Lovely Complex Episode 6 Eng Sub
Elwanda Menhennett
Frank provides some data related to some of the current economic indicators. Carl introduces the effects of both inflation and the related Federal Reserve actions. He provides some historical perspectives, beginning with the Nixon and Carter years.
There are multiple drivers of the current inflationary period, according to Frank. The COVID-related economic stimuli share part of the blame. Roughly 50% of the stimuli was spend, 20% saved and 30% was used to pay off debt. Tariffs also contributed to the current situation. Energy demand is rising. The worker shortage plays a factor. The pent-up aggregate demand is playing a role. Add in the supply chain disruptions and you get a volatile soup of economic pressures.
Frank comments that the Fed has driven down interest rates far below the true cost of money. This dates back a good 30 years. The control of interest rates is a key tool the Fed uses in dealing with inflation.
This claim was made early on by the Biden administration. Frank explains the term transitory as it relates to inflation. In 18-24 months, the inflation should subside. While 1.5-2 years seems like a long time, it may not be in economic terms.
This is a complex issue, driven by the pandemic. However, Frank also comments on the impact of tariffs on the economy. Some firms may not have been prepared for the results of the tariffs. When a company decides to outsource is production and inventory, the networks are exposed to potential breakdowns in the supply chain. Computer chips is a prime example. Some of the manufacturing of chips is currently returning to the US, in an effort to protect this key input.
Frank discusses how he explains the global supply chain to his undergraduates at the Rubel School of Business. He also predicts that the crisis should repair itself and be resolved by the end of 2022. The private sector finds a way to overcome challenges. FedEx and UPS are prime examples of taking innovative approaches, along with some passenger airlines.
This is another key factor in the struggling economy. There are various reasons for our current situation. Many workers took advantage of the lockdowns to seek alternative employment or to go back to school. The stimuli provided incentives for people to increase savings and reduce personal debt, which also delayed their reentry in to the job market.
An issue people overlook is directly related to the availability of childcare. During the lockdowns, many of these workers left the businesses. The availability of childcare is much more limited, in some circumstances, than it was prior to the COVID lockdowns. This makes it more difficult for adults to return to work.
Carl explains that older workers, nearing retirement age, have seen a dramatic increase in the value of their retirement portfolios. This is making the decision on when to retire much easier and some have obviously begun that transition.
Oil is obviously a commodity sourced on the world market, influenced heavily by OPEC. Refining capacity is a pinch point in our ability to break free of capacity constraints by other producers. As we look for alternative sources of energy, we need to be mindful of the immediate gap created if oil production drops, without a current, viable replacement source. The country and millions of households still need to run. We do that primarily based on oil.
Oil is the universal input. Petroleum and petroleum derivatives are found in so many common products and packaging, not to mention the transportation to bring these products to retail businesses for consumption. When the price of oil increases, the impact is felt across the economy.
Frank shares his perspective of how an authoritative, command-and-control economy (i.e. China) can make gains for a prolong period of time. But eventually, innovation must provide additional growth. Innovation struggles to thrive in these types of economies. Add to this the enormous population of China, with a significant portion living inland. The domestic infrastructure creates a series of challenges for the Chinese government and its economic stability. In years past, the Chinese economy was growing at a rate of 10-15%. Now, that growth rate has sunk to closer to 5%.
Economic pressure can often lead to political unrest, and possibly war. There are several important hot spots in the world. Any one of which could rapidly escalate into a military conflict with significant economic ramifications on the global markets.
Frank discusses how another benefit of economic trade is that it keeps countries talking and lessens the probability of an armed conflict. This stems back to the mutual, inter-dependence fostered via the global nature of our economies.
Carl suggests we are beginning to move beyond the pandemic. The capital pumped into the economy had an impact, but the ripple effects of inflation will be a dangerous element for the Fed and our government leaders to manage. The risk is that they continue to fight the last war, instead of dealing with the current challenge.
We injected almost $5 trillion dollars into the economy. A major spending bill on infrastructure was passed. At some point, we need to let the cash flush through the system and enable the markets to stabilize. Inflation is a real risk. Just as oil is the universal input in our economy, inflation is a universal tax.
Carl mentions his concern about the size of government. He comments that the size of government is the inversely related to the size of growth in GDP. He also mentions the risk of more regulation in the banking industry. This could place additional limits on the availability of private sector capital. Carl is forecasting lower rates of return, going forward.
Frank adds that most of this comes down to critical thinking. People naturally tend to overstate the benefits and underestimate the costs. While episodes such as these seem to be wide-ranging, the core theme involves critical thinking. We are attempting to approach the topics logically.
The views and opinions expressed during the Bellarmine on Business podcast do not necessarily reflect those of Bellarmine University, its administration or the faculty at large. The episodes are designed to be insightful, thought-provoking and entertaining.
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