Home Entertainment Record inflation levels are coming with no growth, ‘the worst of all worlds’ – Steve Hanke

Record inflation levels are coming with no growth, ‘the worst of all worlds’ – Steve Hanke

by smart

we’re back with steve henke a professor of applied economics at johns hopkins university and we’ll be talking about inflation the unemployment rate and the henke kaufmann’s gold sentiment index and where he sees gold headed next professor welcome back good to be with you david it’s always good to be with you too we’re going to catch up on your gold sentiment index but before we do that let’s talk about inflation this week you and i hadn’t had a chance to talk about the latest cpi readings 5.4 headline inflation was the latest data point that was released earlier this week and i wonder how much of this was due to the declining unemployment rate you and i have talked briefly about the phillips curve before which is the inverse the economic theory that states that there’s an inverse relationship between unemployment and inflation so let’s briefly discuss this i have these uh fun diagrams i want to show you this is a published paper by queen’s university in canada and all it is it’s a four-page paper and the title of the paper is japan’s phillips curve looks like japan can we look at uh take a look at philips uh figure one here japan’s employ inflation and unemployment rates from january 1980 to august 2005. so it’s there’s there’s an inverse relationship here between the cpi and the unemployment rate if you go to the next slide now this one just shows the same thing except uh with the x-axis inverted and so they’re trying to illustrate that uh it looks like japan let’s go to a map of japan that this is a published academic paper so um yeah that that’s all that’s how it shows i wonder what the uh phillips curve in the u.s looks like professor does it look like uh california does it look like rhode island i don’t think any academic has been ingenious enough in the united states to do what they’ve done in canada uh university but at any rate the the whole phillips curve notion is is utter nonsense and to think about that relationship the negative relationship between inflation and unemployment think about the 1970 we had a lot of inflation and we had a lot of unemployment so we had a positive relationship so it you can play all kinds of tricks with it the main thing about the inflation is that it is always and everywhere a monetary phenomenon this is what milton friedman taught us long ago and the transmission mechanism is between the it goes from growth in the money supply to growth in asset prices to growth in economic activity to ultimately to increased inflation that’s the transmission mechanism it always works and it’s working in the united states like a charm right now the rate of growth in the money supply has been about three times higher than the rate of growth should have been if the fed would have wanted to reach its inflation target of two percent so the money growth is growing very very fast it’s it’s getting into into the inflation zone the transmission mechanism is working perfectly we’ve seen asset prices go up the stock market boom the economy is booming and now we’re seeing these inflation numbers come up by the end of this year john greenwood who’s a chief investment a chief economist rather at invesco in london and i have just finished a piece that actually will appear in the wall street journal in the next few days and which our forecast is for by the end of this year the inflation rate year over year in the united states will be between six and nine percent six and nine so it’s good that would be the highest on record i think wouldn’t that be the highest on record since the 70s wouldn’t that surpass the uh 2008 level yeah it would it would it would be we we’d be we’d be starting to claw our way back into those stagflation years in the 1970s wow okay you’re not the first economist i’ve spoken to who has uh who has said that the reason i brought up the phillips curve i was going somewhere with that i wanted to ask you how much of this inflation was caused by uh was caused by a tightening of the labor market zero really it’s irrelevant it’s caused its cost a hundred percent by the growth in the money supply it it money matters money dominates and and to paraphrase an old saying that they had during the clinton years it it’s the money supply stupid that’s the only thing stop stop worrying about interest rates the labor market whether used car prices are going up or down and all these other nonsensical things that are out there look at the growth in the money supply and that is going to tell you what is going to happen with nominal gdp and inflation going forward i hate to i hate to beat a dead horse here but uh uh mr jerome powell from the federal reserve doesn’t seem to agree with you he said that we should unlearn monetarism well you you pointed this out actually to me originally his testimony in february right said precisely that the money supply is irrelevant how how the chairman of the federal reserve is the biggest central bank in the world can say that the money supply is irrelevant it’s just nonsensical i mean there are a lot of nonsensical things going on right now that’s what makes the market so interesting okay because so just just yeah okay very good so so when people return to work in september presumably when the uh when the enhanced employment benefits end in september they’ll return to work you don’t see any significant changes in uh in the economy well no because the the economy is right now is the forecast from the atlanta fed is that we’re going to see 10 and a half percent real growth we’re going to have a record growth rate in the united states and and that’s on that’s on track i mean for forget all of the whistles bells out in the weeds all this stuff we we know real growth is going to be very high and it’s not going to be changed when people go back to work or not i i’m following the atlanta wage growth tracker and between the end of last year to now it’s actually been declining i i wonder why that is people were talking about a shortage of labor people talking about wage inflation yet the actual data doesn’t show that wages are rising okay how can how can how can we explain this phenomenon well because uh the the wage tracker covers all all types of employment and and what you read about in the paper the journalists love to to get outliers or extremes they’re every all data has a distribution from from a low to high and and what the journalists love to do is get way off on the low end of the distribution or way off on the high end of the distribution they they don’t want to report what’s going on in the distribution the wage tracker is is is you know aggregating it all up putting it together and and you know you’re you’re getting just what you said it looks like the wages are falling a little bit but there are a lot of sectors by the way that they’re going up if you want to go out to a restaurant you’re going to be lucky to have a waiter or a waitress waiting on you because they can’t find people to take the jobs and and they’re having to they’re paying them big premiums to try to suck them into the labor market that’s exactly my point well i would assume that wages are going up but i guess what you’re saying is that it’s not applicable to all sectors maybe only some sectors are experiencing tightening all right uh finally what does this mean what does stagflation mean for not just the average person but the for the investor as well well let’s start for the average man first okay i’ve i was not i never lived through the 70s as you know so i want to know what what that era was like what does it mean for somebody who wants to pay his bills or buy his groceries and pay his rent all i all i can say you’re lucky you didn’t live through it it was terrible yeah the worst of all possible worlds you have a lot of inflation and jobs are scarce that’s not what we’re seeing now by the way we’re seeing inflation and in a booming economy we’re not seeing the stagflation the type of thing where the the real economy is weak the real economy is very strong and booming right now as we’re coming out of lockdown and and things are getting on track so now now we have now we have very high inflation and and i think expectations should be for higher inflation and we have a very strong really con okay and uh just on the inflation measure um some people have talked to me about what the real measure of inflation should be and they’ve told me that back in the early 80s and 70s inflation was higher partly because the measurement of cpi back then was different from that of today how can you how can you respond to that is that is that true and if so why haven’t they revised your series to simply have the same formulas today well they they hit and in 1995 we had the boston commission that looked over all these price indices and at that time the washington commission concluded that this the consumer price index in the united states was was in fact overstating the rate of inflation by between by let’s say about 1.1 to 1.3 percentage points so that’s that’s that’s one piece of evidence that we had then in 1997 alan greenspan he was chairman of the fed at the time he said that the cpi was overstating the rate of inflation by about a half a percentage point to one and a half percentage points more or less the same thing as the boschkin commission so there their biases in the system there there are actually four biases that that bias the measurement up it’s biased up because of what they call a substitution bias the outlet bias the quality changes bias and the new product bias now now all those biases all they mean in summary without getting out in the weeds with you on the thing david is that that the economy is changing very fast and there’s a basket of goods in the consumer price index and and as a result of that let’s say that for example a substitution bias if something is is gets expensive you know state gets expensive well what do you do you substitute and buy buy hamburger instead well there isn’t in in the basket steak is in there but hamburger isn’t in there and that’s why that’s where you get a higher reading for meat meat’s going up according to the to the cpi but in fact quietly people have gone away from expensive meat expensive cuts of meat and they’ve gone into cheaper cuts of meat and and they don’t change the basket of what kind of meat is in the basket and that’s why the bot these biases and the same thing with the outlet bias you you go to amazon or walmart or some cheaper place to buy things if they’re cheaper and and that’s not accounted for quickly enough the quality thing is the same thing we get higher quality products being produced all the time that are that are cheaper and and they they they’re not put in the basket fast enough so there’s a there’s a bias due to that and also the new product bias is very a very similar kind of thing so so there is a bias and that and and the the bureau of labor statistics they they do try to account for this uh but and and i should i should add that there have been since 1919 there have been six comprehensive changes enter in the revisions to the cpi so you’re right they they do revise the whole thing and they’ve done it six times one 1940 about every 10 years since 1940 roughly about every 10 years they they will make a comprehensive revision and and these comprehensive revisions they don’t revise the whole series backwards they just revise it going forward and they don’t they don’t present an old series parallel with the new series so you can’t really compare them well they should they should do that right because you then you’ve got like a whole series going back 50 60 years or whatnot and then you’ve got different chunks of that series using different measurement uh methodologies it’s kind of inconsistent right you you you have kind of apples and oranges mixed into the the time series of data for one thing the easiest way to do this would just be to continue to calculate things the old way and have the old series and next to it have a new series parallel to it so you can compare and see what was going on that would be the easiest way to sort it out they don’t they don’t do that though okay well you should you should uh you should you should apply to uh work at the bls and rectify this and let us know well you if you read by the way the the they do have a lot of professional good professionals at the bls and if anyone wants to look all they do go to the bls website and get con the entry for consumer price index it’s a 67 page document that tells you more than you want to know it’s it’s the kind of thing you don’t want to read before driving david maybe right before bed then all right finally let’s talk about gold professor thank you for that very thorough explanation let’s talk about your gold sentiment index we’ve been updating this regularly for the audience the eight hour gold sentiment index so what are we looking at right now where is the sentiment headed okay it’s it’s headed up that’s the blue line the yellow line is the price of gold and if you go back to starting at the right hand margin and move back towards the left a little ways you’ll see a double bottom in that blue line and the double bottom means bang you’re you’re going up it’s bullish it’s bullish and that’s exactly what happened remember i told you the last time we had a double bottom and and we started seeing up ticks in the sentiment index and they’ve continued and the price of gold has been pretty strong so it’s a backed off a little bit today but it’s been strong since we were on the last time it’s been up the the the hanky coughness gold sentiment measure has been pretty accurate here you go we remember we were we were a little bit on the left hand side last time we were in neutral territory but on the left now we’re in neutral territory in the right sentiments getting stronger we’re getting more and more stories and text as we’re text mining that indicate that bullishness is coming into the stories when you when you read to get sentiment to take the temperature of things we text mine everything coming out every hour and you’re finding more and more stories that are bullish about gold than we have had in the past week and what does your research tell you about the sentiment any sentiment uh indicators predictive power relative to price well so far i can report that the hanky kaufman’s goal sentiment index is as i i’ve told you repeatedly we’re in kind of a pilot study phase but so far it’s working like a charm it looks like we’re really back to the chart let’s go back to the chart let’s take a look at the chart here yeah nice correlation there we’re really on to something where the sentiment has been strong and bullish the market it fought follows that and and it the sentiment anticipates where the market is going if sentiment is strong the market will get stronger and stronger when sentiment turns around and gets bearish the market gets bearish on us and for example the last point where the double bottom is right i told you we were we were entering a bullish phase and sure enough the market started going up you asked me the last time you said well how strong is it i said i don’t know and and for traders it doesn’t matter all that matters is to know the direction of things david going up the score that you’ve uh given at the end the the anki kaufman score is that what is that based on is that based on the trend or the direction the latest direction because if you go back to the chart one more time the latest direction actually is down it’s uh we’re looking at a slight downturn in the blue line here i’m not sure that time frame is significant it’s right now and on kitko i’m not going to reveal a secret sauce in that dashboard no problem but but but but just read read how fast the speedometer is indicating that you’re going that’s all you have to know the mechanics of all the details of what what’s behind that speedometer that is the secret sauce all right excellent okay so we’ll be watching this sentiment indicator now we’re slightly more bullish thank you very much professor thank you for coming on the show today great to be with you my pleasure as always enjoy the weekend in vancouver oh well thank you and uh and you as well well you’re not in vancouver but i think you’re all the way out in baltimore enjoy the weekend over there mrs hankey and i are going up to newport rhode island for the weekend excellent excellent well enjoy that enjoy the weather and uh well we’ve got a few summer months left so uh well let’s follow up later in the summer and talk about uh i’m sure there’s more inflation releases to discuss and thank you for watching kikko news i’m david lynn don’t forget to subscribe to our youtube channel and follow me on twitter at david lynn underscore tv [Music] you


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Record inflation levels are coming with no growth, \'the worst of all worlds\' - Steve Hanke
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