Corporate Strategy

121. The Q2 Economy Update w/ Alex Restrepo

June 03, 2024 The Corporate Strategy Group Season 4 Episode 15
121. The Q2 Economy Update w/ Alex Restrepo
Corporate Strategy
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Corporate Strategy
121. The Q2 Economy Update w/ Alex Restrepo
Jun 03, 2024 Season 4 Episode 15
The Corporate Strategy Group

Why does a meal at McDonald's cost $20 when economic indicators suggest everything is fine? Join us as we bring back our capitalist correspondent, Alex Restrepo, to address this perplexing disparity. We kick off the episode by debunking common myths about money, like the outdated belief in the gold standard, and explain why money is essentially an abstraction. Alex lays the groundwork by tackling fundamental economic principles, putting the confusing reality of high prices into context.

From there, we journey through the history and mechanics of inflation, starting with the 16th century’s gold influx under Charles V of Spain, all the way to the recent inflation spike of 2022. We dissect how supply chain disruptions induced by COVID-19 have led to higher prices, stressing that an increase in money supply without a corresponding increase in goods and services fuels inflation. Alex breaks down the fundamentals of supply and demand, offering clarity on why inflation persists despite technological advances and efficiency gains.

In the latter part of the episode, we unpack the role of the Federal Reserve in shaping monetary policy and its broader economic impact. Alex discusses the Fed's strategy for a "soft landing" to control inflation without triggering a severe economic downturn, highlighting the importance of long-term economic stability. We also touch on the broader implications of short-term thinking in public companies, and the growing disparity between different types of workers, calling for political action and societal change. Tune in for a comprehensive and insightful discussion that makes complex economic concepts accessible and relevant to everyday life.

Everything Corporate Strategy:
All the links!

Elevator Music by Julian Avila
Promoted by MrSnooze

Don't forget ⭐⭐⭐⭐⭐ it helps!

Show Notes Transcript Chapter Markers

Why does a meal at McDonald's cost $20 when economic indicators suggest everything is fine? Join us as we bring back our capitalist correspondent, Alex Restrepo, to address this perplexing disparity. We kick off the episode by debunking common myths about money, like the outdated belief in the gold standard, and explain why money is essentially an abstraction. Alex lays the groundwork by tackling fundamental economic principles, putting the confusing reality of high prices into context.

From there, we journey through the history and mechanics of inflation, starting with the 16th century’s gold influx under Charles V of Spain, all the way to the recent inflation spike of 2022. We dissect how supply chain disruptions induced by COVID-19 have led to higher prices, stressing that an increase in money supply without a corresponding increase in goods and services fuels inflation. Alex breaks down the fundamentals of supply and demand, offering clarity on why inflation persists despite technological advances and efficiency gains.

In the latter part of the episode, we unpack the role of the Federal Reserve in shaping monetary policy and its broader economic impact. Alex discusses the Fed's strategy for a "soft landing" to control inflation without triggering a severe economic downturn, highlighting the importance of long-term economic stability. We also touch on the broader implications of short-term thinking in public companies, and the growing disparity between different types of workers, calling for political action and societal change. Tune in for a comprehensive and insightful discussion that makes complex economic concepts accessible and relevant to everyday life.

Everything Corporate Strategy:
All the links!

Elevator Music by Julian Avila
Promoted by MrSnooze

Don't forget ⭐⭐⭐⭐⭐ it helps!

Speaker 1:

Hey oh boy.

Speaker 2:

You got really excited about that. Yeah, I did not remember.

Speaker 1:

No one ever does, no one's ever ready for it Gets you every time. Welcome back to Corporate Strategy, a podcast. That could have been an email. I'm Bruce and I'm Clark and we've got Alex Restrepo, capitalist correspondent, back again to walk us through the state of economy. And he's got documents, he's got data. Welcome back to the show, alex. Thanks for having me again.

Speaker 2:

Thanks for being here. I am so excited to learn because I am ignorant and I am ready to unveil the truths of the economy.

Speaker 3:

The scales will fall from your eyes.

Speaker 1:

I'm ready for the scales to fall, but before we do that, I want to be respectful of our guest, alex. How?

Speaker 3:

you doing Doing pretty fantastic. My dudes Pretty happy with everything that's good to hear.

Speaker 1:

It's been a minute since you've been on, so I know that our listeners want to make sure you're doing okay, life's good, because Clark and I's life is great, as evidenced by every episode we put out. So I just want to make sure you're you're in the same boat, you know.

Speaker 3:

No, I am, you know, I have a good life. Man, I got, I got, no complaints. But we're going to talk about how not everybody is having those outcomes here in a second.

Speaker 1:

Yes. So that's the curiosity, right? We if you missed last week's episode we even made the call out. We said, Alex, please save us, because we don't understand. Right now, there is a vibe that, well, there's a, there's a statement that the economy is great and there is data to back this up, and then there is the vibe which we all live in which says it's $20 to get a cheeseburger and fries from McDonald's. So something's not adding up, and that's why we need you to help us understand. Make them scales fall when do we start?

Speaker 3:

So I think, to start right, we kind of have to understand the economy as a whole, right First, to be able to then eventually get to the divergent incomes I'm sorry, not incomes outcomes. So I think in order to understand the you know what's going on we have to understand monetary policy. And then, in order to understand monetary policy, we should probably start with money, right. What is money? I'm assuming y'all understand that, but I just want to confirm before I get into an explanation understand that, but I just want to confirm before I get into an explanation.

Speaker 1:

So I will say my understanding so you can tell me I'm wrong. But my concept of money and I want to hear Clark's too, before you tell me I'm wrong my concept of money is it is obviously the dollar, fiat, lux. It's not real, but it is based on an idea which I think was the gold standard. Right. Like gold is worth a certain amount of money, it's, you know, intrinsic, it's finite, and we base the dollars we have on how much gold we have and how much you know fictional money we generate through our own sales, profits and expenditures. And I know we're in like trillions of dollars of debt, which means we have way less gold than we have dollars. That's my thought, clark. What?

Speaker 2:

do you think? I think I'm pretty much in the same spot. I might be misremembering, but, alex, didn't you kind of break it down for us, maybe very briefly?

Speaker 1:

We didn't listen. Yeah, if anything, maybe we just didn't intake any of it, but my understanding is very much similar to Bruce's.

Speaker 2:

So it's something that we use to conduct trade of goods, services and so on. That is to Bruce's point, backed by how much gold we have kind of as a nation, and that's how kind of everything ties into the economies. We probably sound like idiots for what you're about to say, but every single time you get on I wish my economics teacher sounded like Alex and taught the way you did, because I pick up so much more from you than I do from back then.

Speaker 1:

You met an economics teacher.

Speaker 2:

I did.

Speaker 1:

Lucky.

Speaker 2:

Macroeconomics Do I?

Speaker 3:

remember, so you know you're not totally incorrect. I get where you're coming from. First, we're not based on a gold standard, and we haven't been for 50 years, so there's that first, the whole time we've been alive.

Speaker 3:

But it is worth noting that at one point we were on a gold standard. However, there is a misconception in the world that gold has an intrinsic value that somehow makes it special. World that gold has an intrinsic value that somehow makes it special, and even then you'd be wrong. Gold does have value in terms of it has a very high conductivity. It's very ductile. It is very difficult to damage gold. It's easily recycled and reconstituted.

Speaker 2:

It's a finite resource too, right.

Speaker 3:

Right, I'll get to what you're talking about in a second Cause. I I, I do know where you're coming from, but everything, everything we've ever used for money, is an abstraction, right. And so, including gold, including silver, including gems, including anything else you want to think of, and I think everybody you know, especially you two, are likely familiar with the concept of abstractions. So, for your backgrounds, a simple abstraction would be using a higher level language other than assembly to code, because it's a pain in the butt to code in assembly, and so you would use a further abstracted language that can be a little easier to intuit for you as a human in terms of what you want to get as an outcome, and I actually think that's not a bad analogy. So, because, ultimately, what has value is anything that adds value to you as a human. So think about your hierarchy of needs.

Speaker 3:

Right At the very bottom, you have food and shelter, having a need for that. You can't live without food, and it'd be difficult to live without shelter. Food and water and shelter those things have value. However, trading food all the time is tough. Let's say we started a farm and the three of us specialized in different crops. The three crops that we all grow would be enough to cover our protein needs, our carbohydrate needs and additional nutrients like vitamins, but we would just trade amongst ourselves for the ones that we didn't grow. That's easy enough.

Speaker 3:

Now what if we expanded that to everybody? That's on the Discord, literally dozens of us. What if we expanded that to everybody? In a tribe, hundreds of people right A nation state? We have over 300 million people in the United States. Bartering becomes very difficult, right, and so you needed an abstraction, and that's where money comes in. Money is meant to represent the value of goods as currently accepted, meaning. Let's say you have a piece of gold or a $100 bill. Either way, those have a certain value in the marketplace. That is accepted, and people will trade goods and services for that value. That's what money is ultimately.

Speaker 1:

So that makes sense and I think I do remember you saying you know, maybe it wasn't the same exact version you gave right now, because this is perfect and I would never forget what you said right now. So clearly it was your fault. We don't remember, but it does make sense. It's a problem of scale and number of people. My question comes from and I know the gold standard doesn't exist anymore when and why did we stop using real things for money to get into fake things for money? Because, like I get, barter doesn't work, but gold's not barter right, like that's. That's technically assigning a currency to a thing.

Speaker 3:

Yeah, so money should have. There's three qualities, three traits that you generally look at for what's called a currency, which is like the more effective term than calling it money. A currency just means you know how you maintain transactions right In a market and ideally you want to be able to have that as a like a mechanism for greasing the wheels of the economy right market, and ideally you want to be able to have that as a mechanism for greasing the wheels of the economy right. So the three things that a currency should have it should be a store of value, it should be relatively scarce and it should be fungible right, but kind of like, you know, going back to our tech backgrounds right, kind of like how you can have like good, fast and cheap pick two. Ultimately, currencies tend to be in the similar boat, where you can have a store of value and scarce, but maybe it's not as fungible right, and vice versa. And so the challenge with gold is that there's only so much gold in the world at the moment. Right, we don't have a means of creating unlimited gold. That's not necessarily a bad thing, because that means that it's scarce and, as a result of it being scarce and people accepting it almost universally. It is a store of value, right. It's going to maintain its value against whatever other things are going on in the economy, but it makes it a little more difficult to be fungible.

Speaker 3:

I'll give you an example. I own some gold right Now. If I wanted to transact with that gold in this economy, I would have to go out and sell that gold to a gold buyer. I'd have to find a buyer for that gold who would, in exchange, give me the fiat currency that's more generally accepted in our economy. So that, and but that's not the only example right, like, let's say, you know, 800 years ago I wanted to, you know, pay some mercenaries from two countries away to come in and flank my enemy. That means that I have to send gold or they would have to accept my promise that I will give them the gold, and it's. It basically just slows things down, right.

Speaker 3:

And so having a system of first fiat currency which allows you the first step, right, is fiat currency, which is just printing money that you say has a certain value. That allows you to inflate the money supply on demand, which allows you to, in the short term, do more things with relatively little impact to the economy In the long term. There are other challenges, and we're absolutely going to get into those, because that directly correlates to the differing outcomes that are out there in the real world. But in the short term, it allows you to be more flexible, and that was one of the big reasons the US decided to go off the gold standard.

Speaker 3:

There are other challenges, though, that money solves for as we know it today, and that's because today we've gone even beyond printed fiat currency. Today, it's basically a digital currency world, and I'm not talking about Bitcoin or Ethereum. I'm talking about dollars. Dollars are effectively a digital currency, and you have all the banking systems like Swift and all that that handle transactions, especially at a large scale, but even at a small scale. You have your banks that you connect to, you check your balance, you're able to zell money over or use Venmo or whatever it is, but those are dollars being sent digitally, and all of that makes that currency very, very fungible, which allows it to be very flexible.

Speaker 1:

I ask a probably stupid question but did we have to switch to fungible currencies? Because and this is just ignorant speaking America, and the United States itself, is a very debt prone country.

Speaker 3:

Yeah, maybe there's a lot of debate about that and I think it kind of going down that route of questioning is probably for a different podcast, meaning as to how we got here, it's not so relevant. Just understanding the nature of it is more important, like the how in this moment is more important so that we can get to a different why. And the different why that it makes sense is how is it that? You know, hey, if I'm 20 years old and I'm starting off in this economy, things seem so much harder for me than they did for like my uncle or my dad or whatever, when they started 20, 30 years ago, right, and so I think that that's probably the more relevant topic. But ultimately, you know, you'd be looking at potential political conversations and things like that, and that's probably, you know, a little more spicy than you want to get into right, that's fair and appreciate that we're not going to go there today.

Speaker 3:

So question answered yeah, and so now there is a big downside right to any money, and that's that money is potentially subject to inflation and deflation. Right, Inflation it's ironic that the names actually are kind of inverse, because inflation is basically a lowering of the value of the currency and deflation is an increasing of the value of the currency. So, interestingly enough, that's the case now. But when you think about it, you assume because maybe you've heard this on other podcasts or from other pundits or whatever that the reason we have inflation is because we have a fiat currency. That's not true.

Speaker 1:

Interesting.

Speaker 3:

Inflation can happen for any reason. I'll give you one example In the 16th century, so mid-1500s, charles V of Spain.

Speaker 3:

He was the inheritor of many Habsburg territories, including Spanish colonies in South America, and as a result, he was able to import a boatload I mean actually literally many boatloads worth of gold and silver from the Americas, from the Americas, and he was using that to fund his wars against the French King, against the Sultan of the Ottoman Empire, against this dude Corvinus out of Hungary a bunch of different people, and that's a whole sidetrack of history. But the point is, the reason I bring it up is because the value of gold and silver crashed, because so much of gold and silver was flooding the market, and so it caused an inflation with regards to gold and silver. Now, if you can think back to the explanation of money, why do you think inflation happens at all?

Speaker 1:

We'll let Clark answer first, because he's smarter than me.

Speaker 3:

Because there is a direct correlation between what money is and why inflation happens.

Speaker 2:

Is it just the perceived value of a good or a service?

Speaker 3:

No? So let's think back to our analogy. So remember, we have assembly that's real close to the hardware. And let's say back to our analogy, right? So remember, we have like assembly, it's real close to the hardware, right? And let's say you use like C, right, can you, because C allows you to do some fancy stuff, can you decide to write into C do more processes than the CPU allows?

Speaker 1:

No there's a cap? Well, you can do it, but it won't work.

Speaker 3:

Uh-huh.

Speaker 1:

And so okay so similarly with money, right?

Speaker 3:

Remember, money is an abstraction for goods and services. Now, having more money never increases the amount of goods and services, right, never, not ever Right, because, again, money is just currency. What can increase goods and services is capital properly deployed to increase technology and make things more efficient. Efficiency and new technologies allow for increase in terms of the amount of goods and services available in a given market, but increasing the money supply never does, which is why it doesn't matter if you use big stone wheels, puka shells, gold, silver, rubies or dollar bills. It doesn't matter that if you somehow find more money or just create it, it will never increase the amount of goods and services. So what happens is the goods and services that exist. Because there's more money, you now need more money to buy the same goods and services. That's how inflation happens.

Speaker 1:

So, if I can make a little bit of a logic leave here is part of our problem, and I'm sure you're going to get into the real answer to this, but this is me hypothesizing that right now we are putting out an incredible amount of goods and services as just the planet Like we are we are a capitalist planet and we're we're just constantly thinking of new ideas, new phones, new TVs, new everything, new businesses, services, et cetera that it does generate a lot of of sale of of said goods, goods and services, but there is not enough money, currency, to actually procure and buy the goods and services is that where the?

Speaker 1:

inflation happens.

Speaker 3:

No, no, no the inflation happens because, no matter how much we increase the goods and services that are going out, because we have become more productive, especially like the? U right On a per capita basis, we're incredibly productive.

Speaker 1:

Right.

Speaker 3:

But the challenge is that, no matter how productive we are, we are creating even more money in the money supply than our productivity is generating in terms of goods and services, and so the outstripping of the money creation is what leads to that challenge. The other challenge and this was the reason inflation started at all recently, like in terms of the runaway inflation we had temporarily in 2022, was because of the bottleneck at ports due to COVID, and so it wasn't the COVID checks that went out that caused inflation in the first place. What caused inflation was the fact that goods were not coming in like they used to out of Asia because of the bottleneck at the ports and, as a result, there were fewer goods in the American marketplace, which meant you needed to compete with more dollars in order to purchase the limited amount of goods that were here. So that was the reason inflation kicked off back in 2022. So that's Economics 101, supply and demand.

Speaker 2:

That's kind of what you're saying, right A?

Speaker 3:

hundred percent. That's what I'm saying, but I want to emphasize that because I think that gets lost a lot. People assume inflation happened because we printed a bunch of money because of COVID and maybe it didn't help. But we would have been fine if the flow of goods and services had been uninterrupted, and by fine I mean that we may have still had inflation, but it would have been nominal, like it would have been 4% or 5% instead of it got as high as right around 10% at one point.

Speaker 2:

Yeah, absolutely Okay. So so far, just for the record, bruce and I are zero points in this game, but this, this, it kind of all circled back, you know, to everything that you're saying. You know it's it's supply and demand, and I think, with what's interesting, though and maybe something I don't understand, and maybe Bruce you're like okay, he already said this with AI and with everything, we are becoming more efficient, and what's crazy is that the amount of currency that we're printing still outpaces the efficiency gains that we're getting from, like technology for example.

Speaker 1:

That's where I'm failing to grasp this too right, like my brain is telling me we're, we, we're selling more iPhones than we've ever sold before. You know we're, we're buying more things. There's more people, more product, more reason to buy. But I mean, you know, I get, I get what you're saying about the, the ports being down during COVID, starting at that initial spike. Why is it not correcting itself? So, before you, answer.

Speaker 2:

I'm going to say something just so I can get wrong and get down during COVID, starting at that initial spike. Why is it not?

Speaker 1:

correcting itself.

Speaker 2:

So before you answer, I'm going to say something just so I can get the wrong answer again. I'm going to try. If there's nothing, I'm going to do. I'm going to try. So is it because the demand keeps on getting stronger and stronger for these goods and services? So it's outpacing even the supply that we can generate.

Speaker 3:

Yeah, you're, you're 80% correct.

Speaker 1:

That's like a yes, though. So yeah as one, and I have zero.

Speaker 3:

But between both of you you've set up the first of a tale of two economic outcomes right, and that's the good one, right? So for a big part of the economy, things are good, and part of that is inflation has curtailed. If you notice, I did put some stats in the Discord and we can review them, but I just want to make sure that it was clear that I wasn't just pulling them out of my butt. Here are some actual references. Inflation has cooled off and so we're seeing inflation I think it's at around. Let me refer to the Discord real quick actually, and I want to get the numbers wrong.

Speaker 2:

I was looking at it right before this too. It was really helpful because I was trying to understand, like, okay, is that true? Because, like I said, I'm ignorant, I don't listen to the news, I don't watch anything, I don't read anything, and so, like I hear, I only hear what's around me, and what I hear around me is like people are still struggling to get jobs. The job market sucks. What else we hear is that inflation is high and things are costing more than ever. So this data was very helpful and very analytical.

Speaker 3:

We're going to cover all of that. So it's worth noting that inflation in March of 2024, now, this is only monthly inflation, it's not annualized but monthly inflation for 2024,. I'm sorry, I think it is annualized, but the monthly inflation rate is 3.5%, right.

Speaker 2:

Yeah, compared year over year.

Speaker 3:

Right, and it's worth noting that again back in 2022, late 2022, early 2023, we were just shy of 10%, so 3.5% is way down Now. We had gotten it as low as below three in recent times, so it's actually ticked back up just a smidge from the lows that we got back down to earlier in 2024. But it's just worth noting 3.5% Now. Wage growth in the US is 5.94% for the March of 2024. What that means, just doing some math, is that we're at about what is it? Two and a half percent real wage increases in the US right Now. So meaning that and when I say real I mean if you take the wage increase and you subtract inflation, your actual purchasing power went up by 2.5%. Does that make sense?

Speaker 2:

Yeah, yes, absolutely.

Speaker 3:

Okay, so that's the good part of the economy. Additionally, joblessness is down. Yes, absolutely. What I mean by that is people just transitioning jobs. So, as an example, at one point Bruce and I worked together and I decided I did not want to work there anymore, for reasons that we can get into at some point.

Speaker 1:

It's okay, you can tell them.

Speaker 3:

At any rate. So I left that workplace and I went to work at a new place. Technically speaking, for a couple of days I was unemployed, and that would be rolled into those statistics. So 3.9% unemployment is incredibly low, incredibly low. At one point in the 90s, people were touting how amazing it was that our unemployment rate was at 6%. That was considered epically good, and right now we're at 3.9% unemployment, which is helping drive those wage gains, by the way, and so which is helping drive those wage gains, by the way. And so what also is helping drive those wage gains is that productivity is up right, and so we are generating value in our economy, and that value is currently outpacing inflation.

Speaker 2:

So that's good, right. I like this side.

Speaker 1:

Well, so can I before you, before you drop whatever it is you're about to drop, can I? Is it because? Is it because the, the, the inflation going down and the wages going up is not actually, it's not actual, factual, true, right Like wages could have gone up significantly for large wage earners but not gone up for service industry, for example. Is that where this is going? That's not where.

Speaker 3:

I'm going at this time, but it could be so it's worth knowing that.

Speaker 3:

There's an old Ross Perot quote and you may not know who Ross Perot is, but in the 90s he ran a third party candidate race that potentially really affected the course of US history. It put Bill Clinton in an office, basically. But anyway, ross Perot had a famous quote that I think it was like statistics, or like peanut butter if you put it in a horse's mouth and make it look like it's talking something like that. But the point is, or no? There was another quote, what was it? There was like there's three types of lies there's lies, damn lies and statistics, yeah.

Speaker 2:

I've heard that one before.

Speaker 3:

Yeah, I forget who said that one, but either way, statistics can be made to obfuscate deeper truths, and in part, that is what's happening in part. And so what I mean by that is that, yes, much of the job, like the wage gains, are happening at the higher end, but in this particular instance, there are wage gains at the lower end too, and that's because, after the pandemic, a lot of folks got different types of jobs and they were happy and they decided not to go back to their service sector jobs that they had like a low end service sector jobs, because technically we're in the service sector. It's worth noting Both of you and myself are all in the service sector.

Speaker 3:

Technically speaking, we provide services, but the lower end, like waitstaff, things like that they actually have had significant wage gain because fewer people are wanting to do that work. And so it's just math, supply and demand. Once again. If there's lower supply of workers workers then you're going to the demand for those workers is going to increase, and so the crossing over between those two lines is going to be at a higher price point. So that's what that means. So, but that's not the other shoe I was going to talk about.

Speaker 2:

Okay, so how many points? Would you say? Bruce gets half a point.

Speaker 3:

I think a solid, you know, 7.75 points like right there Cause that was really good.

Speaker 2:

Okay, no, it's a good, it's a good call out. I mean, you guys obviously are not dumb, so I mean you're all depends on you.

Speaker 3:

No, so the? So the question right Is how did the inflation number go down? Yes, All right. So the inflation number was real high and it stayed real high for a bit. Now it's down. Do either of you have hazard a guess as to why it's gone down? I went first last time.

Speaker 1:

I think, bruce, you're up. I know Dang it, I get the hard one.

Speaker 3:

If you want, I can give you a hint, please. Yes, I didn't get a hint.

Speaker 2:

What is this?

Speaker 3:

so the hint is it affects. Two episodes ago you talked about, uh, how much it costs to buy a car with a car loan. That is related to this.

Speaker 1:

Oh, oh, okay, I know, I know the interest rates. Yes, interest rates why are we talking? Okay, so why I? This is just a mystery to me. As well as you know, I know the interest rates are set by the Fed, right.

Speaker 3:

That's correct.

Speaker 1:

So, firstly, what gives them the right to set interest rates? And secondly, why do interest rates impact inflation? Why do interest rates impact inflation? I mean, I get that higher interest rates obviously means spending more money. More money being spent means more income from the goods and services creators, so technically that would lower inflation because of spending right. But why are they so tightly tied?

Speaker 3:

So when I answer that you're about to make a real strong connection between some neurons, it's going to be awesome.

Speaker 1:

Oh, my neurons are so ready.

Speaker 3:

But first, you know, just got to make a quick joke on your question, the way you asked your question, because the way you asked it was like first, how dare you? That's how you asked the question and I love it. I'm here for it. So the Federal Reserve? Right, it gets its mandate from a bill that was passed in 1913 to basically try to help regulate boom and bust cycles. It's worth noting that, without getting deep into the political aspects, the Federal Reserve is neither federal nor reserve, in the sense that it is not actually a government body and it is not a reserve of cash. It basically handles monetary policy. Fiscal policy, which is to say budgeting and how budgets are allocated, are handled by the executive branch. So the president signs budgets into law. Technically speaking, I think Congress has to pass budgets, but the president signs it and either Congress or the president can create budgets proposals that would then be approved or disapproved by Congress. But that's fiscal policy, monetary policy, and this is, if you recall, at the very beginning I said we're going to get into monetary policy.

Speaker 3:

Monetary policy is decided by the Fed and they determine the basic bottom line interest rate for moving money around between banks and that in turn affects every other interest rate after that, which includes car loans, home loans, mortgage loans Anything like that is going to be impacted by that base rate that's set by the Fed. So why are they correlated? Let's get back to that neural connection you're about to make. It's very simple. It goes back to Clark's answer from earlier supply and demand. If I, the Fed, increase interest rates, it means that borrowing money is more expensive, which means the public at large is going to borrow less money, which means demand goes down, which means prices go down. That's's it. That's the simple answer to that okay, that makes sense.

Speaker 1:

Yeah, it does. It does make sense, and that's that's almost a little bit more upsetting, because the fact that it makes sense doesn't feel like it's replicating to what we're seeing out in meat space.

Speaker 3:

oh, no, no, no, we're no, no, we're about to talk about the second outcome and why it's so bad.

Speaker 1:

Okay, so it's true.

Speaker 3:

But there's something going on here, so I'll give you an example. Right, everyone, all three of us talking, are very fortunate that at the moment, there is still something effectively called the middle class and we are well within it. We're very, very fortunate. That's an ephemeral concept that may or may not stick around in the future. There are different ways to look at that, and so maybe our quote unquote middle class continues to exist, maybe not, but either way, at the moment we're in this wonderful space that, as an example, two episodes ago, bruce, you said you could have bought that car cash and I know that you weren't flexing, but you pointed out something, which is to say that, potentially speaking, you could have been impacted by higher interest rates. Not at all.

Speaker 3:

That's not a luxury available to the vast majority of this country, or the world for that matter, and so higher interest rates disproportionately impact poor people, bottom line, and in a number of ways, not least of which is the fact that, even though inflation will start to tamp down in the short term, technically speaking it increases the cost of everything because borrowing money is more expensive. And if I'm a business that has to borrow money to make budget or buy things that I need to then sell, then I'm going to pass those costs on to my consumers in the short term. In the long term, demand gets tamped down and, as a result, prices go down, but that also has pain associated with it. If demand goes down, that means that fewer people are going to the movies, fewer people are buying backup software are going to the movies, fewer people are buying backup software, fewer people are going to theme parks or buying brand new cars. Because demand goes down.

Speaker 3:

What does that mean? That means that at the next quarterly reporting of how your business is doing, your business is down, and so you're going to have to take action. You may cut jobs, you may lay people off, you may reduce wages. Maybe there's no raises this year because the economy is struggling a little bit. That is the tail end of that. That impact in terms of demand reduction and all of those impacts absolutely affect the poorer folks in our country more, because their existence is not just paycheck to paycheck, but often it's payday loan to payday loan, which is even worse than paycheck to paycheck.

Speaker 1:

And so you're paying interest on money you're earning.

Speaker 3:

Exactly, and so the three of us are incredibly fortunate that we can weather this storm and we'll be fine, right, not only are we paid well enough that some of those impacts just don't directly impact us at all, but our skills are high enough that, even if we got laid off, we could find other work relatively easily if we had to, and so we are incredibly fortunate. But that is not happening for the vast majority of this country. And the vast majority of this country, if they had an interruption in pay for two weeks, it would create a huge, huge issue, and the problem, of course, is that that is happening right. And so that's where economic forecasts right. Even though right now we're in a good spot in the economy and that's what I said last time we talked about the economy the forecasts are tepid, right, there's concern that if interest rates stay high and they will stay high if inflation stays high, that this impact could lead to an actual recession, and so that remains to be seen, but that's where we are today.

Speaker 1:

And just because I've been so off this whole pod on what I know, can you talk through what a recession actually is?

Speaker 3:

Yeah, a recession is three quarters of negative GDP growth.

Speaker 1:

Three quarters of negative GDP growth.

Speaker 3:

Yeah, that's the technical term. In reality, you can feel the effects of a recession even before a recession actually hits.

Speaker 1:

Right, and I mean, that could be what we're feeling right now.

Speaker 3:

A hundred percent and so.

Speaker 3:

I'm going to look her up real quick. There's an economist Well, she's someone who does economy posting. I think her name is Kyla Scanlon. She quoted the term vibe session, which was the idea that it's not technically a recession because we have GDP growth, but for most people they feel like they're in a recession because we have GDP growth, but for most people, they feel like they're in a recession right now, and that's definitely where we are today. And so everything I said earlier was just a very long way of getting you the base level knowledge you needed to understand why the Fed is doing what it's doing and then the impact that's having on everyone else. Now we can talk about extrapolations thereof in terms of what this means for the future, but that's at a minimum. I wanted to get us to this space where at least we understand the current state.

Speaker 2:

Yeah, it's really interesting to kind of talk through this, because then you know, a bunch of deeper questions kind of come up, of like, well, how do you fix it? And I think that's something Bruce would normally get into would be like, okay, now let's talk about how we're going to come to a solution, how do we look at a positive side of this and I don't know if you have that, alex, but like something very basic from this conversation would be like well, the Fed just change it. But I think there's so many factors that go into what they do and why they do it, you know, that are outside of just our nation and them just changing a number. Right, that will affect everything. And so it's interesting and that's why I think this is such a mysterious concept, because there's so many factors it's impossible to predict really.

Speaker 3:

So what the Fed has been targeting is something called a soft landing, where they ratchet up interest rates slowly. They don't go all the way like they're not raising interest rates to 15%. They ratchet them up slowly and then eventually, hopefully it lasts long enough to get inflation under control and then they can ratchet them down slowly without having too big of an impact on the economy. If that can happen, that's the ideal sweet spot called a soft landing, right? So that's the Fed's target. Now the question is why, right? Why would they want to inflict pain on the economy? And the answer is in history, in the 1970s there was was 70s, early 1980s. I'll give you an idea of what the outcome was right. As a result, in 1980, 80, 81, I had a math teacher tell me this story they had their interest rate on their mortgage when they bought their first house was over 18%. Holy crap.

Speaker 3:

Yeah, that was pretty normal back then, Wow, I want you to think about that as you complain about 6.9% interest on something.

Speaker 1:

I just like I have a little mini heart attack.

Speaker 3:

I might need to go to the hospital after this Now that interest rate happened after years of stagflation, which is stagflation is a combination of stagnation and inflation. It's static growth, so normally when you have inflation, you also have a considerable more amount of growth. Also, they're normally correlated. Right, you have growth as well, which is good to see growth in the economy, but stackflation is there's either no growth or negative growth and inflation is going off. You know, going crazy, and that's what we had. It started because of an oil embargo that OPEC did after some other Israeli-Palestinian war that happened back then. So, just like we had an issue with the ports during COVID, you can go back to the smoking gun that started it. But ultimately they had runaway inflation and they had negative growth combined, and so, as a result, the Fed had to implement this incredibly painful regime to get inflation under control. The reason they had to get inflation under control is because when inflation is not brought to heel, it literally ruins nations, not figuratively, literally.

Speaker 3:

The Roman Empire fell in part because they were shaving metal off of their coins that they were paying people with. Yeah, they were causing inflation because they were giving less and less metal, because there wasn't enough precious metal to go around. That's one example the Weimar Republic in Germany collapsed because of runaway inflation, because they were printing money after money after money, right, and it just wasn't catching up and it led to great political instability which led to the rise of the Third Reich. In Venezuela right now they have catastrophic runaway inflation and, as a result, there's really deep, sad things going on over there. And then Argentina is doing their best right now to get it under control.

Speaker 3:

But for a long time Argentina has struggled with runaway inflation as well, and it really cripples their ability to do just about anything as a government. They can't really affect any positive change in their country because they don't have the financial wherewithal to allow for it. There's no stability. And so let's say, if today I buy some bread and it costs me a dollar, and then tomorrow I buy some bread and it literally costs me $10 tomorrow, right, think about that level of inflation. Then how can I do any sort of long-term planning? And so now everyone has this very short-term scarcity mindset where it's every man for themselves, and it becomes pretty awful pretty quickly.

Speaker 2:

That's why you drastically can't just shift it. It's got to be to your point of soft landing.

Speaker 3:

That's also why you had to get it under control, and so inflation cannot be allowed to run rampant. History has shown us that runaway inflation absolutely destroys any sort of governmental stability. So the answer, of course, is that's why the Fed's not like trying to create joblessness because it's fun. It's worth noting that they have a purpose behind it. Now you may disagree with the Fed being the right body to do this, and fair enough, but ultimately, what their goal is right now? Their goal is not to create a recession, so that may happen as a result of what they're doing, but that's not the goal. The goal is to get inflation under control.

Speaker 1:

And we haven't talked much about the corporate side of things here. But I'm going to ask anyway is there something to be said about companies? You know they're doing lots of layoffs, they're raising their prices, trying to keep things in the red line going up and to the right, paired with inflation, paired with interest rate are. Are they adding to the problem by reacting so strongly to the environment that's happening around them?

Speaker 3:

Yeah, I think they want to stay in the black right, Not the red.

Speaker 1:

Sorry, the black yes.

Speaker 3:

And the answer is yeah. The current financial situation that we have in the US in terms of public companies is that this quarter's results are always the most important and we've talked about that problem before right, and that leads to very short-term thinking, which does lead to what will be, in the long run, bad decision-making, and that bad decision-making can have an impact on a company, but it can also have an impact on the economy that company is in, especially if many companies are doing this, which does happen to be the case.

Speaker 1:

That's my fear. I don't understand this nearly as well as you do and I feel better after having this conversation about my understanding. I still couldn't deliver it the way you do, but I feel more confident in my knowledge. But the fear is, even without knowing any of this, that companies are not treating the situation the way they should to help balance it out because they're so inward facing in their decision making, like you said, short-sighted, right. Just this is what I'm worried about, not two years from now. And do they not? Do they not realize that this kind of decision making could be what fails them as a company two years from now? I?

Speaker 2:

think that, to challenge that maybe I think, alex, you're gonna school me in this too. It's remember that it's owned by a lot of public companies. Obviously public shares owned by the people, and if the perception is the company is doing bad, then they sell, they stop investing in the company. So it's kind of like you know it's if they don't report good results, it's yeah, it's a it's a cycle, because the market just has to work that way.

Speaker 2:

If they don't do well, they'll lose the additional you know spend into their company or investment into their company, and it just keeps going from there. So they kind of it's they have to do it, otherwise they will die anyway.

Speaker 1:

But aren't the investors themselves, the ones that know the economy well enough to say like it's okay to have a bum quarter, Like it's? For the good of all.

Speaker 3:

This is something we talked about many, many episodes ago, but currently corporate bylaws are set up to allow for investors to act very selfishly and very short-sightedly. Corporate bylaws could be altered to change that, like to require that you hold the company stock for a certain amount of time, or that you hold company stock for a certain amount of time after you take a vote on anything. Things like that could be amended into corporate bylaws. So that is something that could be done, but currently there's nothing stopping an investor from shorting a company, buying a bunch of its stock, tanking it because they're able to have just enough influence and then making money on the short right. There's kinds of all kinds of stupid things like that that can happen, um, so unfortunately, at the moment there's really no stopping it in terms of just the way our corporations are set up, at at least the public ones, and the private ones even less so, because there's even less regulation or oversight.

Speaker 3:

Man, yeah, it gets worse if you want to talk about it, because my fear is not how corporations are going to do, my fear is how people are going to do. My fear is how people are going to do.

Speaker 2:

Yeah.

Speaker 3:

I've already talked about the idea that the middle class may be ephemeral, right. It may be a mirage that exists today but won't tomorrow. We're currently in it. We're information workers, right. We're in the service industry, but specifically we're information workers in the sense that all three of us deal with technology, right, and the reason we're paid well is because of what we know and what we can do with that knowledge. There's so many people who aren't. What's going on with them?

Speaker 2:

right, like they're being left behind.

Speaker 3:

It's not just service workers. Right, think about teachers. Right. If you think about the ultimate information worker, it should be a teacher, right? Right, but they're subsidized by the public and the public decides not to invest heavily in teachers and, as a result, they have to do, take second jobs or hate to be able to do anything. There's a meme I posted it was a pretty terrible one about tax breaks right like for people who own yachts, versus teachers. And like teachers have a $300 limit on what they can write off in terms of school supplies that they buy with their own money to help their class learn. They have a $300 limit on what they can claim, but if you own a yacht, feel free write it all off.

Speaker 3:

So we have a lot of problems, institutional problems that allow these depredations to happen, and we would have to get around them in a way. That probably requires political action of some sort, and I'm definitely not going to talk about the specifics of that here, but ultimately it probably does require that. I just don't see any way around it. Otherwise it's going to continue and even if there isn't a continuing middle class, it's going to look a lot like cyberpunk out there, so it's going to look like us three on this conversation right now will be corpos and everybody else. Would be like runners on the street trying to figure out how to get their daily bread, and it's just not going to be pretty. I don't recommend that dystopia as our outcome.

Speaker 2:

And so hopefully we can take action before that happens. Absolutely, it's a good wake-up call. I know we're ignorant by choice in a lot of ways, but I think to your point. It's because of the position that we are in, which is so fortunate, and I think sometimes these conversations kind of open your eyes again and be like I need to pay more attention, because the impacts of these things are so much broader and they impact other people way more than they impact me, so I need to care about them and I need to use the power that I do have and the things that I can control to help the broader outcome.

Speaker 1:

Well, it's the. It's the empathy effect, right. Like you know, i's the. It's the empathy effect, right. Like you know, I brought the mcdonald's example earlier because I was. I had to get mcdonald's for a quick lunch one day and, like I see, the the help wanted sign that you know, says like 17 an hour, but I spent more on my lunch than what you could make working there in an hour and I just thinking, like this doesn't math right anymore. This used to cost like seven bucks and they made way more than that.

Speaker 3:

So, like go ahead, yeah, no, I just want you to think about how much $17 an hour is, cause it sounds like a lot when you compare it to the minimum wage. Minimum wage, I think federal minimum wage is what? $10 or something like that. I forget exactly what it is, but regardless, $17 sounds like a lot for quote unquote an entry-level job. I say quote unquote because we all know that the reality is that, for any number of reasons, folks that have already been in the workforce for a number of years do end up working at places like that, and I'm not judging them, I'm just saying it happens. It happens, right.

Speaker 3:

So $17 an hour is about $35,000 a year. All of a sudden, right, $17 an hour doesn't sound like a lot. No, I want you to think about rent, right? So the three of us live in Florida, in theory, an affordable state to live in. A one-bedroom, one-bath place for rent is going to run you 1800, you know 2000 a month, depending on where you are. You might be able maybe to be able to get it for 1200 in a really bad part of town, maybe, right? That's still over 12,000 a year, and just rent.

Speaker 1:

Yeah.

Speaker 3:

So wait, we're not done. 12,000 a year in rent and, by the way, you're probably still going to pay some taxes on that 35,000 you made, so you're not even taking home 35,000. And then what do you do? For transportation Almost everywhere, you're going to have to buy a car in Florida because there's really terrible mass transit. So now what's your payment on that car? We already know the interest rates are high and then insurance is high right Gas rates are high.

Speaker 3:

Uh-huh. So how much is left over to do anything with to live on, right? Because we haven't even come into food yet and we all know that food has gone up in cost both at the supermarket and at any restaurant, right? So $17 an hour may sound and, by the way, $35,000 a year is assuming you get 40 hours, which chances are you won't, because they don't want to give you benefits. So chances are you're going to get 30 hours a week instead of 40. So maybe you take a second job, right? Just think about the stress. I think there's an important reason as to why, if you ever drive through neighborhoods that are, let's say, we'll call them more affordable neighborhoods, there's a lot of folks smoking in those neighborhoods. Why? Because they're stressed.

Speaker 3:

Because they're stressed and, by the way, heaven forbid, you have a medical issue.

Speaker 1:

Oh my gosh, it like. Yeah, I went to the hospital in February because I thought something was wrong with my gallbladder. Fortunately there wasn't. I had a CT scan done. My wife went to the hospital two years ago, had a CT scan done after she had COVID because she had a pleurisy in her lung, cost her a hundred bucks at the end of the bill that she had to pay for it, bucks at the end of the at the end of the bill that she had to pay for. It cost me 2000 and I'm still haven't paid it because I refuse. Like they like the rates, it's, everything's gotten so expensive and I, just as as someone who's a little bit of an empath to society at large you know this is what bothers me is I think about, well, if I'm having this visceral reaction to the price of food, medical care, the interest rate of my car, like what are people doing that aren't me, because I'm fortunate Like what do they do? How do they survive and how can like what can we do to help them?

Speaker 3:

By the way, you don't have to be an empath for this to matter to you. Let's say I really was as cold and heartless as my title on the discord implies the bourgeoisie. Let's say I was that cold and heartless. Well then, my concern is stability. I want to be able to do my business and earn my keep and live my great life. Now, if 80, 90% of the population is struggling to literally not figuratively but just live, to just exist they're struggling to just do that what's going to happen to stability in the country that I'm trying to do business in?

Speaker 1:

I mean it's going to go out of control.

Speaker 3:

And so, without stability, it becomes very difficult to have a functioning market, and so it's just. Even if you're a coldless capitalist, there are reasons to care about these, these situations yeah I I mean you know I we talked about this after we traveled, our travel episode.

Speaker 1:

Uh, you know, when I was in san francisco, I saw a robbery happen in front of cops and 30 bystanders and no one cared, no one did anything and I thought how, how is a store supposed to continue to exist in this kind of infrastructure where, you know, under 900 robbery is okay and yeah, like I don't know. It's just, it's very concerning for me because I work for a company. You work for a company. Clark works for a company. Like we need the companies to be successful, for us to be successful, and eventually the success will stop happening because people will stop paying for it. So, like it is a cold way to look at it, but like I need people to be happy and able to spend their money so I can continue to do that well, it was a good talk, so che yeah?

Speaker 2:

good thing we ended on a positive note.

Speaker 1:

Yeah, I love it. I know we're way up on our time here, so you know, as always. Thank you, alex, for joining us. Dear listeners, what do you think about this? If you want to talk to us, we're all three in the Discord. You can get into our Discord by going to our link tree it's in the show notes or you can go to corporatestrategybiz. That's Clark's favorite website biz. Thank you again, alex, for joining us. I know we kind of have to end it abruptly here just because of time, but I really appreciate you walking us through this. It's been super helpful for me. Has it been helpful for you, clark? Oh, yeah.

Speaker 2:

Yeah, I think it's always just a good wake up call and I think it's just, it's just good to be informed. It's so funny because you don't think about these things at all, and just the way you can talk about it and explain it, alex, it just makes it. I think it's just simple enough even for two dummies to understand. So we appreciate you coming on and giving us a current state, just so we can be informed and we can understand how we can use things we can control to help the broader good.

Speaker 1:

Yeah, and, and you know, my challenge is what do we do right, like maybe we need to have another episode in the future. We talk about what do we do us businesses, governments like, what do we need to do to fix this? But that is a conversation for a different day. So thank you again, alex, for joining us.

Speaker 3:

Yeah, thanks for having me Appreciate it.

Speaker 1:

Anytime. And again, if you want to join us in the virtual space, get in our Discord. This is where these conversations start and you can be part of it, and we want to hear your voice, not just have your listenership. So please check out our Linktree, check out all the links If you want to support the show, if you want to get on an email newsletter, if you want to do anything, chances are it's in the link tree. So, thank you for listening. As always, please share us with your friends Per usual. As per my last email, I'm Bruce and I'm Clark and you're on mute. We'll see you next week.

Understanding Money and the Economy
Causes and Effects of Inflation
Economics 101
Understanding the Federal Reserve and Impact
The Fed's Goal
Impact of Short-Term Thinking on Economy