada. How much of that is actually true? How much can we lay at the feet of externals and how much can we lay at the feet of the Biden administration? Well, that's a good question. But the externals are also due to policy. Right. Right. So let's just take the biggie.

Everyone would blame on the war. Well, the best guy on the war is John Mearsheimer at the University of Chicago. And he said back in 14, do not start talking about NATO or EU membership for Ukraine. Or you're going to lead them down the primrose path he called it, right? And so all of a sudden, NATO and the Euro folks started kind of telling the Ukraine and Zelensky, hey, we got your, maybe we got your back. I think we got your back. Do we have your back for real? We're going to send you a bunch of stuff.

Right. But do we really have your back? And then the U.S. is not sure. And, you know, it's amazing. The cynical take is that we're using Ukraine to weaken Russia while letting women and kids die. Really? And so it was a terrible error. Mir Schimer said,

Ukraine is a buffer state. It'd be the equivalent of Russia sticking somebody on the Mexican border, right? Another mini country right there that's Russian. How would we like that? Well, we have this thing called the Monroe Doctrine, and we don't like that. And so we did this to Russia, and it's clear that's the route to the Black Sea, which is crucial, and the wheat's crucial, and the exports are crucial. and Ukraine still could have been wealthy. They still could have been democratic.

They still could have had freedom. Nothing impinged there. We started poking the bear. And so to answer your question, are there other factors? Yeah, there's other factors. But most of those, the open border is a disaster. That's called by policy as well. Agriculture is caused by the same policies we're talking about.

fertilizer, all that, same, same story. So, yeah, I think they're making a lot of excuses. And also the energy policy is huge. That's policy-driven. We used to be energy dominant across every sector, right? Where the Saudi Arabia, for real, of natural gas. We got plenty. But the left somehow has amassed so much political power, right?

Because if you just look at, you know, like industry capture, right? And Jim Buchanan wins the Nobel Prize for this stuff, right? In economics. And so, I mean, how in the world did we get Exxon, these giant Exxon, mobile, shell, whatever? These big beamets who used to kind of run the world and they had too much power. And now they're bending the need of this PC stuff, right? And they've caved and they're doing this green stuff. Right.

And it's just at first inspection, right, which no one ever does. does, just the basics. If you go this green route, which I'm fine with. If markets choose that, that's fine. But they're not choosing it. And it can only power five or 10 percent of your economy. Sure. And now Europe went beyond us. They're 20, 25 percent of their economy green. And Russia's got a gun to their head now on energy and food. Now, given that, it seems as if we're sort of pointing that it's a lot of everybody's fault, but the Biden administration is making policy decisions that are impacting that at a very real level. And I don't think it's everybody's fault.

It's the left's fault primarily, the left, not liberals. The old liberals I can talk with and have a debate. But now there's no debate allowed, and they're threatening people. And they'll ruin your firm if you don't behave yourself. And it's like, whoa, that ain't America. Right. Now, I totally agreed. But now what, if anything, then should the Biden administration be doing to correct this?

or is this exclusively a Fed issue? Oh, no. Everything I just said, they need a reverse policy, but they're never going to do it. It's intentional. I mean, they're paying off all that grain investment, private interests, and lobbyists that have existed since Al Gore. Right? They're running another, right, Obamacare's 20% of the economy that had to be run through the feds. Now they're running all energy through the feds, and they capture rents and control through regulation, everything that comes to D.C.

where it's the federalism, right? And, you know, that's what we should do, is return everything to the states, everything possible, and we're never going to do that in a million years. Right. That was Dave Brat, Dean at the Liberty University School of Business, and a former Virginia Congressman, Dave, very much appreciate your time. Hey, thanks for me. I have a great interview.

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