Stephen King - Ideas Lab Series - July 12th, 2023

[00:00:00] Stephen

There’s no doubt in my mind that inflation creates winners and losers. It is very unfair and there’s no discussion about it. It is like a lottery, you discover 5 years, 10 years down the road that you have lost out or you’ve made a significant gain. But that loss or gain has nothing to do with you and everything to do your starting position and whether you are either a vulnerable person in the light of higher inflation or whether you’re a person who’s likely to be blessed by higher inflation.

[00:00:33] Intro

Imagine spending an hour with the world’s greatest traders. Imagine learning from their experiences, their successes and their failures. Imagine no more. Welcome to Top Traders Unplugged, the place where you can learn from the best hedge fund managers in the world so you can take your manager due diligence or investment career to the next level.

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Here’s your host, veteran hedge fund manager, Niels Kaastrup-Larsen.

[00:01:28] Niels

For me, the best part of my podcasting journey has been the opportunity to speak to a huge range of extraordinary people from all around the world. In this series, I have invited one of them, namely, Kevin Coldiron to host a series of in-depth conversations to help uncover and explain new ideas to make you a better investor. In this series, Kevin will be speaking to authors of new books and research papers to better understand the global economy and the dynamics that shape it so that we can all successfully navigate the challenges within it. With that, please welcome Kevin Coldiron.

[00:02:05] Kevin

All right. Thanks, Niels, and welcome, everyone. Our guest today is Stephen King. Stephen is HSBC Senior Economic Adviser. For many years before that, he was their chief economist. Certainly, I had the pleasure of reading his work for a long time when I was working in London. He’s also written four highly regarded books and we’re here today to discuss his latest one, which is called, We Need to Talk About Inflation. So, Stephen, it’s a pleasure. Thanks for joining us today and welcome to the show.

[00:02:39] Stephen

It’s a pleasure to be here with you, at least virtually, if not actually face-to-face, but we’re almost face-to-face, aren’t we? Because I can see you.

[00:02:48] Kevin

Yeah, sorry about that. One thing I really appreciated about your book, funnily enough, is the writing style. You made topics really accessible. But more than that, I really enjoyed actually the summaries. You start each chapter with a concise and clear summary of what you’re going to discuss, and at the end of the book, you condense everything down into 14 lessons that we should all know about inflation. The first of those lessons is money matters. I think that’s intuitive to most people. The more supply we have of something, all else equal, it’s worth less or should be worth less.

I know when I started working at the Fed in the late 1980s, that was the dominant philosophy. Control the money supply, control inflation. So I was wondering, perhaps we could just start off by talking about how that became the dominant view, at least at that time, and then we can follow up with why you think that’s not the whole story, that’s just really the beginning. So if you don’t mind maybe starting off with why money matters.

[00:03:56] Stephen

Well, of course, for many years, people thought that money didn’t really matter at all. Back in the Happy Days of Keynesian economics in the 1950s and 1960s macroeconomic policy was aimed at lowering unemployment as much as it could and bolstering growth as much as it could. The view at the time was that inflation was not really likely to be a problem at all. So it did come along in the late 1960s, particularly in the US. It forced a complete rethink of how policy works.

In the 1970s, policymakers discovered something that they never ever thought they were going to encounter, which is the idea of stagflation. So this would be a combination of very low growth or high unemployment on the one hand, but also very, very high inflation on the other. These two were not supposed to go together at all, yet here we were in the 1970s with both high unemployment and high inflation. This led to a complete rethink, I think, in terms of what macroeconomic policy should be doing.

To cut a long story short, there was a growing belief that money did matter, that if there’s too much of it floating through the economy, then there was actually a very good chance you’d end up with higher inflation. Worse, if policymakers were seen to be turning a blind eye both to the higher inflation and to perhaps the monetary excesses, then people’s expectations of inflation would become increasingly embedded. Before you knew it, you had a huge problem whereby for any given growth rate, you’re getting higher and higher rates of inflation, which was a very unsatisfactory state of affairs.

So during the 1970s and the early 1980s, you had a return, I use the word carefully, a return to prior monetarist views of the world, i.e. that money did matter, that if you ignored it completely, you were likely to end up with some nasty or unpleasant inflationary outcomes. When Paul Volcker comes along as the chair of the Fed in the late 1970s, he’s determined to bring money supply back under control in the hope that by doing so it will then lead to falling inflation. Lo and behold, in the 1980s, that’s exactly what we saw, this combination of slowing monetary growth and also falling inflation.

Paul Volcker gives a speech just after he steps down from the Federal Reserve, in the late 1980s, where he says, effectively, by the late 1970s policymakers has almost begrudgingly recognized that the defeated inflation was a necessary precondition of achieving other macroeconomic aims in terms of let’s say low unemployment or decent rates of economic growth. A precondition of controlling inflation was controlling monetary growth. If you didn’t do the latter, you wouldn’t get the former.

If you didn’t get the control of inflation, you wouldn’t get all the other good things happening in the economy. So that’s where I think I would say you have monetary aggregates, monetary focus was probably at its height. But then, of course, as is often the case with economics, once you start to try to control money supply, you discover that its relationship with inflation begins to break down, that the relationship is statistically nothing like as robust as people might initially have expected. But that takes us a long way away from those monetary instincts.

In fact, before this latest dose inflation, back in say 2020 or 2021, when again, the money supply numbers were growing at an incredible rate, in fact, not again, they were growing at the fastest rate we’ve seen in the entire post-Second World War history. But when money supply was growing that quickly, the odd thing was that the Federal Reserve and other central banks didn’t really seem to be bothered that what would have been a major red flag in the 1980s had become just a statistical quirk and therefore could be ignored in 2020 and beyond.

I personally think that ignoring that supposed statistical quirk was actually a major mistake because it was telling us something that wasn’t quite right about the performance of the US and indeed the global economy.

[00:08:40] Kevin

Yeah, it’s interesting. It’s almost come full circle, from Volcker maybe not focusing exclusively on money supply but saying that you had to control money supply if you wanted low inflation to a few decades later, money supply growing exponentially or explosively anyway, and the Fed shrugging its shoulders. Your second point, which I think is obviously one of the reasons that money matters but not exclusively, is that public perceptions, public behavior, interacts with the supply of money.

Could you maybe explain that, why public perceptions and public attitudes matter almost as much as just the supply of money?

[00:09:25] Stephen

Yes. Actually, some of this goes back, oddly, over a number of centuries, so the book is full of little historical nuggets of one kind or another. One of them actually is revolutionary France in the 1790s. The reason why I focused on revolutionary France was A, that they had a lot of inflation, hyperinflation on some measures in the 1790s, but B, that the inflation was not just a consequence of printing money, although that was an important part of the story. It was also the sense that people couldn’t trust this money.

Now, bear in mind that pre-revolutionary France, the money that existed was mostly based on precious metals. So it was silver or gold or whatever that provided the backing, the trust, the certainty of what this money was. Come the revolution, those who could take their gold and silver out of the country did so. So you had this exodus of money as it was previously understood. The revolutionaries thought, “Well, what can we do? We haven’t got enough of this gold and silver. We’ll just print paper money instead.”

Although all of us are used to paper money these days, people were certainly not used to paper money in the 1790s. So there was a deep suspicion about this stuff anyway, this funny money, so to speak. But beyond that, it also turned out that those printing paper money hadn’t thought carefully enough about the fact that this paper money could easily be counterfeited. Exactly what happens. So the money supply expires not just because of the actual money being printed, but also because of this massive industry of counterfeiting that is going on.

Eventually people, the public, just refused to use this stuff. Because if you were to sell a cheese flan to your customer in exchange for some of this money, the problem is that the next day, the money was probably worth less than the now stale cheese flan would be worth, so the money was actually depreciating more rapidly than your pastry and baking goods that you were trying to sell. So public trust matters hugely.

For example, if you’ve got a central bank today that looks at the rise in inflation and says we must do something about it, they raise interest rates in response to the higher inflation relatively quickly, then the public are likely to trust the central bank and say, “Okay, you strongly believe that this inflation has to be dealt with.” If you have another central bank that says, well, this is all just kind of a technicality, you don’t have to worry about it too much, and does not raise interest rates in response to higher inflation, in those circumstances the public might say, “Well, actually, we’re not sure you’re that serious about controlling inflation, you’re not doing the things we would normally expect you to do, and therefore, we have less faith in what you’re up to.”

We’ve seen examples of this, particularly during hyperinflations, because during hyperinflations, what tends to happen when you’ve got prices rising at 100%, 1000%, 1,000,000% a year or whatever it might be, in those circumstances, typically, the central bank is in the business of printing money to fund the government’s borrowing. In those circumstances, you end up with a catastrophic inflationary outcome.

Recent examples of this would be either Zimbabwe or Venezuela, most obviously, and of course, around a 100 years ago, you also talk about the hyperinflation in Weimar Germany. They’re all good examples of where the public’s trust collapses because the public knows very well what is happening effectively that the government is trying to deal with its own borrowing, not by borrowing from the public, but effectively borrowing from the central bank and printing money, almost without limit in the process.

[00:13:22] Kevin

Are there also deflationary examples of public attitude mixing in with the money supply? I’m thinking in my mind about, say, right after the financial crisis, when QE was first started in the US, there was a huge increase in central bank money and then there was a famous letter written by 50 economists and money managers saying, hey, we’re going to have hyperinflation, and then it didn’t happen. To me, the reason it didn’t happen is because you created a lot of money, but that didn’t translate into credit growth because no one wanted to borrow because of all the economic uncertainty.

So is that a counter example- not a counter example. Is that an example of public attitudes working the other direction or do you see that as something different?

[00:14:17] Stephen

No, I think it’s a very good example. In fact, I would suggest that, in thinking about monetary policy and what you choose to do in terms of printing or not printing money, you have to try to gauge where the public are at that particular point in time. So you go back to the letter in the Wall Street Journal, I think the mistake that was made in the letter was to assume that all money is the same money at all times. You print more of it and you end up with inflation. But that wasn’t what was going on at the time of the Global Financial Crisis and shortly thereafter.

Before the Global Financial Crisis, you had an awful lot of bits of paper in circulation that people treated as being a bit like money. In other words, you could swap it for money easily any time, any day. This of course included subprime mortgages, it included collateralized debt obligations, credit default swaps, and so on and so forth. It was kind of a weird alphabet soup of the financial system as it was back then. Then within the space of hours or possibly a fateful weekend in 2008 when Lehman failed, during this whole period, a lot of the stuff that had been treated as being like money suddenly became toxic. No one wanted it.

So the way I would describe it is that during that period, you had the destruction of what I would call private money. So it’s not money that’s issued by the central bank, but it’s stuff that the public see as being like money, and then when they stop seeing it as being like money, there is of course, an overall shortage of money if you add both private and public money together, which is what you probably should do at all times. The loss of public money suggested there was a real risk of a 1930s-type depression, so a total collapse whereby prices are falling rapidly, real levels of debt are rising rapidly, and you have a complete meltdown with mass unemployment and mass bankruptcies and mass bank failures.

All those things were a possibility back in 2008, 2009. The purpose of printing money back then was effectively the printing of public money to offset the shortage that had come through in private money. So the consequence of this is that we avoided another Great Depression, which was a fantastic economic outcome relative to what was threatened. But at the same time, we didn’t end up, at least initially, with the kind of inflationary problems that those authors of the letter to the Wall Street Journal had suggested, because they haven’t, in my view, dealt with this issue of the destruction of private money in the first place.

Once private money had been destroyed, the chances of there being an inflation problem associated with the printing of public money, that was now much lower.

[00:17:13] Kevin

Yeah. We actually talked about that in the book that we published in 2018, this notion of moneyness. You have assets that in certain conditions are like money, and that the moneyness of those assets can evaporate very quickly, in which case, you suddenly have a deflationary shock. So if we take the first two things together, we’ve got money stock as a potential measure of inflation, but that interacts with how the public is feeling about the credibility of the central bank or about the economic prospects generally. You have to look at both those things in terms of evaluating inflationary risks.

I guess a third element that you talk about is this, you call it the Burton-Taylor effect or the Taylor-Burton effect. For any of the listeners out there who are under the age of 40, that’s Richard Burton and Elizabeth Taylor who were this famous Hollywood couple in the 1960s who were constantly getting together, breaking up, getting together, breaking up and in between throwing TVs at each other and vodka bottles and stuff like that. But it was this kind of, in some sense, fatal attraction. Sometimes they would be apart, but they couldn’t resist coming back together.

You use that analogy to describe the link between fiscal and monetary policy, that there’s always this underlying, I don’t know, attraction, temptation, whatever you want to call it, for the government to use the central bank to finance its spending. Perhaps you could just maybe elaborate on that a little bit and why you think that’s so important for everyone to understand.

[00:19:04] Stephen

We’ve been through this era recently of independent central banks. The obvious question is, why would you have a central bank who is independent, that is not, if you like, directly controlled by politicians? The answer is very simple. The politicians are always thinking about how to boost the economy before the next election, but in the process of doing so, they’re likely to take inflationary risks that might be regretted after the next election.

Therefore, they basically try to deal with their own uncontrollable instincts by handing over the job to an independent central bank that doesn’t have to worry too much about who’s going to win the next election and can instead focus on inflationary outcomes over the medium to long-term. All of it sounds vaguely sensible. If you take the view that ultimately, having higher inflation is not going to solve your economic problem, then actually outsourcing the job of controlling inflation to the central bank might seem like a reasonably sensible thing to do.

History, however, would suggest that this kind of independence doesn’t last forever. The most extreme examples of this are actually during wartime. They’re always associated with high inflation. I’m thinking here of the battles that the Romans had against all comers between the time of Julius Caesar and the Emperor Diocletian 300 years later. I’m thinking here of… Well, actually, the American Civil War in the 1860s had an awful lot of inflation associated with it. The Napoleonic wars 50 years earlier than that, they also had a lot of inflation associated with them, as did World War One and to a certain degree, as did World War Two.

So why is it that you get this inflation? Well, it’s partly because inflation is a mechanism that the government can use to tax people without them realizing it. It’s a sneaky version of taxation, and it can work in one of two ways. The first way is simply that if you push prices up relative to people’s wages, then obviously, they’re worse off. So if you’re fighting a war, you create shortages of either no food or energy during the war and those prices rise and wages don’t rise alongside the rise in prices and people are genuinely are worse off. It’s a bit like an increase in indirect taxation. So that’s one version of the story.

Another version of the story is that high inflation typically occurs against a background of still relatively low interest rates, and those real interest rates adjusted for inflation are now negative. So if you’re a cash saver in these circumstances, your cash is falling rapidly in value from one year to the next. Effectively, if people are planning to spend a year, two, three years later, spending the nest egg they built up through their working lives, and then you discover there has been a dose of inflation of 20%, 30% a year, under those circumstances, their cash savings are rapidly falling in value.

So effectively, this is like a wealth tax. It’s a way of undermining people’s earning. Now, you might say, well, if it’s a tax, then why not actually be honest and use taxation rather than inflation? Well, the answer here of course is that inflation is sneaky and you can blame it on other things. You can blame inflation on, I don’t know, Vladimir Putin or the pandemic or you can blame it on, I don’t know, all sorts of things you can blame it on. But the key point is that you don’t have to take direct responsibility immediately for the inflation that’s coming through because you can deny it and say it’s not really your fault. It’s been caused by something else.

But the other reason is that sometimes governments get themselves in a position whereby the political options begin to run out. So if you have a situation where let’s say the tax take with an economy is unusually large and you just can’t really raise taxes any further, the public just won’t take it. Equally, perhaps, you’ve been quite sort of austere with regard to levels of public spending, you can’t cut that any further. So you’ve got levels of taxation, levels of public spending, levels you can’t really adjust any further. But at the same time, you still have a large budget deficit and perhaps continuous additions to government debt.

Well, in those circumstances, what are your other options? One option is to default, and most governments typically don’t want to default because it’s hugely embarrassing for a start, and also, it raises the cost of borrowing in the future to a considerable degree, or you create inflation, because inflation by acting as this kind of stealthy tax system is a way of taxing people without them realizing it.

So my point here really is that the reason why Burton-Taylor is relevant, or actually maybe for younger people, you might say J-Lo and Ben Affleck or something like that, but whichever couple is relevant in the circumstances, the key thing is that you might think that monetary and fiscal policy are completely separate, but they have a habit sometimes of coming back together for those political reasons. So yeah, there’s a couple of reasons for thinking about this today.

The first, of course, is particularly since the global financial crisis and then through to where we are currently post-pandemic, the increases we’ve seen in government debt relative to the size of economies have been the biggest in peacetime that we’ve I think ever seen. The UK has some very good data going back over more than 300 years and I can tell you that there’s no other peacetime equivalent of the big increase in government debt that we’ve seen over this last 15-year period. You’ve got bigger increases during wartime, but not during peacetime.

The second reason why one might be concerned is those two magic words, quantitative easing. The thing with QE is that central banks did this for good reasons. They were getting very close to zero interest rates, and because cash itself, notes and coins in circulation by definition have a zero interest rate. So long as you’ve got notes and coins in circulation, it’s quite difficult to cut rates any further. So if you’re a central bank, you don’t want to say you’re completely impotent in terms of monetary policy. So what you do instead is say, okay, we can do something else. We’ve got another magic trick in our monetary toolbox, and in this case, it’s quantitative easing.

The way this works effectively is that the central bank goes out into the market and buys lots of secondhand government debt that’s already there, it drives the price of it higher, which is another way of saying that the interest rate from this government debt falls, it gets lower. So this means that whereas normally the central bank controls the overnight interest rate, when it’s doing QE, it’s controlling interest rates of the 2-year maturity, the 5-year maturity, or the 10-year maturity. So people who are borrowing at those maturities are also now being affected by market policy.

Moreover, it’s designed to encourage pension funds and insurance companies to invest in assets which may be more attractive than these now very low-returning government bonds. So you hope perhaps that these pension funds and insurance companies will invest in, I don’t know, the stock market or the corporate bond market or property rather than in government debt. In those circumstances, by lifting those market values, you hope that companies will raise money on the stock market and invest more than would otherwise have happened. So this is all done for good reasons.

But the key point here is that you now have a central bank that is in the business of buying up government debt and quite a lot of it, which is another way of saying you’ve now created a situation where the government knows it can actually issue more government debt and not be penalized for doing so via the bond market vigilantes of old, because effectively, those bond market vigilantes who would have taken a dim view of all thisactive government borrowing, they’ve been completely swamped by the behavior of the central bank.

So effectively, in terms of Elizabeth Taylor and Richard Burton, you’ve had this divorce for quite a long period of time. But it’s like they’ve sort of secretly got back together and the relationship has been rekindled to a certain degree. I think that’s where we are currently.

[00:27:35] Kevin

Do you think in that analogy, central bankers think of themselves as Richard Burton or Elizabeth Taylor?

[00:27:41] Stephen

Well, Burton was the one I believe with a bigger drinking problem. I hope they don’t think of themselves as being Richard Burton, but I don’t know. The key thing though is that I think a lot of central bankers have been in denial about these kinds of issues, partly because they take their independence seriously. They didn’t get into QE thinking this would be a way for governments to fund borrowing cheaply. But I think in a sneaky way, that is effectively what now has happened. So that may have dimmed or reduced the credibility of central banks to a certain degree.

It’s also worth adding, this is a very technical point perhaps, but the more of this QE stuff you do, this is particularly true of the UK, the more sensitive are government debt numbers to changes in short-term interest rates. So effectively, the maturity structure of government debt gets shorter, it gets reduced, which is another way of saying that when the central bank is cutting interest rates, this is extremely good news for the governments.

But equally, when the central bank is in the business of raising interest rates, it’s extremely bad news for governments because their debt service costs rise more quickly than they would otherwise have done, which is another way of saying that governments are likely to impress upon their central banks that caution is a good idea because it helps the fiscal numbers even if it doesn’t necessarily help to control inflation.

[00:29:14] Kevin

That’s a great point. I wanted to ask you about that so I’m glad you brought it up. So basically, to try to summarize, what we’re talking about here is an action that the central bank took to deal with a specific crisis, in this case, 2008. It’s taken us down a path where it’s brought monetary and fiscal policy closer together in a way that really hasn’t been publicly recognized. Your last point, just to summarize it again, is basically what’s happening is that when you take the public sector as a whole together, you’ve essentially replaced long-term debt with maybe not overnight debt, but very short-term debt.

So when you have a situation like now when the central bank ought to be raising interest rates to fight inflation, the government really doesn’t like that because increasing its borrowing costs and so there are multiple areas of tension between the government and the central bank that didn’t exist before QE.

I really want to talk about your four inflationary tests. But before we get to that, I want to have you just talk a little bit more about something you raised earlier, which is the unfairness of inflation. Because we read a lot about, hey, government debt is very high now, certainly in peacetime, as you mentioned, and one way to reduce it is through higher inflation. That seems, on the surface, like a solution that “might work.” But you make the point that inflation doesn’t hit society in a fair way. It’s not a democratic solution. It affects certain segments of society much worse than others. Could you elaborate a little bit on that? Who really suffers with inflation and who might be in a position to actually benefit from it?

[00:31:21] Stephen

I think this is something which people don’t pay sufficient attention to. There is an incredible arbitrariness about the effects of inflation on society. Now, of course, if you’ve got the perfect macroeconomic model where you assume that everyone is affected by inflation equally at all times, then none of this really matters, but perfect macroeconomic models are not what we actually live with in the real world. In a very, very simple way, you think what is money there for? It’s a measure of what things are valued relative to each other.

So people often think of money being a means of exchange, a store of value, a unit of account. It’s like a measuring rod. You’re constantly using it as a way to gauge am I being paid more this year than last year, have prices risen of books this year compared with last year. All these things are things you’re trying to gauge. But during periods of inflation, it becomes difficult to work out what is we might describe as a lasting price increase of a particular thing because there’s a genuine shortage of that thing or because there’s an unusual increase in demand for that thing and how much of this is just a reflection of a broader inflationary trend.

So for example, you go along to the supermarket. You buy some apples from the supermarket. Let’s say you buy a pound of apples. You go along there one week and you’re paying, I don’t know, $1 for your pound of apples, and then the following week, you’re paying $1.20. Now, is that inflation? Well, it might be. It might simply be that there’s been a bit of a shortage of apples because of a bad apple crop or it might be because the truck that was driving the apples to the supermarket has broken down so there’s a shortage of apples. There’s a whole series of different reasons for why the apples might go up in price.

A well-functioning economy as one whereby you don’t have to worry about the inflation effect of changes in Apple prices. If Apple prices change in the world or an economy where inflation is low, you know that they’re changing for sensible economic reasons. But if, for example, the price of apples rises 10% this month, and then in six months’ time, your wage rises by 10%, then effectively, you’re no worse off or no better off. The apples have risen in price, your wage has going up by 10% as well, and nothing really has changed.

But if for example the price of apples goes up by 10% and your wage rises in six months’ time by 5%, then you might think well hang on, these apples are much more expensive than they had figured. So the problem with inflation is that it creates tremendous uncertainty in terms of trying to gauge the true value of what’s happening and the true reasons for why prices are changing. Under those circumstances, you start making mistakes.

Those mistakes are at the individual level of perhaps borrowing too much or spending too much on something or another. But they’re also at the corporate level because companies with relatively high and volatile periods of inflation may be tempted to invest less than would otherwise be the case because they’re just not sure about the true future returns on the investments they’re making, because they’re not sure how their revenues are going to pan out in the future. But equally, they’re not sure as to how their costs are going to pan out in the future. These are things they can’t easily control. That also creates uncertainty.

So you have issues of uncertainty and you also have these issues of unfairness. The unfairness comes from the fact that some people in society are just less able to negotiate their way into a better position as a consequence of inflation than others might be. So in terms of the labor market, for example, if you happen to be a member of a powerful union and your union is working on your behalf to compensate you for relatively high inflation rates, then you might get away with a decent wage increase.

If you’re self-employed or you’re, I don’t know, employed by an app in the kind of gig economy, in those circumstances you may find, you’ve got no negotiating ability whatsoever. So yeah, one group of workers gets a decent pay increase, the other group of workers does not under their circumstances. Equally, if you’re a large oligopolistic company, you might well be able to push through big price increases. If you’re a small supplier where there are many suppliers to the large oligopoly, you may struggle to actually get the same kind of price increase through. So you end up with this incredible unevenness as a consequence of higher rates of inflation.

So for all those reasons, it becomes difficult. Finally, back to the idea of savers and borrowers going back to the government being a beneficiary of inflation, if you’re a borrower, whether you are the government or whether you are someone who’s bought a home for the first time perhaps, you may find that inflation is rather useful because in 5 years, 10 years down the road, lots of inflation will mean that the real debts that you’re having to repay are lower than you had anticipated when you first took on the loan.

But equally, if you’re in particular, a cash saver, and a lot of these people tend to be pensioners are more vulnerable in society, you may find that the inflation has destroyed the value of your savings and you are definitely poorer than you originally thought. So there’s no doubt in my mind that inflation creates winners and losers. Now, obviously, we have winners and losers in society for other reasons, but in a democracy, you hope to deal with that through fiscal policy, which is a reflection of elected governments and elected lawmakers.

You hope that society reaches a reasonable accord of what needs to be done to make sure that taxes and benefits and public spending are doled out fairly. People may not individually think they’ve been doled out fairly, but generally, the principle is there. Whereas with inflation, because it’s like a sneaky process, it is very unfair and there’s no discussion about it. It’s like a lottery. You discover 5 years, 10 years down the road that you have lost out or you’ve made a significant gain, but that loss or gain, has nothing to do with you and everything to do with your starting position and whether you were either a vulnerable person in the light of higher inflation or whether you’re the person who’s likely to be blessed by higher inflation.

[00:37:49] Kevin

As I was listening to you talk about that, I am thinking are we as a society now, is inflation likely to hit us in a more unfair way now than say previously? I’m curious your thoughts of that, because clearly, union membership has gone down. So it feels like the ability of people to get wages that keep up with inflation has fallen. There’s arguably more corporate concentration, more oligopolies, potentially more pricing power with corporations.

Wealth is more unequally distributed now, income is more unequally distributed now than it was in the 1970s. So if we put all that together, is higher inflation a bigger societal risk now than it was the 1970, in your opinion?

[00:38:47] Stephen

Well, it was a big issue back in the 1970s. Although, interestingly, I haven’t looked at the US data quite as closely as the UK data. But in the UK, income inequality was actually quite low in the 1970s. But I think the problem was that you just didn’t know in advance where you were going to end up as a consequence of high inflation. The other thing I would note is that it’s true that a lot of people think of the inflation of 1970 as been caused by unions and union power and wage pressures.

People today tend to think exactly the opposite. It’s oligopolies and so on that are pushing through price increases and workers are unable to keep out with these price increases. Looking back through history, the one constant in all this is not so much whether it’s union power or corporate power. It is much more the idea that people can use that power if inflationary conditions are already in place. So if you go back to the American Civil War and look at the Confederacy, there was a very, very big debate back there about the fact that companies in the day were being accused of price gouging. There were controls put onto those prices to stop them from rising.

The question there is, well, okay, the controls are imposed, what happened to inflation as a consequence of those controls? The answer is it just carried on going up. The reason why it carried on going up was because the initial monetary conditions themselves were just too loose, and frankly, a lot of people in the Confederacy were nervous that the Confederacy would lose the war anyway and therefore got rid of their money as fast as they possibly could because they thought that Confederate dollars quite rightly it turned out, might be worth absolutely nothing.

So my issue here is that you might have said, okay, maybe in the ‘70s using incomes policy to control wages, that’ll deal with inflation, or today, use a prices policy to control price increases, that will control inflation. But what has to happen in these circumstances, you try to control inflation for political reasons because you’re worried about the distribution of income. But in the process of imposing these controls, you just find that inflation pops up somewhere else.

It’s a kind of a Whack a Mole game that you try to whack it in one particular area and you do it for political economy reasons, you do it for reasons of income distribution, of wealth distribution, and you’re doing it for honorable reasons. But then you discover that even though those reasons might have been honorable one way or the other, they’ve not made a bit of difference to the actual performance of inflation itself.

So there’s actually a section in the book which looks at price income controls through American history. It makes the point really that, yeah, they’ve been used on plenty of occasions, and certainly, there are circumstances where you might get a fair outcome or a politically more acceptable outcome than would otherwise have been the case. But the idea that these controls are an alternative to tighter monetary policy, there’s very, very little evidence to support that. Unfortunately, we come back to the issue of money itself or monetary policy, at least, being a very, very big influence on the persistence or otherwise of the inflationary process.

[00:41:56] Kevin

So you don’t see the current situation or you don’t see society now as more vulnerable to inflation than it was in the 1970s?

[00:42:09] Stephen

I do apologize. I gave you a very long answer to a completely different question, didn’t I? I wasn’t trying to avoid it. I just went off on a bit of a rift.

[00:42:16] Kevin

I’m just curious, because one way to interpret your answer is no, inflation was highly disruptive in the 1970s, it’s likely to be highly disruptive now. It’s just it will disrupt different people in different ways. That’s one way to interpret the answer. Another way would be, actually given that we live in a democracy and more people now are not union members and therefore don’t have the ability to have their wages keep up, that the way it hits a democracy now might be more traumatic than the 1970s. I don’t know. I’m just saying.

[00:42:56] Stephen

I hear what you’re saying. It’s interesting, though. First of all, it’s worth stressing, and this is true of the 1970s, it’s true of where we are today, that different countries during an inflationary period have different inflation experiences. It’s not the same for everybody. So back at the 1970s, the US and France had fairly miserable inflation outcomes. They were worse than the Germans and Swiss, but they were equally a whole lot better than British or the Italians. I’m British, of course so I sort of vaguely remember my childhood, the terrors, the pain of inflation back then.

So that party goes back to the idea of how much are you willing to be in control of the inflationary process. Frankly, in the 1970s, too many policymakers were focused on trying to reduce unemployment or to maximize growth pretending or hoping that inflation itself would simply disappear, which of course, it didn’t. Fast forward to where we are today, the US performance on the inflation so far has been better than either the Eurozone or the UK.

One obvious reason for that is that the Eurozone and the UK have been be hit harder by the energy price shocks coming through from Putin’s invasion of Ukraine. So that gives you a slight difference. But I’d also add that the Federal Reserve, although I think it was slow to raise interest rates initially, has raised them a fair way more than has been true either in the Eurozone or the UK. Moreover, perhaps because of the extra flexibility of the US labor market, you haven’t had quite the same scale of second round effects that you have had in in my country, the UK.

Wages in the UK in the private sector are running at 7% plus year on year, which is not consistent at all with lasting price stability. So yeah, there’s a sense in the UK that inflationary behavior has become increasingly deanchored relative to where you want it to be more so I think than is true in the US.

But I think one could afford to be slightly optimistic in terms where we are today compared with the 1970s. The good news is that we do have central banks mostly who are more independent that they were, although that independence to be fair can be lost, but they are more independent than they were.

I think there is a better understanding of, if you like, the Elizabeth Taylor Richard Burton problem, so that the problem has reappeared. I don’t think it’s as bad as was the case in the 1970s. Thirdly, I think there is a better recognition that unless you defeat inflation, you can’t easily meet other macroeconomic objectives. I think that was certainly a view that was completely missing for much of the 1970s and I think it is a view that is still lurking there in the central banking fraternity today.

So it’s not as though we’re quite in the 1970s in terms of the philosophy and politics of inflation. But at the same time, I do think that central banks might have become a little too complacent, that they’ve become complacent about their own successes over the course of the last 20 or 30 years. One consequence of that complacency has been an unwillingness to raise interest rates too far too quickly. One result of that, frankly, has been that inflation is far more embedded than any of them had anticipated two or three years ago. So it’s not as bad as the 1970s, but it’s not where we would ultimately like to be.

[00:46:27] Kevin

Toward the end of the book, you put forward four tests that you say, given the given the past doesn’t tell us too much about the future, given how difficult it is to forecast the future, given the unreliability of so-called inflation expectations, all those things, that the way we ought to try to assess inflationary risks is to do four tests. I wondered if we could maybe quickly walk through those and just have you give your assessment. Because I’m guessing, and I could be wrong, but just listening to what you’re saying, I’m guessing maybe your evaluation of the test now is a little bit different perhaps than when you wrote the book.

So the first test is, have there been institutional changes that threatened to create inflation that creates a bias toward inflation? How would you evaluate that now?

[00:47:20] Stephen

Well, I think it’s still true that the Federal Reserve itself got itself into trouble by adopting its flexible average inflation targeting regime in late summer 2020 at a time when people were still very fearful of deflation of the world of falling prices rather than rising prices. The problem with that was that effectively, the flexible average inflation targeting regime required a pre-commitment not to raise interest rates in the event that inflation were move above target because you wanted to commit to the idea that future inflation would be above target to offset the below target inflation in previous years, which all sounds perfectly sensible.

It is sensible in the world of deflation. The problem, however, was that suddenly, inflation itself reappears with a vengeance in 2021. So just at the point where the Federal Reserve really ought to be raising interest rates for precisely these inflationary reasons that had been forgotten about for many a year, it felt unable to do that because it had made this pre-commitment through the flexible average inflation targeting system not to raise interest rates at the first signs of inflation.

So that’s one example whereby effectively, the central bank is saying the only problem out there is deflation. We can’t imagine the world of inflation, therefore, we’re going to effectively manage things as if we permanently inhabit a world of deflation and we have to dig our way out of it. Lo and behold, a year two years later, you’ve got a huge inflation problem and you haven’t done much about it because you thought you’re still fighting yesterday’s war effectively.

The other issue actually goes back to QE, which is that you think what’s the purpose from a central banker’s point of view of the government bond market. What help does it give you in trying to gauge where monetary policy should be heading? The answer back in the day, thanks to the bond market vigilantes as they were called, was that if there were any signs of inflation returning, typically, these vigilantes would sell the bond market driving prices down and yields up.

If you’re suddenly faced with a world of rising bond yields, as a central banker, you might think, oh, this is a bit worrying. It looks like inflation expectations are beginning to build, we don’t like that very much. We will raise short-term interest rates to try to squeeze inflation out of the system. But if you, as a central banker, are the main buyer of government bonds, as happens when you’re doing quantitative easing, you’re kind of putting the bond market vigilantes out of a job. They’ve got no purpose because they’ll always be swamped by your actions.

Then what happens is that inflation does pick up but you don’t respond to it. You don’t respond to it because bond yields are still very low. The reason why bond yields are very low is because you are the buyer of those bonds. So effectively, QE I think distorted the behavior of government bond markets in a way that meant that central banks lost some of the information that they would previously have relied on to adjust interest rates promptly to signs of emerging inflationary pressures.

It’s a bit like fighting a war and then having a peace treaty or something. You decide that you get rid of your radar system because the peace treaty has been signed, and your belligerent neighbor decides once the radar system has been dismantled to attack you again, and you can do nothing about it. So you wouldn’t dismantle a radar system, but that effectively is what happened I think with QE, dismantle your early warning system, your radar system for inflation I think did lead to mistakes.

It, again, came about because the central bankers were convinced that the only risk out there was deflation. They couldn’t even imagine a world where inflation might return.

[00:51:05] Kevin

Right now where central banks are not buying bonds, is the radar systems still switched off because of the possibility that they could buy bonds in the future? Because we’re thinking bond yields are 3%, just below 4%, still below the rate of inflation probably. So I guess my question is, is the possibility that QE could get restarted enough to keep the radar system switched off or are we talking about a world where it’s switched on and off periodically?

[00:51:42] Stephen

Well, I think it’s faulty more than anything else. I think it has come back on to a certain degree because yields would not be where they are today if central banks were still doing really active quantitative easing. But having said that, I talk to quite a lot of bond investors around the world, there’s no doubt that a lot of people are thinking, well, fighting this particular dose of inflation will probably require a significant slowdown in the economy, maybe a hard landing. That means that interest rates will drop back to zero or something approaching zero.

If we’re at zero, then QE will almost by definition have to be restarted. So prior to the advent of QE, no one ever discussed it. It was never ever in the room as a topic for discussion, and now it is always there. So even if it stops temporarily, the expectation is it definitely would return at some point in the future, which is another way of saying that although long-term interest rates have gone up, they’re still not very high relative to the actual rates of inflation.

That might be a problem, frankly, because if yields can’t rise far enough, then there’s a risk that the inflation itself becomes more embedded than would otherwise be the case.

[00:52:51] Kevin

Okay. I guess the answer to the first question is, yeah, there have been institutional changes that threatened to create inflation. Your second test is, are there signs of monetary excess? That’s a really interesting question right now, because as you said, during COVID, there is this unprecedented growth in money supply. If you look at year on year changes, now we’re in a world where there’s an unprecedented collapse in the money supply growth anyway.

[00:53:21] Stephen

Well, it’s slightly slowing, although it’s not collapsing at the pace it initially rose at. One way of putting this is the stock of money is still very high relative to where it would have been pre-COVID. So it’s come down, but from a very high level. I certainly think there’s an interesting debate to be had now about what’s happening with money supply having turned negative. You have a number of monetarists out there in particular who are now saying, well, look, recession is just around the corner, inflation is about the collapse, there’s no big deal about this anymore.

But I think there’s also a danger of asymmetric monetarism entering the debate, which is that a lot of people ignored money supply when it was so strong, but they’re now very focused on it because it’s so weak. So they weren’t suggesting rates should go up when it was so strong, but they’re very keen for rates to come down when it’s so weak. I’m not sure that’s really quite how it works. The second thing I’d note is that lock downs have created a very peculiar relationship between money and the economy because obviously, when money supply was growing very quickly in 2020, none of it could be sped. So the velocity of circulation of money was collapsing.

What has happened subsequently is that there’s lots of money sloshing around, there’s no need for any more of it because lockdowns have ended and all that money that has been sloshing around can now be spent so effectively the velocity of circulation has gone up. Now, staunch monetarists would tend to argue with last year’s circulation as either stable or entirely predictable. I would suggest that over the last two or three years, it’s been neither stable nor predictable. So I’m rather cautious about looking at the money supply numbers on their own and reaching a firm conclusion one way or the other.

What I would note is that the economy is still, in the US, quite robust, labor markets are still tight, unemployment is still very low. For lots of reasons, you might think that even if money supply growth has slowed or gone negative, that the momentum in the economy is still pretty firm, which I think is one reason frankly why the Federal Reserve, even though it has signaled a temporary pause is also simultaneously and strangely trying to indicate that rates will rise further later in the year.

[00:55:36] Kevin

So I guess the answer to that is money still suggests there’s potential inflationary threats out there.

[00:55:43] Stephen

Yeah. It’s not as worrisome as it was, but you can’t give it a clean bill of health at the stage. I think that’s still bothersome.

[00:55:52] Kevin

Your third test, which is very interesting is, is the inflation risk being trivialized? Is it being explained away as it’s just a one-time shock or look in the rearview mirror? Has your view changed on that? Are central banks taking it more seriously now in your mind?

[00:56:14] Stephen

Well, they’re taking it more seriously, which is a bit late, isn’t it? The problem is that they should have been taking it seriously in 2021 when most of them were still worrying about deflation. I think it was Paul Volcker who said that one lesson, when you’ve got an inflation problem, is that you need to act early. You don’t procrastinate. You don’t wait until the public become alarmed before acting on inflation. You act quickly. I don’t think we’ve seen any real evidence of central bankers acting quickly.

Now, in their defense, they will say, well, look, we raise interest rates faster than we’d done in any other previous period, or certainly as fast as previous periods and therefore it shows that we mean business. But then you get back to the problem of deflation versus inflation. The reason why interest rates were so incredibly low, and they were stupidly low compared with the vast bulk of human history was, of course, that they were fighting against deflation.

So the idea that you tweak interest rates a bit and somehow you go from being a deflation fighter to an inflation fighter, I think that’s just not really true. Yes, it’s true that interest rates have risen quite a long way, but if you were to take so-called real interest rates, so effectively taking the nominal interest rates and current measured in interest rate less the inflation rate, you would probably conclude that in real terms, interest rates aren’t that high as yet. They are higher in the US than they are in say the UK.

So again, the Federal Reserve has probably done a better job than the Bank of England. But nevertheless, I would argue that if you use the benchmark of where real interest rates had to go to in the 1980s, we’re still a fair way away from that, which is another way of I suppose indicating that the chance of getting inflation back to the 2% target, that most central banks are supposed to embrace, anytime soon, that looks to me to be increasingly unlikely.

Of course, the problem that if people start talking about inflation on a semi-permanent basis, it becomes part of this wage price game that everyone plays each and every single year. So once it’s established, getting rid of it is difficult. Through time, you can demonstrate the difficulty of getting rid of inflation in these circumstances.

[00:]58:33 Kevin

Your last test is about supply conditions. What’s your take on that now? Clearly, supply conditions were contributing to inflation during the COVID lockdowns. What about now?

[00:58:49] Stephen

Well, the good news is that obviously some of the some of the pandemic problems have eased back. So whether its supply of goods, that’s definitely improved, components has improved, shipping has improved. A lot of the things that people talked about in the early stages of the pandemic are a whole lot better than they once were. But my argument isn’t really about the pandemic alone. It’s a longer argument than that. It’s really about the fact that central banks had it relatively easy for much of their time as independent operators.

So suddenly, from, actually, probably the late 1980s, but certainly the 1990s through to the cusp of the global financial crisis, you could say that central banks took full advantage of what people called the Great Moderation. The Great Moderation was the idea that you’d have reasonable growth, long periods of economic expansion, low and stable inflation, and this was effectively a consequence of the good works of the central bankers themselves. Of course, they would say that because it flatters them.

But the problem I think is that for much of that period, one of the more obvious reasons why we had this combination of decent growth and low inflation was effectively the west through globalization was importing cheaper and cheaper goods from the likes of China and other countries in Asia. So the outsourcing process and the offshoring process had lower production costs, which from the point of view of consumers in the Western developed world was a bit like a windfall gain.

So effectively, prices were falling relative to wages, prices were falling relative to profits, and people could live reasonably comfortable lives. But that depended on continued good relations between Washington and Beijing. It depended on the World Trade Organization consistently pushing through more and more global trade deals. It depended on countries at the individual level buying into their local trading arrangements with positivity. All those things kind of mattered and they’ve all unraveled. So obviously, the relationship between Beijing and Washington is not what it was.

You’ve got a move towards regional trade blocs rather than the global solutions that people advocated 15, 20 years ago. In the case of my country, the UK, we walked away from our main trading partner, the EU, thanks to Brexit. All these things are, I would suggest, longer lasting supply shocks; they’re negative supply shocks. What it basically means is that the Great Moderation is over, that any given growth rate in the US or Europe, the inflation rate is likely to be higher than it previously was.

To turn it upside down, for any given inflation rate in the US or Europe, the growth rate is likely to be lower than it previously was. So either way, it just doesn’t look as comfortable as it did previously. So I’m not for a moment suggesting that the pandemic problems are still there, they clearly have faded. But they were an extension of problems that were already established pre-pandemic and which I think didn’t get sufficient attention but are getting more attention.

Now, I’d also add of course that post-pandemic, there’s a much greater focus on building national resilience, a move away from global supply chains, the debate about nearshoring, reshoring, onshoring, all exactly the opposite of what took place in the Halcyon years of globalization. So I think we’re a long way away from returning to that kind of world. As such, I think the supply story is nothing like as positive as it was back then.

[01:02:28] Kevin

Thanks for that. Essentially, I think what you’re saying is that the tide or the wind was at the back of central banks for a long time, and now it’s kind of in their face, they’re swimming against the tide, structurally anyway. We had Manoj Pradhan on the show about a year ago, actually, Charles Goodhart’s co-author of The Great Demographic Reversal. Obviously, you know those guys. I was a little surprised in your book that there’s really not a mention of demographics that much.

I’m curious what your take is on their argument of the demographic trends being inflationary, the dependency. Basically, more old people, old people are inflationary and we’re going to have a lot more of them, and therefore, that’s also going to create a kind of inflationary bias. Do you agree with that argument?

[01:03:22] Stephen

Well, first of all, I should say that there is a mention of it in the book, but right at the very beginning, I think in the preface, where I say I’m not going down the demographic route done by somebody else. Also, I did have a small debate with Charles about this. I know Charles Goodhart a little bit, not very well, but well enough and I’m aware of his arguments. I wanted to put the focus on institutional issues, issues about central banking policy, those kinds of issues rather than demographics.

But the reason for that is partly because I think the demographic argument is a little ambiguous. It’s not as straightforward as one would like. So I can see exactly the argument they’re making that effectively you begin to run out workers relative to those who are in retirement. You’ve got lots of people in retirement who are trying to spend their money. If you haven’t got many workers to produce the goods that they need, then you’ve got to bid up the price for those workers, wages will rise, prices will rise, you have to make effectively the older people poorer.

One way of doing that is to have more inflation than they anticipated. So as a consequence of that, the real spending power that they enjoy is less than they had imagined. But it works in exactly the opposite direction as well, which is that if, for example, the older generation had most of their savings in the form of let’s say stocks or property, well, they’ve got to realize those assets before they can spend the money. They’re going to sell those assets to someone to raise the money.

Actually, we know from Japan’s experience in once sense over the last 30 or 40 years that in the process of trying to sell those assets to the younger generation, the assets fall in value. As the assets fall in value, you then get mismatches between assets and liabilities on the balance sheet, which means the liabilities are too great that people want to pay off their debts more quickly would otherwise be the case, and that process of deleveraging, effectively, actually is deflationary rather than inflationary.

So I can absolutely buy the argument that there are circumstances where demographics would lead to more in the way of inflation. But equally and partly through Japan’s experience over the last 20 or 30 years, I can see the argument for, in certain circumstances, the demographic situation creating deflation rather than inflation. This makes me sound like a classic two hey economist to focus on one or the other. But I think that in these circumstances, my concern with demographics is that we kind of know the demographics. But working out the economic consequences of the demographics is not always quite as straightforward as one might initially think.

[01:05:59] Kevin

Perhaps we could just end with one final question, which is, if you were constructing the Fed from scratch, or a central bank, an ideal central bank from scratch, how would you do it? How would you determine who sets policy and what they’re targeting and how they’re judged? I know it’s a big question. You say in the book, and I think a really important point, that the decision-making dynamics are in some sense as important or an underrated bit of the effectiveness of monetary policy.

I feel like, and we wrote this in our book at the end of the Rise of Carry that we’re going to have changes in the monetary arrangements, and that will probably take place over the next couple of decades. I think we’re in the early 1900s sort of situation where the current monetary arrangements aren’t really working for society. We’ll probably see changes. I’m always thinking about, what ideally would we like to have happen? So how would you do that?

[01:07:07] Stephen

Well, first of all, I probably wouldn’t start from scratch. I know this is evading your question to a certain degree. But central banks have traditions, they have reputations, they have embedded credibility, hopefully, and you want to hang on to some of that if you possibly can. So history matters, I think, reputation matters. You can see this from comparing some of the old hands of central banks compared with some of the newer examples in some emerging markets that often find themselves in trouble because they bumped into constraints that undermine what they’re trying to do.

But having said that, I think that there are certain things that would be useful. The first is that you have to choose your Chair very carefully. I think that you want someone who is willing to encourage debate within the institution. If you have a chair that discourages debate, then the chances are that at some point, things will go wrong. Secondly, even though the person should be willing to encourage debate within the institution, the person equally should be willing to stand up to political masters.

You don’t want someone who can be bullied into submission by some finance minister or whatever to tell him to do something that’s actually is not really in the central bank’s interest. So that person has to have a robust character, I would suggest, in not falling for short-term political advantage. As for the monetary policy committees, the FOMC or whatever you want to call these things, I think the US has an advantage actually, to a certain degree, which is it has a regional focus more so than for example, the Bank of England does.

The Bank of England has no regional focus at all. It does use agents to try and work out what’s going on in different regions, but it’s not as though the members of the interest rate setting committee actually reflect what’s going on in their individual region. So given the fact that regional inequality in the whole developed world has opened up so much, it might be worth having a better regional sense of what’s going on, which is not just about individuals, it’s also about data or how you think about what’s happening in, I don’t know, Texas versus California or Cornwall versus London, or whatever it might be.

It’d be worth examining exactly what the appointments process is to the committees themselves. I look closely in the book at the Bank of England in particular, and on the monetary policy committee, an awful lot of people are ex-treasury, so effectively, Ex Finance Ministry, which brings back the sort of Burton-Taylor problem through the backdoor, really. Secondly, I think what’s been interesting over the last two or three years has been there hasn’t been much in the way of robust debate, at least not publicly about what’s been going on.

Let’s face it, in 2020, 2021, we were facing some of the most difficult and uncertain economic times certainly through my lifetime, and yet typically, the members of the committee’s came out with exactly the same views as if they knew with certainty what was going to happen. I think actually committee members should reflect the uncertainties they’re faced with and sometimes present different points of view. I would like to see more points of view being presented from within the committees.

I’d also probably want to see more willingness to engage with debate with other people outside of the bank itself. You sometimes see this in a kind of staged way, whether it’s the World Economic Forum in Davos or whatever, but panel discussions where the questions and answers are pre-prepared. But I think I’d like to see more in the way of debate opening up such that people are held to account to a basic degree. I’d also probably argue that when it comes to testifying either to Congress or to Parliament in the UK, maybe you need more expertise on those committees to actually hold the central bankers to account to a greater degree. That will be also probably progress of sorts.

I’m not sure I can solve all this, but I think that committee membership matters, I think the performance of committees matters, how they choose to vote, being held accountable for how they vote, trying to get away from what I described and many other people described as a tendency towards groupthink, which I think is not helpful because economics is profoundly uncertain. Pretending that you know all the answers is likely to be an error and will sometimes come back to bite you, which is exactly what I think has happened over the last couple of years.

[01:11:49] Kevin

Well, thanks for that. Thanks for those thoughts. Thanks for writing the book. It’s called We Need to Talk About Inflation. The FT said it’s a book to read for 2023 and I definitely think it is. It’s easy to read, a lot of history and a lot of important insights. Stephen, thanks so much for taking the time to join us and all the best.

[01:12:13] Stephen

Thank you very much. It is an absolute pleasure.

[01:12:16] Kevin

Okay. With that, I’ll pass it back over to Niels.

[01:12:19] Niels

Thank you so much, Stephen and Kevin for a very enjoyable conversation on a topic that just doesn’t seem to want to go away, just like the Taylor-Burton relationship. There are quite a number of really good insights from Stephen and I think there is a good reason that his book, that only just came ou, is already on the Financial Times 2023 list of books to read. From his four tests of inflation to how Stephen would build a central bank like the Fed, including, among many things, a lot more accountability, there are so many common sense observations that I also think make the book a compelling read.

For those of you who listen to me on a regular basis, I of course completely buy into the dangers of losing the public trust through reckless money printing, which Stephen also emphasized is hugely important, perhaps as much as the money supply itself when it comes to future inflation.

The question that I’m left with and that Stephen also mentions is very simple. Why were central banks ignoring all the usual red flags and simply did nothing to tame inflation when many of us could see it coming so clearly?

Anyways, make sure you go and follow Stephen’s and Kevin’s work, as well as getting a copy of their books because as you can tell from these conversations, some of these ideas and topics are not being discussed enough on mainstream media.

From Kevin and me, thanks so much for listening, and we look forward to being back with you on the next episode. In the meantime, take care of yourself and take care of each other.

[01:13:59] Ending

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