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If you turn on your TV, if you go online, my guess is you’re going to hear a lot about a recession?
Are we entering a recession?
When are we entering a recession?
Are we in a recession right now?
Is this it?
Is it here?
Am I in it?
What I want to argue in this episode is it?
There’s a more important question to ask right now because the answer to this question, determines our entire economic future the future of gas prices and growth and housing prices.
And Ox, and that question is, are we at Peak inflation is inflation?
Finally, finally, finally going down and I believe the answer to that.
Question is, yes, Peak inflation is right here, right now.
I’m calling it in retail.
Target and GAP are slashing prices on inventory.
In the car market.
Used car sales are falling in electronics.
Look like they’re easing in international.
Shipping Freight rates across the Pacific are declining and most importantly, the price of oil Metals wheat, corn, all falling oil.
Prices are falling really, really fast and that tends to mean the gas prices, will follow.
And if inflation is indeed doing a U-turn, that is huge news for the economy, because it means the FED won’t have to keep jacking up.
Interest rates won’t have to keep destroying aggregate demand.
And won’t have to keep pumping the US economy with tranquilizing drugs to break the fever.
The fever is already breaking.
So to get a clearer read on inflation, which will also give us a much clearer read on everything else that’s happening.
In this wacko economy.
Today’s guest is Noah Smith.
The excellent economic writer and the author of the newsletter, no opinion.
We talked about the great disinflation where it’s happening, why it’s happening, and what it means for the future of the US economy, and US politics This episode was in very high demand in our inbox, thank you for that and is always keep it coming.
Send your feedback and episode ideas to plain English at Spotify.com.
I’m Derek Thompson.
This is plain English.
Noah Smith, welcome back to the podcast.
Hey, great to be back.
Good to see you again man.
Good to see you too, man.
So I mostly want to talk to you here about the prospect of a break-in inflation, the fact, the possibility of peak inflation, but since the media is so focused on recession, fears right now, I Maybe we begin there.
Do you think the US economy is in a recession right now?
Well so the word recession is in well-defined.
The popular definition is two successive quarters of negative GDP growth but I think that there are times when that Criterion does not make a lot of sense and this might be one of them.
So when economists talk about recessions, they just mean any deviation below Trend in output and in terms of that, I think, yes, we’re going to stay.
Definitely see a deviation below Trend in terms of output.
But I think that you see employment holding up very well and that means people don’t feel like there’s a recession, you see consumption and capital expenditures holding up very well.
So it doesn’t feel like a recession to a lot of people yet and yet I think we do have evidence that declines in aggregate.
Demand are now at work.
Thanks to the fed and thanks possibly to some other factors.
So even if it’s not something like the 20/20 recession or the 2008 recession, it could still be the kind of downturn that we saw.
Maybe at the beginning of the century in 2000-2001 where consumer demand was pretty strong unemployment didn’t increase too much but at the same time you saw a pullback in investment.
You saw trouble with inventories, you saw trouble with exports.
And so technically the US economy entered a bit of a recession in that year, but it wasn’t the kind of catastrophe.
We’ve experienced in the last two official.
And if I had to make a prediction, you know, of course, predictions are worth the paper.
They aren’t printed on.
I would predict that that 2001 recession is the closest analog for what we’re about to experience.
Which tells me that like one of the more important questions here is not just, are we in a recession?
Or are we not in a recession?
But rather what’s going on with inflation?
Because inflation is really, really persistent and the Federal Reserve has to destroy us.
Ton of aggregate demand in order to stabilize prices.
Then, you know maybe we could see more significant crash, maybe it’s, you know, equities could continue to follow the housing market could continue to fall, but if inflation is already starting to turn now that seems really important in terms of charting the near future of the Fed.
So I’d like to just move into talking about disinflation right now, you look across markets, you’re seeing just signs Galore that prices are already coming down in wheat, natural gas, Lumber corn, Rolex, watches board apes, and maybe most importantly, in oil.
So I want to go through a couple of these categories and have you telling me what’s going on with these prices?
What’s going on with oil prices, right now?
I mean, they’re going down, oil prices are determined by supply and demand in response to higher oil prices.
We have seen an expansion Capacity, the United States has increased oil production by about a million barrels, a day relative to last year, OPEC has increased oil production, somewhat and may be running out of spare capacity to increase more.
And so we’ve seen that Russian capacity.
Russia was the big decrease, right Russia, Russian capacity.
Really crashed after the Ukraine.
War began and sanctions.
Initially hit Russia has now worked out deals to reroute the oil that used to sell to Europe.
To India and China and everyone expected this because oil is very fungible, you can just pump it onto a ship, pump it into a tank sale, it across the ocean wherever you want very cheaply.
And so, so it was always pretty certain that Russia was going to just dive in citizen loyal to Germany.
It was going to sell oil to China, India.
And that is what exactly what is happening.
But what happens is that those people start buying super cheap, Russian oil and they say, Saudis, we don’t need your oil Nigeria.
His way Le whoever else were buying from.
We don’t need your oil will just buy cheap stuff from the sort of captive Russian suppliers.
And so then then those people say, well, okay who will buy our oil and then Europe and America were like, okay, we’ll buy your oil and and so then then, you know, the market sort of stabilize.
So that’s the supply side on the demand side, you’ve seen fed interest rate hikes.
And so, I think that people seeing the FED raising, you know, raising rates hiking rates, that’s going to reduce the And for oil.
So we’ve got a reduction in demand, you know, a sort of not an increase in Supply, but at least a stabilization of Supply.
Not a big decrease and I think that those two things are probably what’s pushing oil prices down.
So we’re seeing oil prices fall.
West, Texas, intermediate, for example, is down from about $120, a barrel to less than $100 a barrel.
If you do the quick dirty math, that is a 20% decline in oil prices in just about a month which should mean about a dollar off the price of gas except the dirty math isn’t very useful because Gas prices are famously.
As economists, say up like a rocket down like a feather.
Gas prices rise quickly and fall slowly.
So does this mean people should expect gas prices to fall in the next few months?
We will just saw gas, price decline, gas prices are already dropping.
I don’t know about 50 Cent’s yet but they are dropping someone’s a little steep and the answer is.
Yes, the answer is absolutely.
Yes, there will be a feed through to gas prices and in fact, what we’ve seen And so now you’ve seen a meme on Twitter today called Dark Brandon.
Have you seen that?
I’ve not seen the drug, Brandon may know Brandon, of course being the Nick Joe Biden’s alter ego and you know, Joe Biden tweeted.
This this kind of silly sounding tweet like hey gas companies, you better, drop your prices, and everyone was like, okay that’ll get them and then it did.
So then melt down in wholesale, gas prices, a wholesale gas prices.
Went from, you know, just eyeballing this what looks like 425 or something down to 337 in like a few days.
So, absolutely a 50% decrease in gas, prices is reasonable.
I would, I would hope for a dollar more.
I think that’s not unreasonable is not unlikely.
I mean, how important is this economically?
And I mean, I want to say politically the fact that it’s important politically is probably self-evident.
But is there a way in Which lower gas prices then feedback through the system and increase demand.
Like if more people are like, oh my God, gas prices are down then, you know, maybe there’s going.
It’s what that alone is going to stimulate economic demand, that then makes gas prices.
Go back up.
So that’s why I’m trying to figure out is like how stable is equilibrium is going forward?
That’s that’s I think a popular misconception.
Is that is that falling prices due to Falling demand?
Will will then make people more eager to buy stuff and then demand will go back up.
If this kind of thing happened demand and Supply ships would not happen.
It would be an impossibility.
It’s not I mean imagine going to the store and saying, you know, like like loaf of bread for like five bucks.
I’m not going to buy that and then the, you know, the baker says, oh no.
Well I’ll you know you’re like I’ll give it to you for four bucks.
Actually, I’ll pay five because you would have paid five originally.
So that’s exactly why this idea of, you know, demand shocks create lower prices, which lead to demand, demand decreases, create lower prices, which leads to man increases, that can’t be true.
Demand is how much you would pay, you know, for certain amount of stuff and there’s no and if demand Falls lower prices, are the result of that.
Not the cause of something else that.
So just keep your, keep your mind.
Never you were 10 whenever you sort of think of this kind of idea in your head.
Imagine the bread imagine saying I don’t want I don’t want to pay five dollars for bread and then a price drop inducing you to pay five dollars for bread.
That’s good, I appreciate that.
That’s that’s a good education.
Let’s move on to another place that disinflation is clearly happening, which is in metals and food.
What are the big metals and food prices that are falling?
Now, in terms of food, we’re talking about staple grains like, you know, corn and rice and And those kind of things, those are the most important food stuffs and, of course, wheat was what got interdicted.
So, who grows the wheat, Ukraine, and Russia grow the wheat, right?
And so, then they’re not the only ones but they’re really big suppliers.
And so they, you know, that’s why everyone was always trying to take over Ukraine back in the day, like, Germany, or whoever Austria.
I don’t know because in Russia, of course because they had the wheat and that Ukraine’s flag is actually a wheat field if you look at it.
It is meant to represent a wheat field.
I don’t know that it is the blue sky with the golden wheat below.
It’s just kind of funny and because it’s so oriented around we the week at disruptive right and Russia is trying to steal, we do.
So got surprised he rushes trying to steal wheat from Ukraine and ship it out and turkeys stopping them, but we can really substitute other grains.
You know, we can substitute corn for wheat and when wheat prices went up that also increase the prices of corn and then but Horn, you know, is mostly grown elsewhere.
He like the United States or whatever and so Corn, Growers could be like Bonanza time, let’s grow more corn and so corn prices, you know, started started falling.
And in terms of metal I would say that if you just if you just watch copper and Tin that’s a pretty good Bellwether.
There’s some specialized metals like lithium that matter.
A lot for specific things, like lithium matters for batteries that you might want to keep an eye on if you want to keep an eye on specific sectors such as the transition to electric cars, you want to keep An ion lithium.
But in terms of just looking at the broad overall, you know, market for Commodities, I would say just look at Copper and Tin.
So we’re seeing this harmonized.
Decline in Commodities oil is down.
That’s a biggie stuff we put in machines is getting cheaper.
Copper tin stuff.
We put in our mouths is getting cheaper.
One thing we haven’t talked about is China, s biggest economy in the world and it has been sputtering a bit in the last few quarters.
What is China’s role in all of this China was experiencing these rapid catch-up growth that slowed in the 2010s, that kept going somewhat rapidly at six and a half percent and then covid hit and it looked like China was going to take over the world.
They bounced really back really quickly from the initial covid and that.
But then this sort of insane overconfidence drove Xi Jinping to do a lot of stupid stuff.
And one of the stupid things he did was crack down on the internet industry.
The finance industry and education industry and the Entertainment industry and he cracked down on all those Industries which is left Chinese industry.
Just Private Industry to sort of cowed and not wanting to develop new stuff unless it’s really really certain that she Jinping will you know, sprinkles fairy dust of approval on it.
Next, he crashed the real estate sector and you know, actually allowed it to crash before, sort of a bunch of other party people came into that.
No, let’s stabilize the real estate sector but it’s probably too late by now.
So the real estate sector which is 30 percent of China’s GDP is really, really hurting.
And then also there’s the zero covid covid lockdown.
So China sort of, you know, screwed its economy over for reasons related to domestic politics and that is romantically reducing the demand for Commodities.
And now that’s reducing Demand on China side.
But remember when China’s demand goes down that means Commodities get dumped in a glut on the global market.
It’s an increase in supply for us so they’re drop in demand becomes an increase in Supply as far as the u.s. is concerned.
Another rich countries and so That that decrease in Chinese demand is helping us as well in that way.
And so, all these things are happening.
Do a combination of demand destruction and Supply.
Increase from a number of factors are just conspiring to push all these prices down.
So one way that I look at the big picture here is we’re coming out of a pandemic that has obliterated the world economy.
We locked down our populations.
We shuttered, the factories we laid off so many people.
The pilots The whole world went into this medically induced coma and when we came out of it, the global economy wasn’t ready to supply the surge in demand and so it sent prices all over the place.
You got a lot of people screaming about inflation expectations, becoming permanently, unanchored, permanently unsettled, and that maybe we were headed for a sequel of the 1970s, a sequel of stagflation.
And look, maybe that’s what we’re going to get.
I can’t see the future perfectly, but right now, Now if you study commodities prices, you are seeing the opposite, you are seeing disinflation.
So tell me what happens next.
How does all of this?
All these stories that we’ve collected together?
How does it affect the average American in the next few months?
So that so people’s direct consumption is going to get cheaper, right?
You’re going to get cheaper, gas, cheaper, food, people are going to like that they’re going to be you know there still be a little shell-shocked from the inflation.
Will still probably their anger will still probably last for a year or more maybe a year.
But by the on the 2024 election rolls around, I think this is going to be over, you know, might not be like, it’s it’s really hard to predict these things, but I think that the burst of Anger from expensive stuff, there’s I let’s let’s not say, I think it’s going to happen but I think there’s a good chance that by 2020 for all, this is all over and whatever mild recession we’ve had is also, it was important politically for the by demonstration to do that now, because when Carter waited to beat inflation until 1980, T.
It caused a brief recession and we weren’t out of it.
By the time, the election rolled around and Carter lost because inflation wasn’t down yet but unemployment was up.
So, stagflation was really looked like it was peeking, right?
As Carter went to re-election and got crushed.
But now, if you do it ahead of time, you have time to recover before the election, of course it’s gonna hit the minterms right there is no there is no stopping Republicans from taking the house back, but but hopefully by 2024, this will be done.
But when the, by the way, the other thing I was going to say is the other way that it feeds into lower inflation, by the way, disinflation means lower, but still positive inflation.
While deflation would mean actual decrease in consumer prices which we’re not going to see.
But disinflation is what we want and and so the other Factor here is that all the a lot of these Commodities are inputs into production oil and gasoline or big inputs into production metals are big inputs into production.
This reduces costs for producers and So producers of everything from Cars to TVs, you know, whatever our whatever people by washing machines, of course, Electronics.
Since chip prices are going down, ships are very important.
Now, all these things, those are going to reduce Consumer Price gains.
So consumer prices will still maybe go up by, but the little might be back to like 2% a year or something like that, and because their components are getting cheaper.
Housing prices have also seemed to stabilize even Fine, in some metros, you’re seeing inventory began to rise in a lot of major cities, which is really, really important.
That is the statistic that calculated risk blogger.
Bill McBride is always looking at, and he’s one of my big go to Jean housing, policy and housing economics.
Just walk me through what we’re seeing in housing.
And why you think we seem to also be seeing disinflation, not deflation necessarily, but disinflation because what this is, Almost certainly mostly Adam and effect.
Then this is how we know demand low reduced.
Demand is playing a big part and what we see now, so acid, the United States housing, construction, industry is very slow.
And to respond, we don’t build a lot of housing in this country.
Now we did start building more in 2021 and early 2022.
We did build more housing starts really increased but they didn’t increase enough to really Cause the kind of, you know, price, moderation, we’re seeing now, instead it’s almost certain that people are just buying less houses.
And why are they buying less houses?
Because mortgage rates went up, like crazy.
One other thing.
I wanted to ask you about and you mentioned a little bit earlier is the crypto bust and the stock market correction.
Could that be disinflationary to like, in what way could people, you know, crypto Bros, losing a lot of money in the crypto market and, you know, Families, who are not invested in crypto at all, losing a lot of money in their 401K is, or in their, in their stock portfolios.
Pull back on spending as a result of feeling a little bit less wealthy.
Is that something that can happen?
There is some sign of a consumption wealth effect from stocks in other words, when your stocks go down, you consume a little bit less.
We can find in the data and it’s not that big.
It is a it is a real but very minor factor and it probably gets overblown a lot of the time.
Research so so crypto probably the same thing.
The crypto was never very liquid.
Crypto is not something where you could sell your crypto, get the money and buy stuff.
So it’s purely psychological here, and purely psychological, you know, factors like this.
Don’t actually seem that important quantitatively.
And so, I think that in terms of crypto, I think, yes, it’s probably having, you know, some effect, you know, people whose Tiptoe went up went right out and like, you know, bought bottle service at clubs or whatnot but I think.
So in other words, I do think there will be a chilling effect from the crypto crash.
It’ll just be modest.
So again, trying to put this all together, I feel like we’re building up to not just one but actually two very important ideas here.
Point number one is that this might be Peak inflation period.
This might be the moment that inflation comes down, relatively permanently.
Number two, it seems like the Federal Reserve is getting exactly what it once.
Like exactly what it wants.
Six weeks ago, you had people like Superstar investor Bill Ackman, who was writing on.
Twitter saying stuff like this.
He said, quote inflation is out of control inflation.
Expectations are out of control, markets are imploding because investors are not confident that the Federal Reserve will stop inflation and quote, five thousand, retweets sixteen thousand likes.
That’s a lot here.
We are now, six weeks later, seven weeks later, and I wonder whether one lesson of this moment.
This moment of peak inflation.
Is that people like Bill Ackman, which is purely Wrong right?
Like in fact, the Federal Reserve has clearly turned the corner on inflation and inflation, expectations are not out of control at all.
We do not seem to be going back to the 1970s.
Do you think this is one of the hidden or not?
So hidden lessons of this economic moment?
Yes, I think if you, I mean inflation, expectations are crashing across the board Market expectations, which are what people actually, betting money on instead of just predicting response to some survey of survey expectations are going down to that market.
Expectations were people We bet on what inflation is going to be are Goin Down down down at the five-year Horizon in the 10-year Horizon, and that means Bill Ackman was wrong and that stock crash was probably more about inflation.
Being high and people thinking, oh my God, the FED is gonna have to raise rates a lot to control this and higher rates will just crash prices.
So let’s just sell which pressures prices.
That’s probably what happened although you who knows what makes stocks do the things they do, right?
Like there’s some sort of mass like Ecology coordination, bullshit, blah, blah.
My let us say bullshit.
On this podcast, you are allowed to say bullshit.
Because especially when discussing the stock market.
So much of the stuff in the like, Finance econ world is bullshit.
So that think that’s what did it was.
The fear of it was rate hikes but more importantly, the fear more rate hikes that crash the market.
Not what Ackman is talking about.
So, Ackman full of it.
Probably done that, I don’t know.
Ekman were generally, but that That was a wrong prediction.
One of the big picture question that I’d love your brain on is like I know that a lot of people when they read the news have to sort of filter the news through a this is good or this is bad filter and this is a complicated one because the fact that these prices are coming down is a sign that the Federal Reserve is destroying aggregate demand and in the biggest picture, the destruction of aggregate demand is not like a purely, good thing.
It can mean that companies go bust.
It can mean higher unemployment.
It could mean all sorts of bad stuff.
But at the same time, I’m the destruction of aggregate demand is having its intended effect, which is to relatively quickly.
Bring down the prices of Commodities and oil and food stuffs and houses in expensive housing markets, which should be a signal that the FED still knows what it’s doing and that we might not have to suffer years and years of heightened interest rates in order to break the back of inflation, which is good for everyone, good for stocks, good for the economy.
So how in your mind you sort of cash out?
All of this.
This is good.
This is bad.
Sort of tug of war, nothing is good for everybody.
And so I think that overall this is good.
This is this is not maybe not exactly exactly.
The Goldilocks scenario, but it’s dang close.
It is the closest.
The thing that we’re now predicting to happen is actually very close to a Goldilocks scenario.
A mild decline in output and employment, if any and a major reduction in inflation and if you bought a bunch of Coinbase and Shopify stock then I’m sorry.
You, you know, financial markets have risk and that’s what that means, right?
If you bought a bunch of Bitcoin neither financial markets, have risk.
So diversify your portfolio and like hold a reserve of cash just in case.
It’s interesting because one boat, you could tie in the episode is you know, people say America is headed back to the 1970s gender norms and culture wars and abortion debate.
It’s political radicalism and a lot of financial commentators have been saying the same thing, right?
We’re recreating late, 1970s stagflation higher prices for years and years but that last pitch is might be wrong.
It’s possible that we’re headed back to the 1970s in every respect except for persistently, higher inflation.
Our nation is in a very pessimistic mood and it’s in a pessimistic mood, for one reason, which is political division.
And for some people, the things they focus on the we different.
Lots of people are now focusing on the Supreme Court.
As I think this should Good other people are focusing on the possibility of a coup and 2024 which is real that will crash the market.
You want to see the markets crash wait till Republicans, try to Stage a coup like a more serious ones.
I they better not like, that’s really bad.
Everybody’s real upset, everybody just keenly feels that their country is not United which is true.
Our country’s not it’s very disunited right now and that’s leading to a lot of threats you know and Rancor and screaming.
You’re screaming on social media, which is now where most Americans live on social media.
And so, I think that Rick perlstein historian, who talks about the 70s has talked about has hypothesized, that people used their people had a lot of unease about changing culture, the sexual Revolution, all kinds of other big cultural changes and they express this as upset being upset about inflation.
That’s his hypothesis.
And, you know, I don’t I don’t think that explains most of it.
I think that people are upset about inflation because they’re purchasing power goes down because their wages, you know, should keep up.
It, can’t keep up on that note and I think this is my last question for you.
Is it remotely possible that American political craziness might recede as inflation receipts that were not just at Peak inflation but also they’re like looking back 50 years.
From now, as Rick perlstein has done for the 1970s, we see the early to mid 2020s as like Kind of inflection point in political Insanity as well.
I think the appetite of normies for ongoing political just bashing and, you know, War and what not like the cold Civil War, like call it as waned and just as the Supreme Court comes in and starts changing the foundations of our society interest in politics I think is waning you see the number of surveys show that like people not a growing number of people are trying to tune out.
Six, which you can never really do, but you can try.
And so I think that even as the real consequence of politics have, are now ramping up?
Thanks to the Supreme Court.
I think popular involvement in politics is now is now a moderating is now I think a lot of what happened in the 80s.
Yeah, I think a lot of people have hit Peak news, honestly.
Yeah, I think that they, they got a lot of it under Trump.
They certainly got a lot of it under the pandemic.
When the front pages of newspapers weren’t just a kind of virtual reality story about something happening somewhere, they weren’t, but were about their lives and policies that were affecting their lives.
I think that there’s a certain amount of exhaustion from from those five six years when, when news was just so unbelievably impressive, and so consistently, Active and I do wonder where I have to kind of hope that we read an era where people can begin to pay a little bit, less attention to politics on a day-to-day basis because things get more back to normal.
The disinflationary moment would be a huge piece of that Noah Smith.
Thank you very very much.