The Munk Debates Podcast - Friday Focus: Inflation Fight – Israel

Episode Date: February 3, 2023

Friday Focus provides listeners with a focused, half-hour masterclass on the big issues, events and trends driving the news and current events. The show features Janice Gross Stein, the founding director of the Munk School of Global Affairs and bestselling author, in conversation with Rudyard Griffiths, Chair and moderator of the Munk Debates.  The following is a sample of the Munk Debates’ weekly current affairs podcast, Friday Focus.   On this week’s edition of the Friday Focus podcast, Janice and Rudyard start the program with a look back at a big week in financial news and markets. The U.S. Federal Reserve slowed its rate hikes to 25 points for the first time, and stocks soared while longer-duration interest rates plunged. What does this say about the future of the fight against inflation? The show wraps up with a discussion of the security and political situation in Israel and the high-stakes fight between the government of Benjamin Netanyahu and the country’s highest court. To access full-length editions of the Friday Focus podcast, consider becoming a donor to the Munk Debates for as little as $25 annually, or $.50 per episode. Canadian donors receive a charitable tax receipt. This podcast is a project of the Munk Debates, a Canadian charitable organization dedicated to fostering civil and substantive public dialogue. More information at www.munkdebates.com.Become 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.

The following is a complimentary excerpt of this week's edition of the Friday Focus podcast by The Monk Debates. To access full-length editions of each and every episode, along with all kinds of great additional benefits and perks, become a donor to the Monk debates. You can do that for as little as $25 a year, and you'll receive each and every year 50 Friday Focus episodes at full length. It's all available right now on our website. website in just a few simple clicks. Triple W. The Monk Debates.com. Look for the Friday Focus option in our navigation bar, the top right of the website. Make your donation, and we will send you each and every Friday a link to listen to the full-length

edition of this program. Thanks in advance for your generous contribution. Hello, Monk listeners. Roger Griffiths here, your host and moderator. Welcome to this, the regular Friday Focus podcast, our program each and every week, diving into the big issues and ideas shaping the news. We do this every Friday with Janice Gorse Stein, the founding director of the Monk School of Global Affairs, International Brown Scholar and author. Janice is coming to us from an undisclosed location where I hear it is not minus 30 degrees today.

But Janice, I won't expose you to being disloyal to the cold that all the rest of us, or at least in central Canada are suffering through today. Let's... The polar vortex as we describe it. Yeah, it's coming to Florida, too, though. Well, it's not in Washington yet, so that's an advantage. Here, here. Okay.

Let's dive in. The first topic has got to be just a crazy week in financial markets. We saw the U.S. Federal Reserve come out, maybe not entirely surprising people, stepping down following the Bank of Canada to a 25 basis point increase in their federal funds rate, the overnight rate. But what was interesting was the commentary, the press conference afterwards, where Chairman Powell, Jerome Powell, seemed to, I don't know, what's the language, doveish signals on a variety

of different fronts. And you saw this frenzy in markets, meme stocks, bed, bath, and beyond, Carvana, all those those lovely stonks, as they were called in 2021, rocketing up on, I don't know what, Janice, an assumption, I guess maybe this is all over. Inflation's done. We're back to ultra-low interest rates. It's just a matter of time. So let me be the Dr. Doom in the room then, Richard, and say this.

First of all, these are pauses, because there's a lag, as you well know, between the time, central banks cut rates and the impact on the economy. So, yes, we're seeing significant improvement in some inflation numbers that are dropping, but we are not there yet. And I would not want to bet my house on either Powell or Tiff Macklin, if they see an uptick over the next two or three months, not starting this game again. So I would be very modest. The second big one, which I think it's driving the markets and is not getting the same kind of attention for good reason as Powell is China's reopening.

And there is euphoria about China coming back into global market, the pent up COVID demand that there is in China for a whole, you know, for bed, bed, bath and beyond, literally, for a whole set of products they've not been able to access. Again, I think at the very best, cautious optimism here, this is a badly dented market. Consumer confidence is really shaken in China as a result of the draconian measures. And it's also, frankly, not clear how deep this opening is. Yes, at Davos, we got the signal, but who did we get from the most Western-oriented, the most technocratic, the most kind of open, exposed, trained economist, Uihei, who is a trusted confidante of G's, but it is also very likely he was sending a signal here. So I am much more cautious than the markets.

Yeah, it's strange. These central bankers have just these completely outsized roles. I mean, to me, it's always a delicious irony that supposedly the most free market economy in the world, the United States kind of lives and dies on, you know, the syllables, the tone, tonality, the body language of someone who effectively is an unelected civil servant. You know, talk about state planning. You know, I guess this type is tolerated for all the good reasons that we need an independent monetary policy. I get that. But what I don't get this week is the sense that, you know, inflation is one and done. I mean, you Janice went through the 1970s.

You know the story of Arthur Burns, the now vilified chair of the Fed, who did, it seems in a way, followed down a path, a trajectory that not that our central banks are on, but that they're dallying with, they're toying with. They like the idea of pausing now, waiting and seeing maybe cutting rates if they need to, but if employment is challenged by, as you say, the lag time of the cuts that have been made. But wasn't that the lesson of the 70s, Janice, that inflation doesn't let you off easy. You got to put your foot on its neck on the mat and basically strangle it out of the economy as Paul Volcker later came back and did. You know, he had the nightmare inflation crisis where rates had to go up to 18%, frankly, to bring down inflation. So we have to be careful rather than not to go back to Volcker's nightmare to judge.

But if we look across the economies that are struggling with inflation in the developed world, none of these economies has yet experienced a minor recession. So to hope that we can get out of these levels of inflation, you know, in the UK, around 10%, and some of the others in Europe, not much less. So to hope that we can do this and entirely avoid even a minor recession, which is where we still are, I think is very optimistic. I really see these two central bank governors, and I am a big believer in central banks, economies do not regulate themselves.

We know that. Market efficiency, that vaunted market efficiency is disappointed us over and over. Markets don't function without good regulation. And so we need these central bank governors. But I think, I don't believe they have made a decision to stop. I think they've made a decision to pause, evaluate, and they have all their options. Sure, egregious. But the pausing, because of a decade.

of conditioning of easy money and the Federal Reserve and these central banks always stepping in at the moment of crisis and never letting the moral hazard play itself out, always bailing everybody out. That's created this frenzied response to the perception of a pause and these dothel signals about disinflation happening through various parts of the CPI. And that works directly against monetary policy. It is a loosening of financial conditions. And that was the bizarre, I'm enough of a macro geek that I actually listened to Powell's press conference. That was a weird thing is he was unable or unwilling to mention and acknowledge that financial conditions have loosened significantly since October by any measure. Goldman Sachs, Bloomberg, you name it.

He doesn't want to go there because the market is lowering bond yields. Bond yields are coming down. The Fed only controls the overnight rate, the yield right at the front of the curve. Those other yields are coming down. Mortgages are getting cheaper. It's cheaper to borrow for car loans, credit cards, businesses. I don't know, Janice. I get this creepy feeling of what a lot of big bureaucratic institutions in our era always do, which is trying to have their cake and eat it too, kicking the can down the road, optionality, data dependent,

you know all the phraseology. Yeah. But the world doesn't often, you know, sometimes it's great. Maybe the world unfolds exactly as we plan. Other times,

it doesn't. You know, to put the politics back in this discussion, and both governors would tell you, they are immune to politics. They are independent central bankers.

That's certainly, unless it's a role, but, you know, Nobody with that kind of responsibility can be wholly immune to politics, frankly. And those two governors are in countries where elections are looming over the horizon. If you're going to tilt the scales as they're trying to estimate the uncertainties here and nobody can be sure, if were I in their shoes, I might be tempted to say, well, I'm going to put my thumb on that part of the scale.

It's not going to push this economy into a major. recession in the run up to next year's elections. And I think that's probably a factor too. But on the other hand, it's a kind of steely character to both these men. I certainly, I know Tiff Macklin, he doesn't bend easily. He has to be convinced that what he's doing is right. And I think if we, in the next two or three months, we see core inflation rates going up as they well could frankly look at the level of spending in the United States. Biden is putting $2 trillion into the U.S. economy. So if the rates go up in the U.S.

And Powell moves first, we can't be far behind. I think we are, we're hanging by our fingertips right now. This is not over. Yeah, my prediction is like it's one of those zombie movies, you know, at the very end or they've killed the zombie and then the hand reaches out of the grave and just grabs you by the ankle. I don't know whether we're going to get pulled into a big recession, a small one. I don't know, but I just, this whole idea of immaculate disinflation, you know, just this

beautiful glide down, employment remaining high, the economy remaining strong. It just seems like a fantasy to me, but it's, what do I know? It hasn't happened, Richard, so. Yeah, but it seems like. like a lot of people in markets are way smarter than I, at least based on the capital they're allocating, certainly a lot richer than I am, are making that bet. And that to me is the $64 trillion question is, is the market right? And the Fed is their market is predicting the Fed will be cutting rates before the end of the year. The Fed and Tiff Meckland and everyone else said, no, no,

we're maintaining rates. We're not cutting. We're being prudential here. It'll be fascinating to see when we do our year-end to show, who was right, Mrs. Market or Mr. Powell and Mr. Mecklin? I don't know. I'm kind of betting with you right now against the market. Now, we should both say, Redyard, nobody should take our advice on any decisions they're about to make. We have a macro look way up. And in comparison to people who do this professionally, we are commentators, not advisors. Here, here. Well, let's take a break when we come back on the other side. We're going to dig into our second topic of the show, which has got to be Israel. A lot going on there. A security situation that seems to be deteriorating. Politics amped up to 11 on the dial. Some high-stakes discussions about the Supreme Court. We got all that for you right after this break.

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