The Munk Debates Podcast - Be it resolved: Get ready for a big, long-term surge in inflation

Episode Date: April 15, 2021

20 trillion dollars of government stimulus in countries around the world. Interest rates so low there is no incentive to save. And more than half a billion vaccinated consumers ready to pull out their wallets and kick off the Roaring 20s of the 21st century. Some experts believe that a surge of inflation, such as we haven't seen since the 1970s, is now in the cards. Inflation bulls argue that the post pandemic recovery is just one of many trends converging to create rising prices for years to come. They argue that demographics and in particular an aging population that shrinks the labour force and dramatically increases health costs are accelerants for long term inflation. Skeptics argue that post pandemic recoveries typically drive prices down, not up: the mindset after experiencing a plague is to pay down debt not spend more. While the government may be printing money at a record pace, the rapid technological change brought on by COVID will ramp up automation of workforces driving wages down. And with interest rates on safer investments like bonds suppressed by central banks, aging populations will spend less, suppressing consumer demand. The spectre of a long term rise in inflation is just that, a fiction of our imaginations. Arguing for the motion is Manoj Pradhan, Founder of Talking Heads Macroeconomics based in London, England. He is also the co-author of The Great Demographic Reversal: Ageing Societies, Waning Inequality, Inflation Revival. Arguing against the motion is David Rosenberg, President of Rosenberg Research in Toronto, Canada. David was previously chief North American economist at Merrill Lynch. Sources: WTVR CBS6, CNBC, Yale School of Management, Yahoo Finance The host of the Munk Debates is Rudyard Griffiths - @rudyardg.   Tweet your comments about this episode to @munkdebate or comment on our Facebook page https://www.facebook.com/munkdebates/ To sign up for a weekly email reminder for this podcast, send an email to [e-mail]. To support civil and substantive debate on the big questions of the day, consider becoming a Munk Member at https://munkdebates.com/membership Members receive access to our 10+ year library of great debates in HD video, a free Munk Debates book, newsletter and ticketing privileges at our live events. This podcast is a project of the Munk Debates, a Canadian charitable organization dedicated to fostering civil and substantive public dialogue - https://munkdebates.com/ The Munk Debates podcast is produced by Antica, Canada's largest private audio production company - https://www.anticaproductions.com/   Executive Producer: Stuart Coxe, CEO Antica Productions Senior Producer: Christina Campbell Editor: Kieran Lynch Associate Producer: Abhi RahejaBecome a Munk Donor ($50 annually) to get 72-hour advanced access to the full length editions of Friday Focus and Munk Dialogues. Go to www.munkdebates.com to sign up. Hosted on Acast. See acast.com/privacy for more information.

There are options, and that's why we need to take this opportunity seriously. Probably you can prevent global warming unless China is part of the solution. This is not normal male behavior. This is predatory behavior. We don't know how bad this bug is. We don't know what this bug does. All of that was thrown away in those eight minutes and 46 seconds, and that's the moment that I became an abolitionist. Extraordinary claims require extraordinary evidence. Welcome to the Monk Debates. On every episode, we provide you with a civil and substantive debate on the big issue of the day to arm you the listener with enough information

to make up your own mind. Today's debate, be it resolved, get ready, for a big, long-term surge in inflation. For President Biden's $1.9 trillion coronavirus relief package has been passed, meaning a new round of stimulus checks for most Americans. What you see is an awesome increase in liquidity, courtesy of the central banks. global liquidity is likely to be up by about $20 trillion. Given the amount of stimulus about the course through the system, it's going to be a minor miracle if there isn't at least an inflation scare this year.

This morning we got a major warning sign about inflation. Producer price is planning more than expected in January. Hello, I'm your moderator, Rudyard Griffiths. Well, between historic levels of government stimulus and countries around the world and more than half a billion vaccinated consumers ready to pull out their wallets, we could be on the verge of kicking off a roaring 20s of the 21st century. And with that, some experts say will come a surge of inflation like we haven't seen since the 1970s. As Milton Friedman said, inflation is always and everywhere a monetary phenomenon.

If you believe that, you look at the central bank balance sheets exploding right now. And you say, there's going to be inflation. inflation bulls argue that the post-pandemic recovery is just one of many trends converging to create rising prices for years to come. They argue that demographics, in particular an aging population that shrinks the labor force and dramatically increases health care costs, are accelerants for long-term inflation. Here's Charles Goodhart from the London School of Economics. An increase in the young and the old, particularly the old, who consume. but do not produce, it is inflationary. It has further inflationary effects because the only people take care of them. Skeptics say that the mindset after experiencing a plague is to pay down debt,

not spend more. With interest rates on safer investments like bonds suppressed by central banks, aging populations will spend less, suppressing consumer demand. And while the government may be printing money at a record pace, the rapid technological change brought on by COVID-19 will ramp up the automation of workforces, driving wages down. In short, the specter of a long-term rise in inflation is just that, a fiction of our imaginations. And you're just not going to see a permanent increase in the price level, and that's got to do with the structural transformation of the U.S. economy, to now that's one organized around digital technology, that's disinflation, and that's going to offset the temporary increase in prices.

On this installment of the Monk Debates, we challenged the essence of these arguments by debating the motion, be it resolved, get ready for a big, long-term surge in inflation. Arguing for the motion is Minoge Pradhan, founder of Talking Heads macroeconomics based in London, England. Manoge was previously managing director of Morgan Stanley, and he's also the co-author, along with Charles Goodhart, of the much-talked-book-on-a-book on inflation called the Great Demographic Reversal, Aging Society's Waning Inequality, Inflation Revival. Arguing against the motion is the legendary David Rosenberg, President of Rosenberg Research

in Toronto, Canada. David, in his many-decade-long involvement in commenting and analyzing financial markets, is the past chief North American economist at Merrill Lynch. Manoj, David, welcome to the Monk Debates. Thank you very much for having us, and thanks for everyone for listening in. I'm really looking forward to today's conversation. It seems that all people are talking about or worrying about is the risk of rising inflation. We're all trying to understand.

Is this a moment where the global economy for the first time in decades could experience a surge in prices across the board around the world, upsetting and changing all of our assumptions about what things should cost, what interest rate should be? Or is this a blip? Is COVID a blip? And we're really all of us inside a long-term secular decline of inflation that began in the 1980s here in North America and then spread around the world. So the opportunity to have the two of you experienced seasoned observers of economics, of markets, of central banks on our program today is a privilege indeed. A resolution today is simple. It's to the point. Be it resolved. Get ready for a big long-term surge in inflation. Manoge, you're speaking in favor of today's resolution. I'm going to put a couple minutes on the clock and hand the program over to you. Well, thanks very much. There are three points that broadly outline what we're trying to say. Number one, I love the way you said it. It is a secular trend. But our argument is that secular trend was driven by demography. that global demography, particularly China, led to disinflation.

The second point that we have is, look, it's a very simple friction that sets inflation into motion. The old and the young don't work. They consume. And so they create an inflationary impulse. The working age population produces more than its consumes. And so they are disinflationary. When the world was dominated by workers, you've got a disinflationary impulse. And now that the elderly are going to start taking over a little bit more of the delta,

you're going to have an inflationary impulse. And the last part is we're all set for an incredible surge in debt that is related to aging. It's very difficult to get rid of debt through growth because we're going to grow slower. I don't think central banks will aggressively lower inflation because of debt. So the one thing that we have is what Milton Friedman told us, which is taxation without regulation, inflation. Thanks, Minoge. David, you're arguing against our motion today. Be it resolved. Get ready for a big long-term surge.

in inflation. Let's hear your two-minute opening statement. It's one of the few times I think I've heard that aging demographics are inflationary, and I find that people who use that argument look at it principally from the supply side. But we've done at Roosevelt research, and we wrote a report on it recently, looking cross-sectionally across the globe and actually found that the older the population profile, the lower the long-term inflation rate. And it seems to me from a demand side, that tends to make a lot of sense because as you head into your retirement years, most of your spending is really confined towards necessities. You're past the key point of your lifespan where you're focused on, shall we say, cyclical goods and services. You know,

that aside, you know, look, most of the inflation debate is really centered around the response to the pandemic, the fact that we've got disrupted supply chains, that we've got this massive fiscal and monetary reflation going on. Right now, and has been the case for the past year, the pandemic, its impacts on supply and demand, the stop and go fiscal policies, which are mostly transitory in nature have caused these wild gyrations and volatility in the data. What I don't understand from the inflation argument is people tend to believe that with the reopening of the economy, only demand is going to come back. But you see supply is going to come back as well. Remember, as in April of last year that oil prices for one day actually went negative, now it's

$60 a barrel. And people talking about deflation a year ago were dead wrong. And I think people talking about inflation right now are dead wrong. There's just tremendous volatility in the price data. I think we're going to have a near-term inflation spasm, and I think the Fed is right, that it is really just transitory. And there was a comment that was made about debt. This debt that finances current consumption comes at the expense of future aggregate demand, but what stays on the balance sheets is the excessive debt. That's the massive tourniquet or constraint on aggregate demand. Without aggregate demand. You're going to need to have one hell of a sclerotic or inelastic supply curve to generate the inflation people are talking about. So we come out of the pandemic with even more

bloated balance sheets globally than we've had in the past in the government sector, the higher the debt burden, the lower the long-term inflation. And Japan is just an incredible template for that scenario. Excellent, David. Thank you. Menoid, your opportunity now to rebut what you've heard from David? What issues? What points of his do you want to take exception with? I'll put another two minutes on the clock. Let's hear your rebuttal. So we could take quite a few, actually. There's a lot in there. Well, let me try with a few things. I don't think anyone disagrees that this year's inflation numbers are going to be anything but a massive kind of recouping of the lost demand that you had over a period of time. I don't think that's the problem. The issue is, if you look at Friedman and Phillips, both those models today are giving you complete.

completely diversion signals. Hi, Monk members, Rudyard Griffiths here, just jumping in for a second, because in this debate, we're going to hear a number of references to the Phillips curve. So here's a quick explanation to help you out. The Phillips curve is a visual representation of the inverse relationship, inverse, between unemployment and wages. The theory is that if one rises, the other falls. So if unemployment falls, workers' salaries should grow.

At least that's the theory. Okay, back to our debate. You know, you've had monetary aggregates rising aggressively across the globe while output gaps are deeply negative. A year from now, what you're going to see is that savings have gone up. So a year from now, exactly when the Fed is expecting inflation to come down, monetary aggregates will still be high. Velocity will have made somewhat of a comeback. Some of that spending that you've been keeping away from consumers might go into real estate. And the output gap will have become positive.

I don't understand why that's a deflationary. impulse. Number two, I think the story on debt has to be very carefully understood. The two examples that you've used, both China and Japan, were a deflationary impulse because a lot of the debt that went into the economy really never created assets that produced any returns. Of course, that's going to be deflationary. Debt is deflationary if you raise interest rates aggressively and shock people into not being able to create enough revenues. But otherwise, broadly speaking, debt tends to be inflationary. The third thing I'll argue about is take a look at a lot of the studies that have broken up demography into cohorts. Pretty much all of them tell you that when you look at

the elderly part of the population, they consume more. And that leads to a higher level of inflation. The final thing I want to squeeze in here is I think we've got to be really careful about old age consumption. In the advanced economies, it's very clear that with old age, the kind of spending that you get is financed by governments to a large extent. So government transfers help elderly people access their services. That gets translated much faster into debt. And if I'm right about the kind of debt profiles we're talking about, they do lead to consumption. They do lead to higher spending.

But they don't lead to excess capital, creating excess capacity and deflation. I don't think that's what we're up against. Thanks, Minoge. Your opportunity now, David, to give us a rebuttal. Let's hear it. I mean, I've done the work on this myself. just go to the Fed survey of consumer finances, which gives you 10-year age cohorts in the United States over time. And you see very clearly that once you're past the age of 60, your spending on cyclical goods and services goes down precipitously.

The only area where spending goes up is on health care. So I don't know. I guess that we're just looking at two different data sources. Look, we can skin this cat several ways. And you can look at inflation a bunch of different ways. I think that Rogoff and Reinhart wrote the epic classic over a decade ago on debt dynamics, and it's not linear, but you get the laws of diminishing returns on aggregate demand from debt ratios that climb above 60 percent.

In the United States, in the government sector, we're already getting up to 130%. And we saw it in the last cycle. You have to, I'll just come back and say, I'm hearing these same arguments that I heard a decade ago. And all these inflationists are just drumming up the same slide. package they had at the beginning of the last cycle. Everybody was talking about inflation, fiscal deficits. Here's the issue I have. We closed the cycle before COVID with a three and a half percent unemployment rate. Tariff increases, nationalism, protectionism, the Fed's explosive balance sheet,

money supply doubled, the fiscal deficit went through the roof, we had tax cuts apparently were supposed to be inflationary. We had the lowest unemployment rate in 50 years, three and a half percent. and core inflation was barely above 2%. Wage growth was barely above 3%. They were basically about a third of what these trends were the last time we had 3.5% unemployment, which tells you something about the shape of the Phillips curve. Hi, listeners, Roger Griffiths, your moderator, just jumping in here again. We've got another mention of our friend the Phillips curve.

Remember, this is the graph that says when unemployment is low, wages are high. What David is saying here, in effect, is with three, 0.5% unemployment, you'd be expecting to see a real curve on the graph upwards, showing higher wages and therefore potentially higher inflation. But in fact, in recent business cycles and economic cycles, that has not proven to be the case. He's saying the Phillips curve is dead. Stay tuned for Menoid's view on this topic. Now back to our program. And productivity is an inflation killer. What people who are in the inflation camp don't tell you. that there is an 83% inverse correlation between productivity and inflation. And one of the

telling statistics last year is that we had a year where GDP was down 3.5% worst year since 1946, employment was down 5.7%. But what did businesses spend money on last year? Was IT, services, software, were up 7% in volume terms. So it's funny that in a year that was the worst year for the economy since 1946, productivity growth, that's 2 and a half percent was its best ever, at least since 2010. So I have a tough time reconciling an inflation view with productivity when productivity ultimately contains unilabor costs, and it's ultimately the trend. There's no more perfect correlation with inflation than unilabor costs, productivity adjusted wages. The implications of productivity on unilabor

costs will be fundamentally disinflationary for an extended period of time, irrespective of everything else we're talking about, whether it's debt or demographics. Thank you, David. Well, let's get to the moderated middle of this debate where I get to pepper you both with, you know, questions that are top of mind for our audience. So, David, I know you have strong views about 2022. You have a theory of a fiscal cliff. Give us that view into the future and why you think it's potentially disinflationary, or at least it's not going to lead to a round of rising inflation in the next period of time. Well, I mean, the question becomes, what is the sources of vitality and dynamism in the U.S. economy? Vaccination.

and stimulus checks. Why did Donald Trump have to sign on $900 billion on December 27th? Because the economy was relapsing once the previous round of stimulus checks ran out. And of course, we had the extra insurance policy being taken by Joe Biden. That's leading to what's going to very clearly be a second quarter boom. But this is a stop and go economy. Now, the economy is already in the United States three quarters open. So we have 25% to go, and then we're going to level off. The reopening party is going to plateau in terms of incremental impact on growth. And then we hit July and August, and the stimulus checks, this last huge round, is going to subside. And so what I think is going to happen into the fourth quarter

is we're going to have a repeat of last year's fourth quarter. You look at the monthly GDP numbers from the end of September to end of December, GDP in the United States was negative 2.8%. From end of September, end of December, we were actually going back into a double dip until we got this next round of stimulus. But don't you see, this is all transitory short-term stimulus. As not as if Uncle Sam gave you a permanent wage increase. And that's what I have in my forecast. I actually think that past the light at the end of the tunnel on COVID is going to be

actually very difficult for the economy. And so I have a tough time believing that we're going to get inflation. I'm not talking in the next 10, 20 or 30 years. because frankly, I don't know. I don't go out that far. But let's call it for the next couple of years. I think people are going to be surprised at how weak the demand side of the economy is going to be. I've done work on this because ultimately we are behavioral analysts.

How do you actually have a forecast for inflation without having a view on where the savings rate is going to be? And one of the reasons why inflation didn't come back in the last cycle with all the stimulus is because the health sales sector in the United States spent most of the 10 years repairing their balance sheets. And it's ongoing. I mean, the savings rate is still, Roger, the savings rate is still 13.6%. And the economy is three quarters open. It's like Americans are saving more and spending less. That's what we found in a new CNBC and Acorns invest in youth survey.

So 46% of the 5,400 people that we pulled now describe themselves as more of a saver compared to before the pandemic. So you see a lot of the stimulus is going to get saved, not spent. And the one statistic that actually haunts me is the one that said this, going into the pandemic, more than half of the households in the United States, did not have enough savings to get through three months of vital economic activity. So I think there's going to be scarring, not just in the labor market, but scarring in terms of where is the personal savings rate going to level out at in the future? And if you take a look at previous shocks like this, the savings rate stays higher for longer. And you see, that ultimately impairs 70% of the economy called the consumer in terms of the impact on aggregate demand and then the impact on inflation. Menage, let's hear your thesis for 2022. I think we're all trying to understand where markets, our investments, inflation is going to go over the next year.

Why do you think there could be a big inflationary surge on the horizon? not years away, but potentially in the next 12 to 18 months to come. I think the points we would disagree would be following the following. Number one, you think about a fiscal cliff, but that fiscal cliff is very difficult to reconcile under two circumstances. Number one, it's not like the Biden administration is stopping where they are. Number two, I think it's very, very, very clear that the two mistakes that, one, made on the fiscal side and the monetary side are very keen to not be repeated. Number one,

fiscal austerity was blamed for a lot of the slow growth that we had seen in the post-global financial crisis. Most administrations don't want to do that. And number two, there's been a sea change at central banks, right? We're talking about inclusive growth, which means their ability to sustain overheating their or their willingness to sustain overheating, their willingness to sustain inflation in order to get that inclusive redistributive growth sets the threshold at a very, very, very different level. David's absolutely right that some of the stimulus is going to run off. But if he is also right about supply coming on stream and productivity coming on stream, I don't know that we are not necessarily going into the golden years. Are they going to be

fantastic and rosy? Maybe not. But they certainly don't look bleak to me. I think they look all right. And the final thing to point out is, where is that savings going? I mean, you know, we'd all go back to Milton Friedman's permanent income hypothesis, right? And he would tell us that if your income shock is temporary, you're going to save it. If your income shock is permanent, you're going to spend it. And I don't really know if all consumers know where they stand at the moment with their lifestyles. And so what they seem to be doing is they seem to be getting into a good that's part consumption, part investment. There's about 20 countries around the world, including the United States, in which house prices are growing tremendously fast.

And if that story continues and you move into. a housing boom from a house price boom, then the ability of the housing sector to move the economy higher is very, very well known. Hi, Monk podcast listeners. I wanted to let you know about our spring 2021 Monk Dialogue series on the fate and future of our democracy. These are in-depth, online, and interactive video conversations with some of the world's brightest thinkers.

We'll feature over the next number of weeks, everyone from Jonathan Haight, to Scott Galloway to Douglas Murray, to Nazarene Malik, to Timothy Snyder, and Irshad Manji, all reflecting on how has COVID-19 reshaped our democracy? How are we dealing with the forces and stresses of this pandemic on our institutions and on our shared values? You can find out more about the monk dialogues on our website, www.w monk debates.com forward slash dialogues. Now back to our program. Manoge, I think there has been a longstanding assumption that technology is deflationary, that automation, robotics, this is replacing workers.

It is lowering wage demand. And without wage demand rising, without workers, unions, people clamoring for a higher pay and compensation, you just, you can't have a large secular trend in inflation. in inflation expectations and a surge in prices over the long term? What's your reply to that? First of all, if you all get a technology revolution and we're all in driverless cars and everything's changed and every single aspect of our lives has changed, I'll be very happy to be proven wrong. What David's perhaps not alluded to from his research

is if you avoid the cycle and you look at the trend, as you said, the secular one over the last 30 or 40 years, the problem is that it's not the Fed that kills the Phillips curve. It's China that puts it into a coma. And you're going to get a reversal of that Phillips curve argument as the demography story turns. So you've had the entire capital stock of the Chinese economy being completely revolutionized at a time when labor costs were low. And that completely killed inflation. Now you're trying to get into deflating services through technology. There's scope for that. There's no doubt about it. But it's a little harder because you're trying to disrupt

services of highly paid workers and the advanced economies who have been basically compliments for technology. There's a very nice recent paper from the NBR looking at the use of robots and nursing homes in Japan. And one of their conclusions is that you don't really need fewer people. We actually think productivity is going to go up. And frankly, if you look at the structural side of things, I don't think it really means that we're going to get away from inflation back into disinflation again. As I said, If you get a massive revolution and we're all living in Stephen Spielberg's world, well, I'll be very happy to be wrong, but I don't think we're getting there very soon. Thank you, Minotia. Big question for you, David, also, which is Minotia's point that the world's getting older.

That means that the working age portion of the population is getting smaller. So, especially in a country like China, which because of its one child policy has arguably one of the steepest and possibly most destructive demographic cliffs. to fall off in the next decade. So why isn't that? Why isn't Minot's right? Take everything else aside. Destiny is demographics. And right now, we are on the precipice of the graying of the globe. And this will drive inflation for decades to come.

Well, yeah, I don't dispute that demographics are an important part of what drives aggregate demand. But I guess you'd have to explain to me how aging populations drive aggregate demand. How does that work? I basically reach the age of 65. I drop out of the labor force. I'm collecting my pension. I'm making a lot less than I was before.

And I've already raised my family. The kids have moved out. I'm not buying a new car. I'm not buying a new house. I'm not having to furnish the new house. After the age of 60, incomes fall off a cliff. And it doesn't matter if you're spending more out of that lower income. what are you spending your money on?

Most, the only part of the spending pie that goes up with age past a certain level is health care. So, you know, tell me how many 75-year-olds are going out and buying a Tesla. But David, what about the working age workforce itself? You agree that that's going to shrink. So doesn't that mean that those people can claim higher wages? Higher wages? Okay, should it lead to higher wages? The question is, why hasn't it already?

It's not as if we're not growing a year older every year, about every decade the median age of the population. It's getting a year older. The median age of the U.S. population is 38. 10 years ago, it was 37. But I guess I would pose the question back to you, although you're the moderator, is we're a year older than we were 10 years ago

in terms of the median age of the population. Why was there no inflation cycle? And why was there no wage cycle? the question that the inflationists have to ask, we had the end of globalization as we knew it with Donald Trump and all the tariffs and all the nationalization, protectionism, isolationism. That already happened.

All the experts were telling you that was going to be inflationary. The actually AIDS profile of the population and the last cycle got older, Rudyard. So why didn't we get the inflation last cycle? We had everything, the repeated QE's, massive expansion of the balance sheet, money supply doubled.

We finished the cycle with a trillion dollar, deficit out of 3.5% unemployment, lowest in 50 years. Why didn't we get the inflation before the pandemic? So, Manoge, let's hear your answer to that. I'm luckily not one of the, I wouldn't call myself an expert. I'm at least not one of the people who said we'd have inflation over that time period. In fact, when we wrote the book in 2019, we had no idea whether inflation would actually show up over the next five years or so. This is a super tanker. If you look at the global trend, I think where David and I may not. disagrees when he talks about a cyclical view, I'm talking about a 30, 35-year-old view.

Global demography started turning around in 2010. What has changed, and let me answer David's question as best as I can, first of all, until this demographic reversal had turned around, we really had no structural argument before for inflation, and we never made that argument. Our argument is a relatively new one saying that, look, this is changing and we need to change with it. If you look at longitudinal data, national transfer accounts, it shows you that aggregate consumption after the 60s actually goes up significantly in the advanced economies. So they may not buy Tesla's, but they sure are consuming a lot of services. They may all be healthcare. And what's even worse, they're getting it financed by the government. So there is demand. There is aggregate

demand. And that aggregate demand is being issued by someone who has the ability to extract. senior-rarch revenues. I think that's powerful. Can we say confidently it's going to appear in six months? No. But the secular trend, I think we have a lot of confidence on. And we actually have more confidence in the markets that 2022, which is the year in which the Fed thinks inflation is going down, is actually pointing exactly the other way. So, David, final argument to try out on you before we start moving towards closing statements is one that Minogue brought up towards the beginning of this debate. And it's the fact that central banks have enabled, encouraged a kind of a glutton's feast of debt, not only during this pandemic, but in the decade prior. And the quickest, the easiest,

the most efficient way for all of us to get out from under that debt is inflation. It's the, you know, the silent tax that, you know, you can complain about, but it's certainly different than something showing up on your tax bill at the end of the year. So why are you confident, David, that the central banks aren't going to get away with that? That they aren't going to get away with engineering a situation where inflation becomes inevitable because it is the exit strategy. It is their preferred way of escaping this yawning debt trap that is opened up before us. Well, look, we had a boom in debt.

in the last cycle that was in the corporate sector, and then broadly speaking, of course, in the government sector. You know, the comment was made about austerity, but, you know, a couple of years during the Obama regime, the Tea Party, you know, had their thumb on his throat, but it was only a couple of years. We finished the cycle with a trillion dollar deficit at a time of a three and a half percent unemployment rate. You couldn't have built the conditions more for inflation than we had back then. Look, it goes to the goal. to show how complex the inflation process is. It's a very complex matrix. I would say that what's happened is that we came off the great financial crisis and the household sector, which is the

dominant component of GDP, which is aggregate demand, went into balance sheet repair mode. People like to say, look at how the household sector has deleveraged, look at all this dry powder on their balance sheet for future spending, but maybe this is a deliberate attempt towards frugality and sustainability. And so what happened in the last cycle, and why I say the savings rate is important is because before the great financial crisis, the steady state savings rate was 4%. And then in the decade after, it was 7%. It was basically averaged out to be higher 3% percentage points per year. And so I think there's a fundamental change happening on the consumer side. And actually, if you're taking a look at the components of GDP and what underperformed the

most last cycle, it was consumer spending. And so without getting that 70% of GDP in full-scale acceleration mode, it's going to be difficult to perpetuate very strong agribor demand growth, which I think is what you'll need to have a real durable inflation call. So I think in some, and this is what happened in Japan. In Japan, the government for decades desaved, but the private sector, and especially the consumer sector, bolstered its savings rate. And I think we're seeing signs of it right now. I mean, to me, that's actually,

if the savings rate is back to 5, 6, 7% by the end of the year or the end of next year, I will just say to you I was dead wrong. But if the savings rate levels off, not far from where it is today, we're in a whole new steady state of elongated frugality in the consumer sector. And one of my central tenants

is that we are in a prolonged period in the United States of households, continuously getting their balance sheet in better repair. I think actually as the population profile ages, this is what people want to do. They know they're going to live longer and they want to enjoy their post-retirement years,

but they want to do it with a certain level of lifestyle, which also means that the savings rate is going to be more elevated than it's been in the past. And I would say once again, we've done the research on countries with high savings rates. And the personal sectors are the ones that tend to have over time the lowest inflation rates. Thanks, David.

So, Miner's a final question for you before we go to closing statements, and that's just about central banks and central bank policy. It's been so much of the last kind of year, even the last decade, one could say, in terms of setting our inflation expectations. How do you think they're going to behave in the coming period of time? And to what extent do they have an exit plan? And how does inflation factor into that?

When we got out of the last crisis, we saw clearly that what was happening with quantitative easing was that it was central banks bailing out the financial sector. But the financial sector's prime objective at that point in time was to establish a rate of return that would strengthen their balance sheet. So you got towards the end of the cycle and you really needed tools like funding for lending, negative interest rates to incentivize or force them, if you will, to lend. This was not a QE story that went aggressively into spending. This is a completely different animal.

What you've got is an actual application of helicopter money with both Yellen and J. Powell coming out last year and saying, we can't send checks to households. You need to do it to the administration. And they did. So the injections that have come in to M1 and M2 are direct injections into the pockets of consumers and households whose primary objective functions are to maximize consumption and production, and they will spend. And the Federal Reserve is there to make sure that they do spend.

The way they're looking at inflation right now, I think, is through the lens of the past that the Phillips curve has been conquered and is dead, and they'd love to see it higher for a while. But I think they are wrong. What I think they get wrong is the fact that when you've got this kind of a situation, you're in a globally synchronized expansion of the kind that you and I will never see, and let's hope we never see it again in our lives. This is the first time that I can think of a crisis of this magnitude whose main thrust or the thing that caused the crisis has been solved within a year and a half. It would have been an ideal time to withdraw policy and yet we're going to do whatever we can to keep that policy in place.

As I said before, if David's right and inflation is low, fiscal cliffs will not arrive because it will be an MMT world more so than it is now. I think when central banks are looking at the inflation targets, they're looking at them very differently qualitatively. of England wants to be green. The ECB and the Fed want to be inclusive. And these regimes are exported very quickly. The Ricks Bank in the past cycle was already talking about the effects of monetary policy on inequality. So it's a subject that's been around for a while. I think that qualitative assessment of what inflation and the tradeoff with growth has to be is completely different from what we've seen before. The question still remains, can they engineer higher inflation. And our point is that the underlying factors over there are something that they're

underestimating. Their problem, maybe three, four years down the line will be how do you talk down inflation or how do you fight it? Fascinating stuff. Well, let's go to closing statements. You've both been very generous with your time. David, two minutes on the clock for you to kind of sum up the key arguments that you want to leave this audience with your assessment for why we're not going to see a big long-term surge in inflation. Let's have your closing statement. All right. Well, I'll just say that, you know, it's like the story of the starving man, and you

could either give him a fish or you can teach him how to fish. And I'll make no bones about the fact that 30% of the stimulus checks are being spent, 70% aren't, but 30% of a big number is still a big number. But this fiscal stimulus is all transitory. This is not a permanent tax cut. The government did not give you a permanent wage increase. Maybe at some point you can build an assumption that they'll do that through UBI. It's all temporary.

Use the template of last year. I beg you, go and take a look and see what happens when stop and go. Stimulus checks stop. And we had a 2.8% GDP contraction in the fourth quarter of last year. It wasn't because of COVID. It was because the stimulus checks ran out. Now, we're going to be at a higher level, but the growth pattern is going to be the same.

These stimulus checks are going to run out late in the summer. And Joe Manchin has already told you he's not signing on to another reconciliation bill. The short-term fiscal stimulus, unless we have a big relapse, is done. And you can talk about long-term all we want. The thing in the United States is that these are two-year election cycles. So what if next year, Joe Biden doesn't have the Senate or the Senate of the House? So what are we going to talk about long-term? There's not going to be the sort of fiscal stimulus that the left-leaning Democrats want.

It's all just based on assumptions. The Democrats really locked out on this so-called sweep. Joe Biden's made the decision to move further to the left, but it's all transitory. The fiscal stimulus is all transitory. But what is going to be permanent, in my view, is the consumer reaction function to the pandemic, realizing they have to do a better job getting their balance sheet into repair, which is what they've been doing for the past 10 years. and one of the fundamental reasons why inflation's remains so low.

So I would say to everybody, this arcane economic statistic, otherwise known as the personal savings rate, I would argue is the most important behavioral aggregate. We've seen that central banks and governments can't create inflation on their own. They need the 70% of GDP called a consumer to play ball. Well, let's see if they play ball beyond June, July, August of this year when these stimulus checks run out. Thank you, David.

Manoge, your opportunity, you're going to get the last word in this debate to sum up your key arguments for why we are indeed going to get ready for a big long-term surge in inflation. That's been our resolution for this debate. Let's have your closing statement. Well, I'll start by saying, Dave was absolutely right. If the personal savings rate remains where it is, it's touching 20%, even north of 15%. I think it's a very different world we're in, but it hasn't really touched more than 7% for the last decade. and a half. With this level of monetary expansion, I don't see that happening. So I'd love to revisit and see if I'm wrong next year. But I'll use my time, if you don't mind, being a little cheeky,

to talk about Japan, because that's used a lot. And we have an entire chapter in the book entitled, Why Didn't It Happen in Japan. And I'll give you three sets of arguments to think about it very carefully. Number one, if you look at Japan's debt profile for the government and you look at their financing cost, you can't tell them apart from Italy, the United States, Germany or anywhere else. What Japan went through was the same disinflationary impact from its neighbor and from global demography that the entire world went through. Number two, and this is a work that we're particularly proud of, having gone to Métis for about 20 years and manually downloaded a lot of the information from there, the corporate sector in Japan got the joke. While their leverage

was falling and everyone looked at them as a debilitated, spent force, they were actually dynamic. they understood that China was taking over the world. They invested heavily abroad, employed heavily abroad, and produced both goods and services heavily abroad, particularly in China and North Asia. And they were actually not repatriating any profits. So far from being something that demography just absolutely ruined demand for, they saw the global footprint, not the local footprint and went ahead with it. And the final point to keep in mind is there are two subsamples of Japan. The period after the asset boom was. really a lost decade. It was a very sad period. But after that, they haven't done very badly.

And if you look at the labor force, most of the wage adjustment, as we know, happens, number one, through bonuses. Number two, it happens through hours. And number three, they moved them into part-time workers. So looking at Japan as a footprint that inflation is not going to come, I think is a very, very, very difficult proposition. I would argue that demography, which feeds into government finance consumption of the elderly is a problem that is going to be solved in a capacity which, as we all know from the pandemic, has no supply at the moment. We're going to push everything forward, and that's going to bring about inflation. Manoche, thank you. David, thank you. These are big, complicated issues, but both of you

have brought not just your kind of wisdom, insight, and experience of this debate, but your prowess as kind of communicators to allow people. like me to kind of step into this essential conversation and to try to understand where inflation is headed both in the next year, but also as we've discussed over the long term in the generation to come. So on behalf of the Monk debate's community, David Monash, thank you for coming on the program today. It's been an absolute pleasure. Thank you so much for having us. Thanks, Roger. Well, that wraps up today's debate. I want to thank Minoge and David. They certainly gave us a lot to think about. If you have feedback or reflections on what you've

just heard, please send us email to podcast at monk debates with an s.com. Here's an email from Mike regarding our recent debate, be it resolved, there is no credible military defense of Taiwan in the face of Chinese aggression. Mike writes, Rudyard and Monk Company, the Taiwan debate was a draw, but it had lots of data points to bulk up each side. For me, the one omission was Taiwan's intellectual property assets and where they go? Or are they already departing if an invasion happens? It seems to me that with the tangled web of global economies, the key players have too many of their hands and too many of their allies and adversaries' pockets. Traditional warfare seems off the table. Andrew chimes in with some of his feedback on our recent podcast. He writes,

I enjoyed the debate on whether humanity is alone in the universe. One of the things that didn't get covered in the debate was something that I've been thinking about a lot lately. What if life doesn't exist the way it does on Earth in the rest of the universe? It was proposed that the emergence of RNA leads to DNA and that leads to life. But what if life in the rest of the universe doesn't have RNA or DNA? What if it's not biological at all? Perhaps a future debate could cover this. Wow, thanks, Andrew. I think my head just expanded by about 32 centimeters. And finally, Finally, here is a debate suggestion from Orlando writing from Puerto Rico. We love ideas for future debates.

He says, I would love to hear a debate on our colonial territorial status versus becoming a state of the United States. Hey, thanks, Orlando, and thanks for listening from sunny Puerto Rico. We've gotten a lot of positive feedback on our members-only podcast, which is yours to listen to any time as a perk of our free basic membership available at monkdebates.com. The Monk Debates podcast is that special place for civil and substantive debate on the big issues of the day. To listen to more debates on everything from climate change to religion to geopolitics to the future of human progress, visit our website, monkdebates.com. And thank you for helping us bring back the art of public debate one conversation at a time. I'm your host and moderator, Rudyard Griffith. The Monk Debates are produced by Antica Productions and supported by the Monk Foundation.

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