Podcast episode

US recession, climate change & monetary policy w/ Darren Brady Nelson – EP151

US Treasury Secretary Janet Yellen claims the US economy is not in a recession,  despite two consecutive quarters of declining GDP. Economics Explored EP151 guest Darren Brady Nelson disagrees with the Treasury Secretary and argues she is taking a political position. Whether she’s being political or not, Janet Yellen has certainly taken a big risk, as Darren and Gene discuss. Darren and Gene also talk about the review of the Aussie central bank, the Reserve Bank of Australia, particularly how climate change could figure in that review. Darren argues the review team should have a broader range of views represented, including Monetarist and Austrian perspectives. 

You can listen to the episode via the embedded player below or via podcasting apps including Google PodcastsApple PodcastsSpotify, and Stitcher.

About this episode’s guest – Darren Brady Nelson

Darren is Chief Economist of the Australian think tank Liberty Works and he’s also an Economics Associate at the CO2 Coalition in Washington, DC. For Darren’s bio, check out the regular guests page.

Links relevant to the conversation

While it’s the NBER that declares whether the US economy is in recession, this CNBC report notes: “Since 1948, the economy has never seen consecutive quarterly growth declines without being in a recession.”

But many economists are skeptical about whether the US is in a recession, including recent podcast guests Stephen Kirchner and Michael Knox. 

Stephen Kirchner on the US recession question.

Michael Knox’s Economic Strategy: Fed hikes rates, but Fed says no recession (PDF).

Transcript: US recession, climate change & monetary policy w/ Darren Brady Nelson – EP151

N.B. This is a lightly edited version of a transcript originally created using the AI application It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:01

Coming up on economics explored…

Darren Brady Nelson  00:05

like to see seemed to have sold or sold for political purposes as the head of Treasury in the US each year is a political appointee. So you know, that is, to some extent a political position.

Gene Tunny  00:19

Welcome to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host gene Tunny. I’m a professional economist based in Brisbane, Australia, and I’m a former Australian Treasury official. This is episode 151. On whether the US economy is in a recession. Joining me is returning guest Darren Brady Nelson. Darren is chief economist of the Australian Think Tank Liberty works. And he’s also an economics associate at the co2 coalition in Washington DC, as well as chatting about the US economy. Darren and I discuss climate change and the review of the Reserve Bank of Australia. In the shownotes. You can find relevant links and details of how you can get in touch. Please let me know your thoughts on what either Darren or I have to say. I’d love to hear from you. In the show notes. I’ll include links to some great commentary on whether the US actually is in a recession from two previous guests, Michael Knox and Steven Kirschner, so make sure you check those links out. Right now for my conversation with Darren, thanks my audio engineer Josh Crosby, his assistants in producing this episode. I hope you enjoyed. Darren Brady Nelson, Chief Economist at Liberty works. Welcome back to the programme.

Darren Brady Nelson  01:35

Thank you. Good to see you. I guess it’s been a while since we last spoke about woke capitalism, I think.

Gene Tunny  01:41

Yes, that’s right. That was a few months ago. So yeah, it’s good to catch up. Again. This is a 100 and 51st episode, and this is your 11th appearance on the show if I’m counting correctly. So yeah, we get around to another chat every 15 episodes or so. So it’s a it’s about time to catch up with you. So it’s great to have you on the show again.

Darren Brady Nelson  02:06

Yeah, congratulation, because I’ve been so prolific. 151 That’s great.

Gene Tunny  02:11

Yeah, well, it’s, it’s just drip by drip. Really? It’s one per week, and they they mount up. Yes. Thankfully, we’re out of the COVID period, although I had it recently. And I was in isolation, but we’re, we’re over all of that. That craziness, which was dominating the conversation for a while, and now we’re getting on to two other issues. Okay, so I thought we could chat now about the US GDP figures and we had some big news last week. Last week in Australia, you’re, you’re still on Saturday there I think Darren in in the states in DC. And we’ve got to now we’ve got two consecutive negative quarters of GDP growth. So GDP grew at an annualised rate or didn’t grow, it fell at an annualised rate of 0.9% in the June quarter, and that followed a decline of I think it was 1.6% in the March quarter, that’s at an annualised rate. Okay, so there’s a big debate about whether the US is in recession or not. Darren, what do you think is the US in a recession at the moment?

Darren Brady Nelson  03:26

Um, well, yeah, I would say so both it, you know, I must admit, in this conversation, you know, certainly, you’re going to be more expertise that I, you’re, you’re a guru of sort of macro economic indicators, and all that, you know, particularly from your treasury background, but other things you’ve done, too. So, you know, maybe I’ll be asking you some questions, too, and hoping to get some answers. But yeah, I’m not sure. Maybe you know, the answer this, but, you know, entire time I’ve been, you know, first studying economics and being an economist, putting aside the debates on whether two consecutive quarters is the greatest definition or not, it seems to have been the definition for a long time. And the most interesting thing I’ve seen recently, and I guess this would have been headlines, I imagined in Australia as well, was the Biden ministration going? No, no, that’s not really the technical definition of a recession. I don’t think I recall it administration, you know, democrat or republican ever, that they may come up with excuses and say, it’s not well, you know, it’s not our fault. It’s the previous administration and all that sort of stuff, our you know, external circumstances. But this is really the first time someone’s ever, you know, including, you know, some of the economists that the Biden administration has, are on record, obviously, talking about in the past that yes, the recession. You know, the technical definition, if you like is the two consecutive quarters of negative growth. So it’s been very interesting time. Once again, I guess in the 2020s, including a lot of media organisations and our favourite, you know, sort of Neo Keynesian economist Krugman coming out and also defending that the Biden administration on Oh, well, it’s not really a recession. So it certainly fits the technical definition that, you know, if you’d like I grew up with. And, you know, that’s, that’s certainly my impression, you know, just actually being in the US. Is it dire just yet? Yes. On the inflation front, yes. But unemployment, you know, still is fairly low. And putting aside the fact that participation rate, you know, that’s a little bit of a worry, but the unemployment rates not so bad at this stage. And usually, obviously, that’s, you know, if you’d like a key secondary indicator, besides GDP itself, that people usually turn to right away, you know, before they maybe dig into, you know, what aspects of GDP have gone down, energy manufacturing, etc, etc?

Gene Tunny  06:02

Yeah. Okay. So there are a few things you mentioned there, Darren, so yes. Not not as strong. Yes. So, yeah,

Darren Brady Nelson  06:09

I’d say yes. technical definition. You know, kind of weak, yes. In a kind of more judgement point of view.

Gene Tunny  06:16

Yep. So you referred to what the White House was saying, and what Janet Yellen in the treasury was saying. So I might just read that out. And then we can go from there. And I can, I can let you know what, what I thought about that. So what, what Janet Yellen said and this is reported by the Financial Times, The White House has maintained that the US economy is not at present in a recession, with Treasury Secretary Janet Yellen saying earlier this week that she would be amazed if the NB declared it was okay. So what what she’s talking about there is the National Bureau of Economic Research, which is I think it’s attached to that attached to Harvard or MIT or one of those East Coast universities. There’s this elite group.

Darren Brady Nelson  07:01

I think it’s I think it’s independent. I mean, look, I don’t know, but I think it’s, it’s more independent than even being associated with one particular university, I think, yeah,

Gene Tunny  07:10

yeah. Yeah, I think you’re right. Yeah. But it’s, it’s an elite group of macro economists, some of the top people and you’ll have regarded, yeah, some of the leading lights of economics on it. And they will, they will date the business cycles, they will declare whether the economy’s in recession or not, and, and generally, what they’re looking for is a sustained downturn that lasts several months, so more than one quarter. And they look at a broad range of indicators. So it’s not just GDP. But that having said that, it looks like GDP is a very, I mean, it’s an important part of it, because it’s that comprehensive measure of economic activity. And one thing I noticed when I was preparing for for our chat, is there was a report from CNBC, where it noted that I don’t think there’s ever been a recession that the NBR has called, which didn’t have two consecutive quarters of GDP growth, if that makes sense. So let’s where’s the actual passage? I

Darren Brady Nelson  08:21

think that’s not correct. I think the they did they call the recession, you know, during the pandemic, and that wasn’t two quarters, I think. So they do have a bit of leeway. But they tend to usually use the two quarters as part of the definition as a, you know, key component.

Gene Tunny  08:38

Okay, look, I’ll have to check that I thought I was ready. I thought I read that. That earlier today. I had that somewhere here in my notes. Okay. Okay. So we might go back to what, what Janet Yellen, what she said here, so she underscored the message at a press conference on Thursday, emphasising that the economy remains resilient. Most economists and most Americans have a similar definition of recession, substantial job losses and mass layoffs, businesses shutting down private sector activity slowing considerably family budgets under immense strain. In some a broad based weakening of our economy. She said, That is not what we’re seeing now. Okay. It seems to me that’s that’s a pretty risky call from her because it does she is running the risk that that the NBA does eventually define this as a recession. And that’s going to be incredibly embarrassing for the administration. So yeah, that would be my sense of it. I think it is a big call from Janet Yellen. And it may be too early to tell. But look, a lot of there are a lot of economists out there who seem positive about the US economy. But that said it does appear that I mean, is it the interest rates, is it what the Federal Reserve’s been doing that’s causing issues? Is it inflation that’s hitting Consumers, what do you think are the main forces affecting the US economy at the moment? Darren?

Darren Brady Nelson  10:06

Yeah, I think, you know, you’ve definitely touched on two key components. But just comment on Janet Yellen. But you know, Janet Yellen was was totally wrong on inflation. So, you know, you know, in, that didn’t seem to impact her sort of credibility within her sort of circle that she goes around with, and the people who hire that didn’t seem to make any difference. So probably won’t next, you know, when she’s proven wrong on recession, which I think she already has been. Yeah, I mean, that inflation is like, one of the key things, it’s, you know, the biggest problems in the US, and obviously, even the Federal Reserve, which has been, you know, the Federal Reserve is part of the process of creating inflation. So, but, you know, they’ve, they’ve gotten spooked, even if the boat administration itself has not, which they, you know, at least publicly, they keep on, you know, they don’t seem to be, you know, they acknowledge it a bit, but they don’t really kind of acknowledge it as bad as you know, even though the official statistics are showing. So, you know, you have, like, you know, I’ve I guess we’ve talked about this many times, but, you know, you have kind of two things going on at once, you know, the, the unprecedented levels of money printing, and, you know, the credit that goes with it, which, you know, from, if you’d like, from a macro point of view, is hitting the demand side. And then on the supply side, they’re doing all sorts of, you know, the Biden administration’s policies are just hurting supply, and hurting productivity, so and competition. So you know, that can sometimes you’ll make up a lot for that money printing, you know, the supply side can react to it, and really dampen what, you know, it’s for the money to the demand side of things. So, you know, energy is a classic one, you know, they had a complete 180 on their energy policy. So the US went from the number one energy producer in the world to not that anymore, and, you know, record time, essentially?

Gene Tunny  12:08

And is that the bottom administration’s fault in your view,

Darren Brady Nelson  12:12

yet? Well, exactly. It’s not just their fault. That is literally their policy. You know, they they’re, they’re going for the sort of green transition, if you like, No, you know, come hell or high water. Right. So, which includes, you know, mounting allowing oil companies to extract oil and all sorts of things. oil, natural gas, coal, etc. And they’ve also hit agriculture with bad policies as well. You know, manufacturing. Yeah, it’s, you know, literally, if you want to destroy an economy, the buy administration is basically ticking all the boxes of you know, their policies. And, you know, putting aside, you know, you can argue whether that’s intentional or unintentional, but I think there’s not too many, if you like, remotely free, market friendly economists who think the buying policies are particularly good

Gene Tunny  13:10

rod, okay, I’ll have to have a closer look at some of the policies. And in come back to that, I just want to go back to that definition of recession, I think I might have missed or may not have communicated properly what that factoid in that CNBC report was. So what they were saying was that, in fact, every time since 1948, the GDP has fallen for at least two straight quarters. So they’re not saying that, if it’s that they would, I mean, there could be recessions if you don’t have this, and that’s what you were saying with the pandemic that was, like you could call a recession, if you don’t have the two negative quarters. But what this point is, is that, in fact, every time since 1948, the GDP has fallen for at least two straight quarters, the NBA ultimately, has declared a recession. So you can have a recession, even if you don’t have the two quarters, but every time you’ve seen it in the data, they’ve the NBR is ultimately called the recession. So what Janet Yellen has done is, yeah, that’s a really big call on her part. And, I mean, Janet Yellen, someone with a distinguished academic reputation, and yep, so really, really big call and potentially it will, will backfire on her so yeah, have to wait and see about that. Yeah,

Darren Brady Nelson  14:38

yeah, y’all want to make it you know, like she’s she seemed to have sold or sold for political purposes. Not unusual that that, you know, it’s not like this has never been seen before. Most of her sort of like topics when she gets into public is less focused on inflation and, you know, recessions and she’s talking about equity and diversity and inclusivity You know, all that sort of stuff? You know, as for? Well, I guess, you know, I guess she is that the head of Treasury in the US each year is a political appointee. So, you know, I guess, you know, that is, to some extent, a political position. Although, you know, usually in the past, it’s been Department of Justice and Treasury have, you know, usually been less partisan, if you like, you know, the people regardless of whether it was democrat or republican in charge, but you know, things have changed quite a bit. Certainly this century and certainly in the 2020s.

Gene Tunny  15:33

Yeah, exactly. Okay. So you mentioned the supply side. Before, we one thing we’ve had in Australia here is just the the ongoing disruption to supply chains. And I mean, the random things just been unavailable in the supermarket’s cuantas seems to have lost its mojo can’t seem to run a flight on shedule any, any any time anymore. And partly, that’s because they lost people during the pandemic. And now we’ve got people on isolation leave, like if you get COVID and have to isolate for seven days, and that’s disruptive. Things just don’t seem to be working as they once did. Is that the same in the States? Have you noticed that in the US? Yeah,

Darren Brady Nelson  16:21

I think some extent, less. Although I understand aviation has been kind of bad here, too. But I haven’t actually been, you know, I’m just going on to sort of news reports and talking to other people that, yeah, they’ve had, you know, things. Well, you know, what happened in the US probably, maybe more than as surely as a lot of pilots, either were, you know, let go or just left because they didn’t want to get the vaccine. Right. So, you know, that was in the federal government has a bigger say, in aviation than they do and other industries, for instance, particularly on employment. And so yeah, that’s all contributed, including also understand, not just pilots, but you know, other people in the aviation industry, you know, various hubs, you know, the people needed at the airports and the hubs as well, you know, similar sort of circumstances. The the supply chain disruption in general, I haven’t noticed it as much in terms of like, you know, like at the grocery store, there was a period where there was a little bit of that. And, but not as bad, but certainly, you know, there were issues as well, in the US, perhaps, maybe not as bad in terms of like, you know, grocery stores and whatnot. So, yeah, it’s been, yeah, again, the 2020s have been very weird times. And I don’t think it’s some sort of like natural market outcomes as such, obviously, markets wrecked, and they, you know, the impact, but I think there’s just the amount of, really over the top interventions and status sort of policies in the 2020 2020 has taken me by surprise, you know, we’ve been prepping backwards, if you like, towards bigger and bigger government, and I think, you know, reaping the rewards. I don’t know why people, even people who, you know, seasoned economists, who should kind of know better, you know, the more the government does stuff and interferes the worse things get it it literally is becoming, like, more and more like an Atlas Shrugged world? I don’t know if you’ve read Atlas Shrugged. probably familiar with the premise anyway. It’s, it’s like that was John go. Like, I’m like Atlas Shrugged there. You know, there were places to escape to in that world, the fictional world of as many, as you can see, in this world, when, you know, all the governments are, have uniform sort of policies on COVID and uniform policies of not tackling inflation, you know, and all that. And maybe it will be interesting to see if the elbow government copies the Democrat lead, which I suspect they will, you know, if Australia gets two quarters of negative growth, that they’ll go that’s not really a recession, you know, we’ll be interesting to see if they go down that road as well.

Gene Tunny  19:12

Yeah, but I mean, one thing that we’ve we’ve traditionally relied on to keep the economy growing is migration, just the, you know, addition of people and and that those consumption, and so that’s starting to pick up again. Look, yeah, possibly that try and redefine it. I mean, I don’t think we’re, we’re at risk of that at the moment. Although having said that consumer confidence has dropped with the, you know, the higher interest rates, so people are freaking out over just the, the increases in interest rates we’ve seen already, because it looks like they just, you know, borrow lots of money during the when interest rates were really low. In the end, you even had the I mean, the Reserve Bank, Governor, I mean, I couldn’t believe it. He last year he was saying, Oh, the interest rates will, our official cash rate will stay at point one until 2024. And arguably, he misled people. And so I mean, he really has a lot of questions to answer for. And there is the Reserve Bank of Australia review, which I’ve talked about in this programme. I don’t know if you’ve had a look at that at all. Darren,

Darren Brady Nelson  20:22

oh, no, tell me Give me Give me a synopsis of what drove that. And what’s happening? Well,

Gene Tunny  20:28

I mean, the RBA has been under a lot of criticism in recent years for for different reasons. I mean, there’s been one group of economists who’ve been critical of it, because they argue that they didn’t, that they kept in their head interest rates too high in the lead up to the pandemic. Now, whether that’s true or not, I, I think it’s debatable, but I’ve had people like Peter tulip and Steve Kirschner on the show. I mean, they they’re very good economists. I think it’s worth considering their view for sure. Their argument is that if you try if you’re trying to achieve the inflation target of two to 3%, so that the so they they were arguing that because inflation was actually lower than that you had scope to have looser monetary policy, lower interest rates, to have more employment growth. And there was some modelling that was done by Andrew Lee, who’s a Labour Party MP and a former a new professor, and Isaac gross, who’s an economist at University of Melbourne, I think. And they showed that if the RBA had met its inflation target, it allowed if it had lower interest rates and let the economy grow faster. You could have had, I think it was like 250 to 300,000 more jobs in the economy. So there were a group of economists criticising the RBA from that direction. And they were saying that, well, the RBA was too concerned about households taking on too much debt. So they didn’t want to have interest. They didn’t want to put interest rates lower. And look, I mean, I could see why the bank would be concerned about that. So that’s why I’m not fully on board with that criticism of the bank. That said, I think it is good to review the Reserve Bank, because it is a bit of a it’s not exactly transparent what they’re doing. So I think there could be greater transparency. And I mean, since last year, when Phil Lowe was making those sort of bold calls, that turned out to be wrong within months, right. It was obvious that we’re in the in the new year when we started getting those inflation numbers that the Reserve Bank would have to act. And so I think they lost a lot of credibility over that. So it’s important now to to have this review. And they’ve appointed So Caroline Wilkins from she’s a former Deputy Governor of the Canadian central bank. They’ve got Gordon to Brewer, who’s a former bureaucrat, I worked for him when he was in the treasury. And he was also at a new at times. He’s good. He’s good value. And Rene fryer McKibben, who’s a professor of economics at ASU. And so they’re going to review the board like the how’s the there are issues to do with board composition, who’s on the board? There’s issues to do with the inflation target, but I’m not sure they’ll do much about that they might tweak some of the language. And then there’s issues to do with the transparency of the board’s decision making what do they release to the public every month? So that’s essentially what the reviews about and I think it’s, it’s a good thing that they’re doing that. So yeah, that’s it. So yeah, it’s worth definitely worth keeping an eye on. Okay, we’ll take a short break here for a word from our sponsor.

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Gene Tunny  24:30

Now back to the show.

Darren Brady Nelson  24:33

So are they the reviewers? Are they sort of, you know, leftist? Senator, for the most part, you know, like a Keynesian and MMT and, you know, something else or what, what’s, what’s the story there?

Gene Tunny  24:47

I’d say the typical mainstream macro economists. So however, however you’d like to characterise that, the definitely not MMT if you had to give them a label, maybe you could You give them a new Keynesian label, possibly. But yeah, they’re not I don’t think they’re radical in in any particular direction. They’re non political appointees, which is a good thing. One of the big ish questions and something that I think the Prime Minister Anthony Albanese, so elbow, as we call him, one thing he will be, he’ll be getting pressured to put a trade union representative on the board. So they’ve had one in the past, I think Bob Hawke, our former prime minister was on the board in the 70s, when he was the head of the A CTU. And then we’ve had various other ICTU secretaries on the Reserve Bank Board, there are some people pushing for a regional rep. But, you know, one thing that Peter Tula, who’s chief economist at Centre for independent studies has been pushing for he’s, he’s he said that the problem is, we don’t have enough people who know about inflation and monetary policy on the board. And so we need more of those people. We need more, it’d be better to have more economic experts or economists on the board.

Darren Brady Nelson  26:05

Yeah. Yeah. And maybe, also further, how about a variety of use, and not just the one kind of, you say, mainstream, and but that’s still a worldview, it’s still it’s still a way of looking at things. And it’s not the only way of looking at things, you know, the combination of, you know, essentially New Keynesians, for the most part, with maybe a little, you know, like 8080 20, Keynesian monetarist? You know, that’s maybe what, you know, most mainstream sort of macro, folks, you know, that’s kind of what they’ve learned and whatnot, be good to, you know, have somebody else, you know, have an Austrian point of view, have maybe a full on monetarist point of view, you know, whatever it is something that’s not just the one point of view, you know, so, so it’s not just Tweedledee and Tweedledum, you know, every time for the, you know, either on the board or this review, you know, I’m not saying these people aren’t smart, or anything like that the three people you mentioned, but I suspect they don’t, they’re, you know, there’s not gonna be a whole lot of push and shove between the three. So

Gene Tunny  27:04

I think the review in a way, please presumes that there won’t be radical changes. I mean, we’re not, I mean, the reserve bank is going to continue as a, an institution, we’re still going to have fiat money is that the sort of thing that you would you think should be up for review that we should be looking at something more fundamental?

Darren Brady Nelson  27:25

Well, at least have one person on there who can be the dissenting voice to say, something like that, but I’m saying like, you know, like, you know, even if it was like, say, one Keynesian one, monitor someone Austrian, I think you might get a pretty decent review out of that, you know, with the monetarist if you like, in between the two to some extent. So, you know, you still have 2221221, you know, want to keep a central bank going, but we just, you know, good to kind of be realistic about, you know, what, you know, what a central bank does, and, you know, what inflation is, what monetary policy is, you know, all that sort of stuff. That’s fine, if the board, you know, I’m not saying, you know, the board should be all full of economists, even if it was a mix of those types of economists, I think it’s fine to have some other, you know, you know, depending on how big the board is, you know, you know, there would be room, I guess, for a union and a business representatives and maybe some other stuff as well, that’s fine. And then they should also review, you know, also the, you know, the goals of the Reserve Bank, you know, obviously, what’s legislation, there’s a lot of stuff in there besides inflation, you know, maybe, you know, just to look at it, and kind of whether all that needs to be in there, or whether there’s should be a better balance, or you should prioritise and go, you know, inflation is number one, and then something, you know, that type of thing. It’d be great. If it was a, you know, a lot of these reviews aren’t all that genuine, you know, they already have a political goal. I mean, you say they’re not political, but it always is, you know, you know, to some extent, they’re under certainly under pressure anyway, regardless of who they stick in there to review things. Now, in the past, you know, some of these reviews have been a lot less political than others, there’s always a political element, you know, like the competition policy review wasn’t particularly political, but there’s always a little bit of an aspect to it, of course, you know, I’d be surprised if they’re not under, you know, some fairly great political pressure to, you know, start going beyond and started looking at, you know, kind of cultural war type stuff, too, you know, that they want to ingrain, you know, sort of race, gender, race and gender and all that other stuff. You know, I’ll be I’ll be pleasantly surprised as if that isn’t going to be a part of

Gene Tunny  29:37

the review. So, as far as I’m aware, race and gender What won’t be at this stage, I don’t think but one thing that possibly will be now whether there’s a culture war issue or not, I don’t know I think I’m not sure it’s, I guess, it does get there are aspects of it that are part of the Ultra wall but the debate about the climate. So, Warwick McKibbin, who is he’s a professor of economics at ASU. And he’s actually the husband of one of the reviewers. But you know, she’s independent of she’s, she’s her own person. You know what, I’m Rene fryer. And she, she’s, she’s work. So, by definition,

Darren Brady Nelson  30:22

you know, at least the old school definition marriages, you’re not your one flesh. But anyway, I understand what you’re trying to say. Okay.

Gene Tunny  30:29

Yes, yeah. So I don’t think she’ll necessarily go along with with works for you. But Warwick was at the conference of economists in Hobart two weeks ago, where I call COVID. And he was on he was, it was good conference. Other than that, it was a great conference.

Darren Brady Nelson  30:46

And super spreader of it.

Gene Tunny  30:49

Yeah, that’s right. And Warwick was on the panel. And now we’re talking about the Reserve Bank review. And one of the things he one of the points he made is that we’ll have to, we may have to amend actually, I think he’s saying we will have to amend our inflation targeting settings or our our goals or objectives, or we’ll have to amend that to incorporate climate change, because we have to recognise that if we’re going to be increasing the will, if we’re going to be responding to climate change, we’re going to introduce a carbon price and one that increases over time. So that’s the, that’s what you need to have that sort of lowest cost adjustment path. So to minimise the cost of adjusting to climate change, you’ll need to have a carbon price that increases and so that’s going to be increasing prices. So you’ll need to look through the inflation, you’ll have to ignore the inflation that comes from the carbon price. So I think culture war issues won’t come into it. But the I think the climate climate change will come into the RBA review.

Darren Brady Nelson  32:01

Okay, well, that’s good to know. It’s terrible news. But it’s not surprising,

Gene Tunny  32:06

though. But But doesn’t it make sense? What Warwick is saying? I mean, if you’re going if the if a government does introduce a carbon price, and you’re going to have increasing prices because of that, then that’s, that’s not really inflation that the central bank should be concerned about? I mean, what do you think of that?

Darren Brady Nelson  32:25

It still should be concerned about it, even if, you know, you know, this is all about thinking about the costs and benefits. It sounds like, just assuming, okay, well look, you know, we’re just not going to worry about the downside of our carbon tax and our climate policies, you know, because it’s such a, you know, unquestionable good to pursue this. That’s, that’s ideology. That’s not economics, that’s really bad economics. And it’s also bad constitutional law, you know, like, to what enshrine you know, certainly a very long standing fad, you know, of the climate sort of industry. But, you know, the concept of inflation, you know, it’s something that stands the test of time, you can disagree on various aspects of it, but it’s always going to be, you know, to the extent you’re gonna have monetary policy, inflation is going to be an important thing to be thinking about, right. Climate change, may not be, you know, like I’ve, you know, been following this debate since the mid 90s. And, you know, I can tell you, Well, just look at the polling, you know, I can’t speak for Australia, but in the US, it’s, you know, something along the lines of it’s well outside the top 10 of topics that people are concerned about in the US, for instance, then you want to start because, you know, elites like him, are in a position to influence these things they want to shove in, you know, the things that they care most about. And I think it’s just atrocious to think you can stick that into the Reserve Bank act. Yeah, sure. You another government can come along and potentially change that if they want, if the if the electorate says, Alright, you know, you’ve been trying to convince us that, that the end of the world has been coming for 30 years, it hasn’t arrived, we no longer trust you. Sure, that might happen. And then, you know, government could change things, but you know, so it’s a bit hard to change stuff in legislation, a lot of damage can be done in the meantime.

Gene Tunny  34:20

Okay. So on where it’s where they’d make the change, it probably wouldn’t be in the act, they would have it in the agreement between the treasurer and the Reserve Bank. If I remember correctly, I think the general view on the Reserve Bank act from the late 50s Was that all look, you know, some of the language is a bit outdated. But you know, maybe leave that alone, you can do all you need you want to do within the agreement between the treasurer and the Reserve Bank. So I think that’s where they would, they would adopt something like that. So yeah, just on that Reserve Bank X, I think, I think what I talk about in that is that the Reserve Bank is supposed to set monetary policy to, to have a stable currency to have to achieve full employment and to promote the prosperity of Australians or something. Something broad like that. Yeah. Yeah. So they’ll probably leave that. And then they’ll, they’ll do whatever they want to do with regard. If they if they did want to put some wording in about climate change, it’ll probably be very vague, because it is all very vague. What’s, you know, what do you? We don’t really, I mean, I’ve got no idea what’s going to happen here in Australia. I mean, politically, it’s, you know, it’s such a vexed issue. And you’re saying is not in the top 10 issues in the US, it’s certainly in the top 10. It’s top five, top three here in Australia. I mean, the previous government lost Blue Ribbon seats, seats that it’s held for decades, seats in affluent areas of Sydney and Melbourne. And it lost them because of climate change was people in those seats are extremely concerned about it.

Darren Brady Nelson  36:07

Yeah, look, there’s a different point of view. You know, that? Certainly they did. But I wouldn’t extrapolate to say that, that is a that means Australia as a whole, has the same views as these inner city suburbs, they’ve just changed the demographics and the ideological viewpoints of these people. That’s why That’s why they lost. You know, these are, you know, just like we’ve seen around the world, it’s, you know, the, it’s the rich and upper class professionals who gravitate towards status policies and status causes, like climate change the working class, and in the middle, and lower middle classes do not. And you know, electoral politics, you know, isn’t just a straight representation of what the entire nation views necessarily. And putting aside the fact that the polling is often biassed and bad and misleading and all that sort of stuff, but that decide. So, ya know, I’ve seen some other people who, you know, Australian, you know, intelligent Australian commentators, James Allen, and people like that. We’ve been having a bit of look at that, to see whether that, you know, that mainstream narrative is actually true. They certainly lost obviously, those seats, they were blue ribbon, but they’ve been changing and moving left for a while now. So many are burdened with just comedy, obviously, particularly in the in the US, you know, how climate change is almost really a non issue from you know, abroad electorate point of view, not, you know, not any specific electorates. Yet, that doesn’t stop the policies from carrying on and then you have all these perverse outcomes of like, you know, I imagined Albanese will get more copy a lot of what the Biden administration so, you know, the push for electric vehicles? Well, you know, electric vehicles are still being produced by coal and natural gas, you know. So you’re really in many ways, you’re not, you actually might even be increasing carbon dioxide emissions through transitioning to electric vehicles from from petrol vehicles. And the fact is, you know, most of the world is actually increasing the use of coal, mostly India, China, Brazil, etc, etc. And even there’s even been a coal like I said, there’s been a coal comeback, even in Western countries as electric vehicle usage gets ramped up. So you know, that and these people don’t go, oh, no, we, you know, they still keep the same people who say there’s an existential problem, keep on producing, keep on pushing electric vehicles, for instance, so that their actions speak louder than their words that it isn’t really an existential crisis. It putting aside the fact obviously, all these elites tend to keep on buying beach side homes and all these sorts of stuff. I think just look at their actions speak much louder than than their words. So we’re getting this system where we get a worse electrical system because they keep on showing throwing more and more unreliable and expensive renewable energies on top of it, yet, they’re not actually starting to take much of the load of electricity production, they’re just sitting there costing more money and hurting the rest of the system. Yet, we’re still relying, and we’re going to keep on relying on on coal and natural gas and the only renewable energy we’re going to lie and it’s going to be, you know, water, hydro, and, you know, putting aside the fact you know, allow many new hydro to be built, but it’s bloody reliable. You know, us Quebec, is, you know, if it wasn’t for Quebec, all the hipsters in New York would be having more blackouts because they’re wrong on water that you know, hydro from Quebec coming down into the US.

Gene Tunny  39:55

Where is that is that near Niagara Falls, or is it is that up in that Region. Yeah,

Darren Brady Nelson  40:00

I mean, kubek is like, you know, the king of hydro in that part of the world, not just for Canada fact, Quebec is mainly supplying electricity to the US part of the population bigger. And that sort of the northeast of the US. So, you know, that’s kind of insulating on, you know, the sure they can shove on some more solar panels and wind, but that’s not really generating a lot of electricity. And we also the perverse effect from that, you know, you know, the main thing that, besides all the kind of pollutants, the actually the toxic sort of chemicals, and all the stuff that it’s needed for electric vehicles needed for solar panels needed for wind turbines, which obviously have detrimental environmental effects. They need coal, natural gas, and hydro to make those things in the first place. Not just to be the ones that really, you know, supplemented when the winds up blowing, and the sun’s not shining. But if it wasn’t for all the, you know, the fossil fuels, it couldn’t even build this stuff in the first place. So it all you’re doing is shoving all this stuff, people making a lot of money. A lot of people are virtue signalling, you know, sort of, you know, they keep on crying wolf for what, like 30 years now. There’s, you know, there’s nothing, you know, there’s there’s no significant evidence that we have a problem. Well, I’ll

Gene Tunny  41:15

push back and say we just had a 40 degree Celsius day in England that they’ve never had in their whole history. And so

Darren Brady Nelson  41:23

you go back, and we look at the Paleo challenge. You look at the evidence, all right. For instance, in the US this damn out in the Colorado River is having you know, it’s because of climate changes is at its lowest level, lo behold, a study, you know, two weeks prior to them making such statements show that they’ve had more levels on the Colorado River 2000 years ago, you know, so, no, I mean, yeah. And we’ve had warmer periods, we’ve had more carbon dioxide in the atmosphere in times. No, none of this. None of this is accurate. It’s all cherry picked to scare the poop out of people to accept these policies they want anyway. And you watch it when we’re old men, we’re going to be the people will go yeah, we’ll look okay, this thing didn’t happen. But I think it was the right thing to do anyway, you know, you hear that a lot. Even now they go like it will even for wrong, it’s the right thing to do. How’s it the right thing to do to make people poor? And have people in Africa starve? How’s that the right thing to do?

Gene Tunny  42:22

Okay, so in a future episode, we’ll have to come back to this. Darren, and we’ll see where we are with the with the data.

Darren Brady Nelson  42:28

You want to see the green policies and action. Look at Sri Lanka.

Gene Tunny  42:31

Yeah, yeah. Look, I’m not I’m not. Yeah, I’m not advocating for these policies, necessarily. Yeah. But I do recognise

Darren Brady Nelson  42:42

that you that’s just kind of a, like, whoever’s watching this. It’s like, you know, you want to see the future, the potential future that Sri Lanka, that’s, you know, that that’s, you know, the way you know, Australia could look, you know, if they’re not careful.

Gene Tunny  42:55

And what did they do? They actually required organic. Org organic produce, did they they been did they ban the importation of some fertilisers?

Darren Brady Nelson  43:07

Lasers? You know, yeah. So, you know, that. Yeah, fertiliser was was the main thing using, you know, green organic things instead of actual fertiliser. You know, they’ve really, you know, this is what this is, what’s happened in countries like Sri Lanka and African countries is to get their aid money. They do the green agenda, essentially. And it’s just a disaster. You know, I’ll tell you the countries that won’t be it won’t be China won’t be India, you know, the bigger countries that don’t need the foreign aid. You know, they’re not going to it’s like, yeah, fine. And there’s also strategic implications, obviously, yes, yes. We’re, you know, who controls the green energy market? Ultimately, China, Communist China

Gene Tunny  43:51

produces a lot of the solar panels. That’s correct. Yeah. Yeah.

Darren Brady Nelson  43:54

When to their, you know, if they are almost a monopoly on this, you know, and increasingly, all the support technology for it as well. So, and in China, this is not a coincidence. It’s not like, who the market chose China, they were just the best people to do it. This is like, this is a plan. It’s a strategy by the Chinese government, they, and you can see it’s written down. There’s books written on this by them to say, Oh, this is what we’re gonna be trying to do, you know, that basically, it’s their mind calm. So don’t be surprised, you know, like, you know, when they when some of this stuff comes true. You know, they have a plan that the Chinese economy is not a free market economy by any stretch of the imagination. You know, it’s it’s a government controlled run for the purposes of, you know, for the benefit of the Communist Party and the strategic interests of China. You know, this is it’s not like you’re dealing with, you know, the Netherlands, that sort of thing. So that’s also a huge thing. Because they’re an aggressive mode. Free power. And you know, when the time’s right, you know, they’re, they’re gonna take action, you know, Taiwan and whoever else, you know, eventually over over time gets in their way. So, you know, to aid and abet this, you know, through these green policies that, that are aimed at a problem that doesn’t really exist or certainly not in the scale. And certainly, even if the problem doesn’t exist, too deep, you know, to essentially decarbonize the economy is just like literally the worst solution for it. And to decarbonize it in a way that, you know, benefits China immensely. These just terrible policies the whole way through and, and, you know, you know, you know, people hopefully one day will be held accountable for this.

Gene Tunny  45:46

Rod. Okay, we might go back to GDP just before we wrap up, and yeah, I think I agree. Look, there’s a big book, there’s a big debate to be had about those, those policies for sure. I mean, from Australia’s perspective, given that mean, we’re such a small part of the world doesn’t make sense for us at this stage to to adopt those policies on a large scale. I mean, we, I mean, we should, my view is we need we should try to cooperate internationally. But we need to ensure that that other countries are following through with their commitments. And I’m not sure that that has always been the case, or it is the case. So that that’s my, my perspective on that. Bond GDP. I guess the view is that, that my sort of thought is that Janet Yellen certainly went too far. The US possibly could be in a recession, despite the fact that jobs growth has been strong, despite the fact that you’ve got unemployment at 3.6%, you could be going into a, you could be in a downturn, the GDP figures, if you look at the composition of them, you had inventories falling, that was a big part of it. So businesses were selling goods, but they weren’t replacing their their inventories. So that that could be a signal that they’re not expecting. They’re worried about the future about future sales, we had a drop in residential construction. That was one. And so that’s, that’s probably driven by the increase in interest rates. At the same time consumption spending was up. So that’s why the summer economists are thinking it’s a bit of a mixed report. And and we’re not entirely sure, but yeah, my take on it would be, yeah, the GDP numbers are definitely something be concerned about. And Yellen probably went too far. When she said, not, we’re not in a recession. I think that certainly could come back and invite her. Do you have any final thoughts on the GDP numbers? But where the US economy is that

Darren Brady Nelson  47:55

pretty much agree with what you just said? And obviously, time is going to tell. I think the bad ministration policies are very bad. And that’s going to come home to roost. So I think, you know, it’s not going to be good times, economically for the US and if it’s not good times, economically, for us, it’s not worth it. Kinda, you know, is obviously a major player, but it’s not the really, you know, in terms of, it’s not the engine of growth for the world. Just yet, the US still pretty much is so you know, when the US sneezes everybody catches a cold.

Gene Tunny  48:39

Yeah, yeah, that’s right. I remember that. That was a that was a popular. So it’s a popular scene in Australia, in the Reserve Bank and Treasury. So yeah, absolutely. Okay. Darren Brady Nelson. Thanks so much for your time. It’s great to catch up. Yes. And I look forward to chatting with you again in the future.

Darren Brady Nelson  48:58

Always great to be on your show and see Eugene, thank you.

Gene Tunny  49:02

Thank you. Okay, that’s the end of this episode of economics explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to contact at economics And we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye


Thanks to this episode’s guest Darren for the great conversations, and to the show’s audio engineer Josh Crotts for his assistance in producing the episode and to the show’s sponsor, Gene’s consultancy business

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Podcast episode

Stagflation: be alert, not alarmed – EP143 + transcript

In early June 2022, the World Bank downgraded its global economic growth forecast and warned of the rising risk of stagflation, the uncommon combination of high inflation and high unemployment, or falling GDP growth. Stagflation is a portmanteau word, combining stagnation with inflation. Economists first noticed stagflation in 1970s USA (see the chart below) and other advanced economies, when it was triggered by the 1973 oil price shock, which pushed up prices and reduced industrial output as input costs soared.

A simultaneous acceleration of inflation and an increasing unemployment rate in the mid-1970s surprised many people at the time, because it was contrary to the Phillips curve trade-off between unemployment and inflation.

In Episode 143 of Economics Explored, show host Gene Tunny and his colleague Arturo Espinoza discuss how the current global situation is similar and dissimilar to the 1970s, including consideration of recent perspectives from the World Bank and BIS.  While we also have a commodity price shock, associated partly with the war in Ukraine, it is less in proportionate terms than in the 1970s, and we also have better macroeconomic policy frameworks (i.e. explicit inflation targets) than in the 1970s. So the takeaway of the episode is that, while we should be alert to the possibility of stagflation, at this stage we shouldn’t be alarmed.

You can listen to episode 143 using the embedded player below or via Google PodcastsApple PodcastsSpotify, and Stitcher, among other podcast apps. A transcript and relevant links are also available below.

Links relevant to the conversation

Is a US recession imminent? w/ Michael Knox, Chief Economist, Morgans Financial – EP142 – Economics Explored (Previous episode with Michael Knox)

Jobs report May 2022: Payrolls rose 390,000 in May, better than expected as companies keep hiring (Google Trends for stagflation)

The Fed must act now to ward off the threat of stagflation | Financial Times

Are major advanced economies on the verge of a wage-price spiral? (BIS Bulletin 53)

Commodity market disruptions, growth and inflation (BIS Bulletin 54)

Robert Heller’s paper on International Reserves and Global Inflation (from p. 28)

Stagflation Risk Rises Amid Sharp Slowdown in Growth (World Bank report) 

Stagflation danger prompts  World Bank to cut growth outlook (Washington Post article)

EP59 on the Natural Rate of Unemployment (re. Milton Friedman’s AEA presidential address)

Friedman’s presidential address

Chart of the Week – The real price of crude oil – Callum Thomas


Australia’s wage price index increased 2.4% through the year to March 2022 (see Wage Price Index, Australia, March 2022 | Australian Bureau of Statistics

Transcript of EP143 – Stagflation: be alert, not alarmed

N.B. This is a lightly edited version of a transcript originally created using the AI application It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:01

Coming up on Economics Explored. My personal feeling is that; and this is informed by my conversation with Michael Knox last week. I don’t think we’ll end up with stagflation similar to the 70s or rather, I hope not. I don’t see at the moment.

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional economist based in Brisbane, Australia, and I’m a former Australian Treasury official. This is episode 143 on Stagflation.

Joining me this episode is my colleague at Adept Economics, Arturo Espinosa. Arturo, good to have you on the show again.

Arturo Espinoza Bocangel  00:44

Thank you, Gene. I am glad to be here.

Gene Tunny  00:48

Excellent, yes. It should be a good conversation because we know that this issue of Stagflation is topical with the recent World Bank report that we’ll get into in this episode. But before we do that, I just thought I’d provide an update on last week’s episode.

So, in Episode 142, I spoke with Michael Knox, who is the Chief Economist at Morgan’s, which is a major Australian wealth management and stock broking firm. And Michael and I chatted about the prospects for the US and Australian economies and what’s been happening with monetary policy. And Michael made a bold prediction in that episode, on where the Australian cash rates, so the policy rate that’s controlled by the Reserve Bank of Australia, so that’s the equivalent of the Federal Reserve in the US or the Bank of England. And he forecast that they would lift it by 50 basis points. So, half a percentage point from 0.35%, he forecast that they would increase it to 0.85%. He was the only economist in Australia who was forecasting there, and he explained why he thought that was the case in the episode.

So, if you’re in the audience, you haven’t listened to that episode yet, please, think about having to listen to it because Michael, I think is one of the best economic forecasters out there. He looks at the global economy, he looks at the Australian economy. And it turned out that the Reserve Bank did increase the cash rate by 0.85%. And it surprised all of the other market economists, all the commentators, and now there’s all this talk about what does this mean for the economy?

Will people now have trouble paying their home loans? Will they get into financial trouble? And there’s a huge conversation about that now in Australia; well done to Michael Knox for forecasting that correctly.

And we were also chatting about this idea or this concern that there could be a recession coming up in the US. So, there’s been a lot of commentary about that. It’s associated with all of this commentary, all this discussion at the moment about stagflation, which we’re going to get into. But Michael is very optimistic about the US economy as we talked about, and just after that episode was published, there was some new data that came out from the Bureau of Labor Statistics; at the BLS. And they reported better than expected, employment numbers in the US for May, CNBC reported that the US economy added 390,000 jobs in May, better than expected despite fears of an economic slowdown and with a roaring pace of inflation. The Bureau of Labor Statistics reported Friday, at the same time, the unemployment rate held at 3.6% just above the lowest level since December 1969.

Okay, so that’s an update on last week’s episode. Okay. Any questions or thoughts on that, Arturo?

Arturo Espinoza Bocangel  04:04

No, let’s start discussing about the topic.

Gene Tunny  04:09

Yep, about stagflation, absolutely. So, I want to devote the bulk of this episode, or the rest of this episode to talking about stagflation. This is something that I asked Michael about last week in our conversation. And I mean, this is something we haven’t; it’s a term that, that I remember, you know, I learned in when I studied Economics, and as you did, we would have learned this term stagflation about what happened in the 1970s. But we haven’t really heard it in the economic commentary for a while. So, there were decades when no one was really talking about it. And then there was this revival of interest in it, I think, from around late last year.

And if you look at the Google Trends Data, and I’ll put this chart on the show notes, so you can see, when interest in the concept of stagflation has picked up again. And that was from around, I think it was around September, 2021. And we’ve had various commentators talking about the risks of stagflation. So, on 25th of May this year, Martin Wolf; so Martin Wolf is one of the leading financial economic commentators in the world. He writes for The Financial Times. He wrote a column; “The Fed must act now to ward off the threat of stagflation.” And we know from the 1970s, the time to throttle an inflationary upsurge is at the beginning. And is there going to be a recession in the US and other leading economies? This question has naturally arisen among participants at this year’s meeting of the World Economic Forum in Davos. So, you probably saw, I think that meeting, they had their World Economic Forum meeting in Davos, Switzerland last week.

Martin Wolf wrote that this is however, the wrong question, at least for the US. The right one is whether we are moving into a new era of higher inflation and wage growth, similar to the stagflation of the 1970s. If so, what might this mean? That was one of the motivations for having this conversation today.

And almost as if I forecast that the World Bank would produce this study on stagflation, they released it overnight, or it came overnight our time. And so, we’ve just been looking at this morning, this new report, from the reserve; sorry, not the Reserve Bank, that’s our bank here in Australia, the World Bank. And the press release; June 7, press release, I’ll put this in the show notes. So, if you listen, and you’re interested, you can find that; stagflation risk rises amid sharp slowdown in growth.

So, you had a look at this earlier, Arturo, didn’t you? What were your main takeaways from this report from the World Bank?

Arturo Espinoza Bocangel  06:59

Well, I think these are very good reports, where they dedicate special focus on globalist inflation. And there is a section which they talk about similarities to the 1970s. They mentioned that they are three of them. The first is that supply shocks after a prolonged monetary policy accommodation, the existence of weaker growth. Also, there are some significant problems or inabilities in emerging economies. Those three things can be similar from 1970s to the current period.

Gene Tunny  07:51

This is because these supply side shocks really hurt those emerging economies more than the richer economies; is that the idea? Because they generally have lower incomes in those countries. And so, they’re going to be very badly affected by increases in oil prices, increases in food prices, and that can bring not only economic turmoil, but political turmoil as well.

So, what we might do is; we might revisit those, those similarities. Again, in the podcast first, it just occurred to me that we probably should, or I probably should just talk about what Stagflation is, what does it mean? And I couldn’t find any or there’s no strict definition of what it is. It’s a combination of unemployment and inflation or low GDP growth and high inflation. But there’s no agreed definition of it’s stagflation, if unemployment and GDP growth are x and y and inflation is there; there’s no quantitative definition as far as I can tell.

So, stagflation; it’s a pretty horrible word, if you think about it. I mean, it’s one of these, what do you call it? A portmanteau word. So, it’s a word that is a combination of other words, to try and convey a particular meaning, the combination of themselves. So, it’s a combination of stagnation, plus inflation. Glenn Hubbard’s introductory Economics textbook. So, Glenn Hubbard was the chair of the Council of Economic Advisers for President George W. Bush, in the early 2000s. In his textbook, they define it as a combination of inflation and recession, usually resulting from a supply shock. Okay, and like with everything in Economics, we’ve defined a concept by referring to another concept, we have to define a lot of times. So, supply shock. What do we mean by that? We mean, something that increases the cost of inputs; it’s a shock on the supply side of the economy, our ability to produce.

It’s not like a demand shock, where there’s an increase in spending or an increase in the amount of money. It’s a shock to our productive capacity. So, this concept, I think, originally came into Economics, or it became prominent in the 1970s, when there was the huge spike in oil prices in 1973, when OPEC, because of the Arab countries are upset with the West because they were backing the Israelis in the war, I think it was the young people war. That meant that the cost of inputs increased. And when those inputs increase, we use oil, well for petrol and, you know, across the economy. And so, it’s pushing up costs of production and produces; firms will try and pass that on to customers. That can be inflationary. Okay.

And you mentioned supply shocks before, didn’t you? In terms of the similarities with the 70s? So, we’ve had that,

Arturo Espinoza Bocangel  11:10

Yeah, we have the impact. However, there is a difference there in the case of the World Bank report, they say that the current shocks or current supply shocks are smaller, compared to those shocks in 1970s.

Gene Tunny  11:33

That’s right. I should have checked the numbers before I came on to record. But if you look at the real oil price back in the 70s, that was in proportionate terms, that was a huge increase, wasn’t it? I mean, it was multiples of the then current price, and it really shocked people. It was a huge shock to face those price rises.

So, I’ll have to dig out what that stat was and put it in the show notes. But that’s what they’re driving out there, aren’t they? They’re saying, well, okay, we’ve seen some big increases in commodities prices, but they’re, they’re smaller still than what we saw in the 1970s. So, they may have a chart and that report that we can refer people to in the show notes. Okay.

So, just on this definition of stagflation again, that was one definition. Now, note, there’s no quantitative; there aren’t any numbers in that definition. Dornbusch and Fisher; so, that was the textbook I use when I studied macro Economics back in the 90s. Rudy Dorn, Bush and Stan Fisher, so very prominent, US macro economists, I think are at MIT. They wrote that stagflation occurs when inflation rises, while output is either falling or at least not rising. And on well, actually, there’s probably no point me giving textbook page references, because this is sort of the 1994 edition. But in that edition, they wrote that during periods of stagflation, such as 1973, 74, 1980, and 1991. There are articles in the newspapers that the laws of Economics are not working as they should, because inflation is high or rising, even though output is falling.

So if we go to the, the data for the US, so I’ll put this chart in the show notes as well. We look at what happened in 1973 – 74. And this was a huge shock, I think at the time. We see that inflation went from a rate of 2 to 3%. And it ended up at a rate of over 10%. I think it looks like nearly 12½ % on this chart, I’ve pulled up. And so, we had those two years; well, after the ‘73 oil shock, so 74, 75 inflation is accelerating. And unemployment is also increasing, and it’s increasing from about 5% to nearly 8 to 9% or so. I’ll put this chart in, and I’ll just check those numbers. And this came as a big shock, because there was this concept of the Phillips Curve wasn’t there? There was this idea that there was this tradeoff between unemployment and an inflation, that if you had high unemployment, then at the same time, you should have low inflation. Or if you had high inflation, you’d have low unemployment. There was this idea that there was this trade off; because empirically, if you looked at the data for the 50s and 60s in the States, or for the UK or other advanced economies, it looked like there was this trade off. It looked like there was a menu from which economic policymakers could choose.

The typical story about the Phillips Curve was that, you could get unemployment down by stimulating your economy, a bit of Keynesian fine tuning, a bit of pump priming. You could reduce unemployment, but if you get unemployment; if you if you do reduce that, that puts more power in the hands of Labor relative to capital, you can tell stories about unions, you can tell stories about people being more aggressive in their wage negotiations, because Labor is scarcer, and that leads to higher inflation.

So, there’s this idea of a tradeoff. And this Phillips Curve was something that was found by Bill Phillips, who was a professor, Bill is from New Zealand originally. And he ended up being a professor at the London School of Economics. Have you heard about that? This is a bit of a tangent, but he built that hydraulic, economic model. Have you ever heard of that, ever heard of LSE?

Arturo Espinoza Bocangel  16:08

No, I haven’t heard about it.

Gene Tunny  16:11

And he developed this hydraulic, economic model in the 50s and 60s. They built a representation of the economy; they’re essentially modelling the circular flow of income with using water and mechanical parts. And this was a model that London School of Economics; I just remember that because she gave a lecture at the University of Queensland in 2016, Mary Morgan, she’s a professor at LSE, London School of Economics. She wrote a great book on the World in a Model. So, she’s done some great work on the history of economic modelling. Her first job, she said, was looking after that hydraulic computer.

So, Bill Phillips, one of the great economists, he discovered this correlation between all this trade off; the Phillips Curve, the relationship that ended up being influential in economic policy in the 60s until it broke down in the 70s. As we are talking about, he looked at UK wages growth, so wages, inflation and unemployment data. Even though what he did was look at wages data, well, it soon transferred as a concept to a tradeoff between price inflation and unemployment, because well, there is obviously a link between wages and prices, because employers will try and pass on those increases.

Does that all make sense? I was just trying to explain why this idea of this stagflation came as such a shock in the 1970s.

So, what was wrong with that Phillips Curve concept? Why didn’t it work out? Well, it was because of this supply side shock, wasn’t it? This was something that wasn’t really anticipated in that Phillips Curve story. And the other problem was that when you have high inflation, the expectations of people in the economy of workers and businesses, your expectations of inflation increase. You essentially, come to expect inflation and inflation becomes a self-fulfilling prophecy, because every time there’s a wage negotiation, or a contract negotiation, you essentially allow for the future inflation, you expect it. And you have things like cost-of-living adjustments, you essentially build it into contracts and under wage bargaining. So that’s one of the reasons why the traditional Phillips Curve breaks down. And there was a very famous speech by Milton Friedman; the presidential address to the American Economic Association in 1968. And I’ve talked about this in a previous episode – Episode 59, on the Natural Rate of Unemployment. And Friedman argued, well, in the long run, there’s really no Phillips Curve, you might think that there’s some sort of tradeoff in the short run, that you can get unemployment down if you pump-prime; if you stimulate your economy, and you’ll get some inflation as a result of that or you could go the other way and try and contract the economy to reduce inflation.

But in the long run, there is no trade off; there’s no Phillips Curve to speak of this. The economy should gravitate towards a natural rate of unemployment. And inflation can be whatever is consistent with people’s expectations.

There’s a big problem if you don’t get inflation under control, and people come to expect inflation, and then you can just have persistently high inflation, and you can have that with high unemployment as well.

Have you seen those diagrams of the Phillips Curve, with the vertical long run Phillips Curve? And then if you start off at a point on that Phillips Curve, so say you’re at your natural rate of unemployment, and you’ve got high inflation expected, then what can happen is, there some sort of shock that increases unemployment. And so, you start off at that high point with high inflation already. Maybe, it eventually has some sort of; it does contribute to a reduction in inflation somewhat, but you still at that higher level of inflation. And so, you can have higher unemployment or high unemployment and high inflation still.

So, that was probably a bit more technical information than we needed. If you have a look at an intermediate or advanced macroeconomics textbook, they’ll have some diagrams; I have some models that go over, that we probably don’t need to look into that. But the main point is that this Phillips Curve, discovered by Bill Phillips; people thought it was this stable tradeoff between unemployment and inflation, didn’t hold in the long run. And if your economy is subject to the supply side shocks, so increase in the price of oil, for example. And then if people come to expect inflation, then you can get high levels of inflation. And they can be very persistent, and you can have the economy slow down, you’re going to have high unemployment, and inflation can still persist for a long time.

And if you did want to get that inflation down, you really need a change in monetary policy, you need a much more aggressive monetary policy, and you need a credible Central bank that can deliver it. And I think this is what Paul Volcker in the US did in the early 80s. And this is what when they massively tighten monetary policy, high interest rates, crunch the economy, but they did get inflation under control. And I think this is related to this point that the World Bank made. There was a point about better monetary policy frameworks. Is that right?

Arturo Espinoza Bocangel  22:37

Yes, that’s right. After that economic event occurring 1970s, most of Central banks started to control prices, try to target inflation. Also, they incorporated the old thing related to these rational speculative in order to take into account potentials proven that pulling golden, been analyzed before 1970s since the Phillips Curve wasn’t explained correctly, the prequel evidence, as you mentioned. In the short run, that Phillips Curve is playing well, but in the long run, they didn’t account other factors, and relationships was different. So, I think most of the Central bank started to work better in terms of expectations.

Gene Tunny  23:45

Yeah. And so, this is this point, that Central banks, they need to have a credible monetary policy. And one way of having a credible monetary policy is to have an explicit inflation target that you’re judged on. And that’s why our Reserve Bank of Australia has a 2 to 3% inflation target, and the Bank of England and the Federal Reserve, they’re aiming for, I think it’s 2%. I’ll put that in the show notes. But they sort of; all of these Central banks tend to have inflation targets in 2 to 3%, which is a recognition that you’re going to have some inflation, but what you want to avoid is higher rates of inflation or double-digit inflation, or even worse, that’s what you really want to avoid, because that really causes a lot of misery. People can sort of, live with inflation of 2 to 3%.

So, that was this point about monetary policy; another thing that helps signal a credible monetary policy. So, by credible, we mean that people in the economy, businesses and workers know that if inflation starts to accelerate, the Central bank is going to squash that inflation as soon as it can. And that helps keep inflationary expectations down so people don’t come to expect higher inflation.

Okay, and one other thing that does help with the credibility of a Central bank is having an independent Central bank, who the worst thing you can have is if your Central bank is influenced by politicians; if it’s controlled by politicians, because, say they’re coming up to an election, there might be inflation increasing, but the politicians don’t want the Central bank putting up interest rates just before an election.

Arturo Espinoza Bocangel  25:43

That’s right. In the world, we have seen many examples. For example, Peru is a good example of a thing that would the government shouldn’t do. For example, in the middle of 80s, Peruvian government, had a high level of debt. That moment, government Allan Garcia took place, and he didn’t recognize the debth. So, they didn’t want to pay. And also, in the government, they started to print money because the other Central bank, was subordinated to the current government. And that was the world’s respond for [unclear] because Peru initiated a stage of hyperinflation. And also, Peru faced a recession period.

Gene Tunny  26:52

So, hyperinflation; there is a quantitative definition of hyperinflation. It’s when you have inflation running at about 50% a month or something. It’s a very high rate, and you can end up with annual inflation rates of over 1,000% or something, which is just mad. What they had in Germany in the 1920s. But also, we’ve seen it in South American countries in the;

Arturo Espinoza Bocangel  27:18

Most South American countries, experience periods of hyperinflation.

Gene Tunny  27:23

So, you are highlighting one of the; when it gets really bad when you don’t have that independence. And because the Central bank is the bank for the government as the government just commits to making all of these payments, and it might not actually have the money, but the Central bank just prints the money. It just pays the bills for the government; the money is just created. So yeah, what they call modern monetary theory nowadays; bad results.

We’ve chatted about the Phillips Curve, why it’s not reliable. I’ll put links to all of these things I’ve mentioned particularly to Milton Friedman’s presidential address, which is just brilliant.

Okay, we’ll take a short break here for a word from our sponsor.

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Gene Tunny  28:47

Now back to the show.

Okay, now, one of the things Central banks are essentially wanting to avoid is this idea of a wage price spiral. So, we’ve talked about inflationary expectations, you want to avoid inflation becoming expected, and then it becoming a self-fulfilling prophecy. So, one of the concepts that disgusts is a wage-price spiral.

Okay, so in early May 2022, the Reserve Bank of Australia; this was a report in the Australian Financial Review. The Reserve Bank of Australia has warned of a wage price spiral if unions exploit the low jobless rate to push for higher pay rises to compensate for an inflation rate to peak at a higher than expected 6%.

So, what is a wage-price spiral? The Bank of International Settlements in Basel in Switzerland; it’s defined a wage price spiral in the following way, and this is in a bulletin that they produced, BIS bulletin number 53 on Major Advanced Economies on the verge of a Wage Price Spiral.

A wage price spiral entails feedback in both directions between wages and prices. Inflation then rises persistently on the back of such a spiral. Once the economy enters the spiral, workers bid up nominal wages more than prices, prompting firms to raise prices further, the likelihood of an economy entering the wage price spiral depends in part on macro-economic conditions.

Workers bargaining power is typically greater when Labor demand is strong and Labor supply is tight. Similarly, firms may have more pricing power when aggregate demand is strong. Labor market institutions also influenced the likelihood of a wage price spiral emerging.

Automatic wage indexation and cost of living adjustment. So C-O-L-A or COLA clauses make wage price spirals, more likely.

And this was important in the; well, it became an issue in the Australian election campaign, because the then opposition leader now Prime Minister, Anthony Albanese; did you see his comments when he was saying that, if we were in government, we would support workers being getting a wage rise in line with inflation. Inflation was rising at well; inflation was 5.1%. That was the last reported estimate from the Reserve Bank, which was higher than expected. And then, Anthony Albanese came out and said, yes, workers, their wages should increase by at least 5.1% To make up for that. And then, the then Prime Minister, Scott Morrison tried to make a big thing out of that and he said, Anthony Albanese is a loose unit, because this could then lock in inflation permanently.

So, this is his concern about a wage price spiral and the BIS was arguing that, this sort of thing; there’s automatic wage indexation, which is almost what well, it’s essentially what Anthony Albanese, our current prime minister here in Australia was almost hinting at. I think he regretted making that comment, because they really don’t want to do that. And if I think they’ve walked back a bit from that position, I mean, they put a submission to the Fair Work Commission, ultimately, it’s up to the Fair Work Commission to decide the increase in minimum wages in Australia.

There was some criticism of the opposition leader at the time, because it could have; there were commentators who were saying, this is a sort of thing that risks a wage price spiral. And you could take that BIS note as supportive of that position. Ultimately, I don’t think that mattered much in the election campaign. So, who knows? I mean, it could have even increased support for Anthony Albanese. People think, well, that sounds fair enough that we’re compensated for inflation. Most people are wage earners as more wage earners than business owners in the country. So, it could have been a popular thing. The PM at the time was trying to say, well, he’s a loose unit, who knows how much impact it had on the election campaign?

Ultimately, I think the election was decided over concerns about climate change. There was this general perception out there that the government wasn’t doing enough on climate change, rightly or wrongly. And that was the dominant consideration.

Do you remember that whole debate or that whole discussion around the opposition leader’s comments?

Arturo Espinoza Bocangel  33:43

I remember that. I saw some news about it. I also reviewed some comments from some Australians, And some people or some citizens mentioned that the proposal is not correct for the current situation in the global economy. Because of course, if you want to raise salary, that will be loads, let’s say factor, or determinant to boost inflation pressures in Australia.

I remember that I checked some economic paper; it’s okay to raise the wages, but it could be implemented gradually. Or maybe you can target some sectors in order to improve the salaries but it’s not a good policy response to increase generally, the wages in the whole Australia.

Gene Tunny  35:01

Maybe limited to the lowest paid workers, rather than have at across all of the wage agreements in the economy so that; fair enough. Okay, we might have to come back to this whole issue of how wages are set in a future episode.

So, what did the BIS conclude about whether major economies are on the verge of a wage price spiral? Well, with most economic issues, they weren’t able to reach a firm conclusion. I mean, none of us has a crystal ball. I mean, I’m always very reluctant to give firm or precise forecast, because you just can’t, because there’s so much uncertainty.

So, my reading of what the BIS was saying in that wage price spiral bulletin, is that, well, they’re not really sure. The key things that they noted in their analysis were that while inflation is returned, it’s reached levels not seen in decades, whether inflation enters a persistently higher regime will depend on labor market developments and on whether a wage price spiral emerges. To date, evidence for a broad acceleration in wage growth is mixed. It’s picked up significantly in the US, but it remains moderate in most other advanced economies. So, it’s certainly still moderate in Australia, it is picking up a bit, but it’s not near what arguably, we’d like to have. And this became an issue in the election campaign to you probably remember this. Well, this is why Albanese made those comments to begin with. Because if you looked at wage’s growth, which was, 2.7 or maybe it was a bit lower through the year, compare it with inflation of 5.1%, then you get a real wage decline of 2.6%.

I will put the exact numbers in the show notes. It must have been about 2½%. If we’ve got a 5.1% inflation rate, I think they were saying the real wage decline was 2.6 or 2.7%, that it must have been a 2½% wage price index increase. I’ll put the right data in the show notes.

That became an issue in the recent election campaign.

Here is where the BIS basically admits; we really don’t know:, Extrapolating behavior from low inflation periods is problematic if inflation remains high, households may ask for higher wages to make up for lost purchasing power and firms may raise prices to protect profit margins. And stubbornly high inflation may lead to institutional changes, such as automatic indexation and cost of living adjustment clauses. So, that’s the sort of thing we want to avoid. And that’s why people were worried about what our current Prime Minister was saying, because there was a concern that we could effectively do that sort of thing, if he followed through on what he was saying.

Did you have any thoughts on that wage price spiral article? You had a looked at that today, didn’t you Arturo?

Arturo Espinoza Bocangel  38:17

Yes. I think, in the report, they also mentioned that some condition must be complied to be under these kinds of wage price spirals. But from my point of view, I think is quite complex to determine if all the countries are going to face that wage price spiral? I think that depends on the particular condition from each country.

Gene Tunny  38:50

Yeah, that’s the problem that the World Bank and the BIS, or the IMF have, because they’re trying to produce forecasts, or do analysis for the whole world or all major economies, whereas there are differences in the institutions within those economies; a very good point.

Okay, so let’s get back to the central question. I mean, all of these things we’ve been talking about, are related to because if we have a wage price spiral, and then we have some shock or the economy goes into a downturn, then we could end up with stagflation. So, it’s all related.

We’ll talk about now, the prospects for stagflation. So, is this something we should be worried about? And it turns out the BIS looked at this last month, so before the World Bank, so this is obviously something that economists in these major institutions are concerned about, and the BIS had to report commodity market disruptions, growth and inflation.

We’ve talked about the broad base supply shock increasing inflation, food and energy prices spilling over to other components of inflation, and possibly; well contributing to a reduction in global economic growth. And we should talk about the World Bank’s forecasts because the World Bank now is forecasting a reduction in global growth, isn’t it? That was one of the major things in that latest report. I’ve got it here.

The bank slashed its annual global growth forecast to 2.9% from January’s 4.1% and said that subdued growth would be likely to persist throughout the decade because of weak investment in most of the world.

And so, the BIS was saying that this is the sort of thing that would happen. It was saying this last month, and I guess, I mean, a lot of other economists have been concerned about that. There’s a recognition that what’s happening with Ukraine, what’s happening with commodity prices, that is going to compromise, global economic growth.

Now, it looks like the BIS; they’re saying similar things to the World Bank and the World Bank, probably. I mean, I’m sure it read what the BIS analysis is pretty much; I think they reach the same conclusions almost. So, let’s go over what the BIS says, and then we’ll compare it with what the World Bank says. So, the BIS has concluded, recent shocks have been smaller than the 1970s oil shocks, but broader based encompassing food and industrial commodities as well as energy. Nonetheless, structural changes, as well as stronger policy frameworks and nominal anchors.

So, by a nominal anchor, they mean, something that’s keeping prices down. They’re talking about inflation targets. So, they make stagflation less likely to return. But this is where they acknowledge that.; we’ve said that, but ultimately, things can happen that derail the economy that can mean our forecast is incorrect. And they know commodity price increases in the wake of the war in Ukraine are likely to weigh on global growth and add to inflation. While lower energy dependence and stronger policy frameworks make a repeat of the 1970s stagflation unlikely, high and volatile commodity prices could still be disruptive. This puts a premium on restoring low inflation quickly before it becomes ingrained in household and corporate decisions.

Absolutely. I think that’s a very good point to make. So, that’s what the BIS said, That’s pretty similar to what the World Bank said, isn’t it?

We might have a look at that now, again. Let me just go back to the media release. They also got a comprehensive report and that chapter, the focus on stagflation, which I’ll link to in the show notes, which is worth reading. I’m just going to consult their media release, which is a really good summary and well written.

Let’s just talk about how the current situation resembles the 70s. And why? What are the reasons why we might think that we could end up with global stagflation?

The current juncture resembles the 1970s in three key aspects: persistence supply, side disturbances, fueling inflation, preceded by a protracted period of highly accommodative monetary policy and major advanced economies, prospects for weakening growth and vulnerabilities in emerging market and developing economies face with respect to the monetary policy tightening that will be needed to rein in inflation.

Let’s have a look at what they’re talking about there. We’ve talked about the persistent supply side disturbances, preceded by a protracted period of highly accommodative monetary policy. By accommodative, we mean, loose, we mean, ultra-low interest rates, we mean lots of money printing, that sort of thing; credit creation, due to the low interest rates. And that’s what we’ve seen in Australia, we’ve seen in the US, we’ve seen it in other advanced economies. So, there’s no doubt about that. And the argument is that buildup of that additional money, that additional liquidity will end up with too much money chasing too few goods, accelerating inflation, right. We’ve talked about that on the show before.

They also talked about vulnerabilities that emerging market and developing economies face with respect to the monetary policy tightening that will be needed to rein in inflation.

So, let’s have a think about what they’re driving out there. I mean, as the western economies increase interest rates, that’s going to mean; this is just one aspect of it. That will attract investment capital, portfolio investment to the US or to other major advanced economies. And if those developing economies don’t put up their interest rates, then that will lead to a depreciation of their exchange rates, which means that the cost of imported goods in those economies will be compromised, or if they’re trying to fix their exchange rates, it puts pressure on their balance of payments. So, it’s a bad situation for those emerging economies.

And also, the thing is, when you have situations like this in the world, when there’s concerns about volatility, there is this flight to safety and money can flow to the advanced economies where there’s a perception, it’s safer, and that could compromise these emerging economies. I wouldn’t be forecasting this yet, but things can happen unexpectedly or rapidly. We know that there can be crises in emerging economies that are difficult to predict, such as the Asian crisis in the late 1990s.

 Any thoughts on any of those key aspects, Arturo? About how, how there are similarities with the 70s?

Arturo Espinoza Bocangel  46:19

No. Your explanation was very clear.

Gene Tunny  46:23

Okay, well, then we should; before we conclude this episode, we should talk about how the ongoing episode also differs from the 1970s. The dollar is strong, a sharp contrast with a severe weakness in the 1970s, the percentage increases in commodity prices are smaller, and the balance sheets of major financial institutions are generally strong.

More importantly, unlike the 1970s, Central banks in advanced economies, and many developing economies, now have clear mandates for price stability. And over the past three decades, they have established a credible track record of achieving their inflation targets.

And they go on to conclude as the World Bank global inflation is expected to moderate next year, but it will likely remain above; I think I’ve missed the words there, it must be above average.

And they talked about; something’s gone wrong with my printout. They do talk about, you know, there is a risk of stagflation. So, stagflation risk rises amid sharp slowdown in growth, okay, so, there’s going to be some moderation in inflation, but it’s likely to still remain high or higher than the normal. And you couple that with the fact that there’s a risk of a slowdown, and they’re talking about a slowdown in global growth. That’s what they’re forecasting, then, yes, certainly, stagflation of some kind is a risk.

My personal feeling is that; and this is informed by my conversation with Michael Knox last week, I don’t think we’ll end up with stagflation similar to the 70s, or rather, I hope not. I don’t see at the moment. I think the US economy based on the indicators I’ve seen in my conversation with Michael, I think, at least for the next year or so, the prospects for the US economy are very good. Likewise, for Australia, I mean, there are always risks. We’ve got some heavily indebted households; we’ve got interest rates increasing. That’s one of the great unknowns at the moment. But if you look at the indicators, such as job vacancies, you look at the fact we’ve got a 3.9% unemployment rate. You look at what’s happening with commodity prices, which were in net terms benefiting from, because we’re a net exporter of energy and minerals to the world. Like, our coal prices have been $400 – $500 US a ton.

Queensland is a huge producer of coal; and that’s benefiting our state and budget. I mean, there’s ultimately; there may have to be a transition out of coal because of concerns over climate change. But at the moment, it’s something that is beneficial to the state economy. So, I think in Australia, I’m not concerned about stagflation at the moment, but as always, I need to say, I don’t have a crystal ball.

Any thoughts, Arturo? I mean, what’s your general feeling on stagflation? Is this just the latest thing that we’re worried about? Perhaps for no really good reason? I mean, it certainly; I haven’t seen this interest in the concept for a long time. And yes, is it something we should be worried about? What do you think?

Arturo Espinoza Bocangel  49:35

I think the case is; it’s good to have these discussions and it’s good to know that most of the Central banks are considering these potential, let’s say, this potential event. If they are well prepared, they can avoid that kind of situation for some countries. As I mentioned this thing, if a cure isn’t going to be general, so some countries perhaps are going to face stagflation. In some cases, if they don’t manage properly their monetary policy and some fiscal responses.

But of course, there are many risks that are out there, for example, as the World Bank report mentioned, if the supply disruption proceeds or the commodity prices continue to climb, inflation could remain above Central bank’s target. So, I think those are potential risks, the Central bank must consider giving good response.

Gene Tunny  51:00

Yeah, good point.

One other point I wanted to make is; and this is related to the other thing that differs from the 70s, which is, the World Bank set out a few ways that the economy is not the same as the 70s. And, one of the important ones, I think, is they talk about the US dollar, don’t they, the dollar is strong. Now, this is a very technical issue, it’s a hard one to sort of get your head around, because you have to go back to the situation in the 60s and the early 70s, before the era that we’re now in, in advanced economies of floating exchange rates. When we had the Bretton Woods system.

Michael Knox referred to the growth in international reserves, he talked about the growth of foreign currencies, held by Central banks in the early 70s that just massively increased in the early 70s. Because what was happening were because of the issues in the US and higher budget deficits and concerns about inflation, people around the world were trying to get out of US dollars. And because of the Bretton Woods system, they were trading their US dollars for their own currency or other currencies, or for European currencies, because there was the strong; well, in those that post-war recovery in Europe and Europe was becoming more prominent. And so, there was a move out of US dollars and to buy those US dollars, the Central banks essentially printed money, they created new money.

So, these changes in international reserves that Michael was talking about, I think was like 80%, over from the end of 1972, sometime in 1972. It was a huge growth in these international reserves, that led to a big increase in domestic money supplies, and that fueled inflation.

This is a great article by Robert Heller, that was in one of the IMF journals; might have been finance and development. I put a link to it in the show notes before, I’ll put it again, because it’s just well worth reading. But I think for us to do that justice, we will probably have to come back and talk about Bretton Woods and the whole international financial system pre 1970s. And look, that’s going to be a lot of work.  

This shows the complexity of the issues that we’re dealing with. In the economy, so many moving parts, it’s all interconnected. And yes, but what we’re trying to do, I think on this show is to simplify it as much as possible. And really make sure we understand those mechanisms because in a lot of economic discussion, there’s just too much that’s assumed in terms of the knowledge of the people reading or listening. There are too many concepts explained by reference to other concepts without explaining those concepts. And I want to try to make sure that we’re as clear as possible.

I think we’re probably in a position to wrap this up. Arturo, any final words? Thoughts?

Arturo Espinoza Bocangel  54:18

I think this conversation was pretty clear. And you’re to understand what is going on globally, in terms of inflation, potentially stagflation problems that some country may face. So, I think let’s stay alert. I think that Central banks are going to react properly in order to address that problem.

Gene Tunny  54:56

Okay, so you said, be alert, I like that. As our Former Prime Minister John Howard once said, Be alert, not alarmed. We will be alert to the prospects for global stagflation. But we’re not going to be alarmed at the moment.

You may not have been in Australia when he said that. That was something that people had amusing. There was about a serious issue is talking about international terrorism, which was, of course, a serious issue. And he said, be alert, but not alarmed. And then that sort of prompted all of these sorts of jokes about, what does that exactly mean to be alert, but not alarmed? I mean, how worried should we be?

And there was the old joke in Australia. Be alert, Australia needs Lurtz. I don’t know if you’ve heard that one. So, I think people would probably; as soon as John Howard said, Be alert, not alarmed. People were instantly sort of thinking, this is a bit of a funny thing to say. But maybe because I remembered that all joke about being alert.

Thank you, Aturo, I really enjoyed that conversation. And if you’re in the audience, and you’re listening, and you’d like to know more about these issues, I’ll put links to everything we chatted about in the show notes. I’ll also make any corrections. If I’ve got anything wrong I discover, in terms of numbers. I generally think the concepts and the facts; I think we got that right. But it’s possible some of the numbers I may have misremembered. So, we’ll put clarifications links in the show notes. And thanks again for listening. Arturo, really appreciate your time today. Thanks so much.

Arturo Espinoza Bocangel  56:43

Thank you again. Thank you very much.

Gene Tunny  56:46 Okay, that’s the end of this episode of Economics Explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to And we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye.


Big thanks to EP143 guest Arturo Espinoza and to the show’s audio engineer Josh Crotts for his assistance in producing the episode and to Peter Oke for editing the transcript. 

Please get in touch with any questions, comments and suggestions by emailing us at or sending a voice message via Economics Explored is available via Apple PodcastsGoogle Podcast, and other podcasting platforms.

Podcast episode Uncategorized

US Inflation, Woke Capitalism & China w/ Darren Brady Nelson – EP127

With US inflation at a 40-year high, who wins and who loses? Are greedy corporations to blame as some pundits are suggesting? Episode 127 of Economics Explored features a wide-ranging conversation with Darren Brady Nelson, Chief Economist of LibertyWorks, an Australian libertarian think tank, which also considers so-called Woke Capitalism and what’s going on with China. Here’s a video clip from the episode featuring Darren chatting with show host Gene Tunny about the 40-year high US inflation rate.

In the second part of the show, the Grattan Institute’s Economic Policy Program Director Brendan Coates explains the franking credits controversy, related to some peculiar Australian tax rules, to show host Gene Tunny.   

You can listen to the episode using the podcast player below or on Apple Podcasts, Google Podcasts, Spotify, and Stitcher, among other podcasting apps.

About this episode’s guests

Darren Brady Nelson is an Austrian School economist and liberty evangelion as well as a C.S. Lewis and G.K. Chesterton style Christian. He is currently the Chief Economist at LibertyWorks of Brisbane Australia and a long-time policy advisor to The Heartland Institute of Chicago USA. He is also a regular commentator in traditional and online Australian and American media. Check out his full profile at Regular guests – Economics Explored.

Brendan Coates is the Economic Policy Program Director at Grattan Institute, where he leads Grattan’s work on tax and transfer system reform, retirement incomes and superannuation, housing, macroeconomics, and migration. He is a former macro-financial economist with the World Bank in Indonesia and consulted to the Bank in Latin America. Prior to that, he worked in the Australian Treasury in areas such as tax-transfer system reform and macro-economic forecasting, with a strong focus on the Chinese economy.

Americans Return to Work as Biden Administration Work Disincentives Expire, but Jobs Remain Over 7 million Below Trend | Latest | America First Policy Institute (article referring to inflation tax of $855/year for an American family associated with a 7% yearly inflation rate)

Summers stumbles – John Quiggin

Woke Capitalism Is a Monopoly Game | Mises Wire

Joe Biden appears to insult Fox News reporter over inflation question

The implications of removing refundable franking credits – Grattan Institute

Here’s another video clip from the episode in which Gene and Darren compare the contributions to economics of Friedman, Keynes, and Mises:


US CPI inflation rate, through-the-year

US Producer Prices inflation rate, through-the-year

US inflation expectations – University of Michigan estimates


“Average hourly earnings for all employees on US private nonfarm payrolls increased by 5.7% year-on-year in January of 2022” (see United States Average Hourly Earnings YoY – January 2022 Data – 2007-2021 Historical) This compares with inflation running at 7.5% through-the-year. 

Amazon hikes average US starting pay to $18, hires for 125,000 jobs | Reuters


CPI Consumer Price Index

PPI Producer Price Index


Thanks to Darren and Brendan for great insights and conversation, and to the show’s audio engineer Josh Crotts for his assistance in producing the episode. 

Please get in touch with any questions, comments and suggestions by emailing us at or sending a voice message via Economics Explored is available via Apple Podcasts, Google Podcast, and other podcasting platforms.

Economics Explored Live

Livestream featuring US jobless claims, Aussie GDP + farewell to Tony Makin

I did a livestream earlier today (Friday 3 December 2021) with my regular co-host Tim Hughes on the latest economic news of the week, including the latest US initial jobless claims confirming a strong US economy, the impact of the omicron COVID-variant on equity markets, and the September quarter Australian GDP figures which revealed the adverse impacts of NSW and Victorian lockdowns. You can click on and watch the video on YouTube below. You can also download the slides I showed.  

In the livestream, from around 22:05, I reflected on the late Professor Tony Makin’s contributions to the Australian economic policy debate, particularly on whether we should worry about the current account deficit in the late 80s/early 90s and on the effectiveness of the Rudd Government’s fiscal stimulus. On the current account deficit, Tony’s articles, along with the contributions of John Pitchford, clearly led to a change in the policy consensus on the current account, so it was no longer something that would be a macroeconomic policy target. Sadly, Tony died unexpectedly earlier this week. This came as a huge shock to so many of us, and it’s obvious from all the conversations I’ve had about Tony over the last few days just how much respect and admiration his colleagues and former students had for him. Tony’s funeral is on Monday on the Gold Coast (see notice below). 

Funeral notice for the late Griffith University Economics Professor Tony Makin, who will be greatly missed by his family, friends, colleagues, and former students.

Please get in touch with any questions, comments and suggestions by emailing us at or sending a voice message via Economics Explored is available via Apple PodcastsGoogle Podcast, and other podcasting platforms.

Podcast episode

EP114 – Tax rules benefiting tech titans and hedge fund managers

Controversial US tax rules mean that tech titans and hedge fund managers can pay arguably a relatively low amount of tax, as Steve Rosenthal, Senior Fellow at the Urban Institute, explains to show host Gene Tunny in Economics Explored episode 114. Steve also talks with Gene about former President Trump’s tax affairs in this episode.

About this episode’s guest – Steven M. Rosenthal

Steve Rosenthal, a senior fellow in the Urban-Brookings Tax Policy Center at the Urban Institute, researches, speaks, and writes on a range of federal income tax issues, with a particular focus on business taxes. In 2013, he was the staff director of the DC Tax Revision Commission.

Before joining Urban, Rosenthal practiced tax law in Washington, DC, for over 25 years, most recently as a partner at Ropes and Gray. He was a legislation counsel with the Joint Committee on Taxation, where he helped draft tax rules for financial institutions, financial products, capital gains, and related areas. He is the former chair of the Taxation Section of the District of Columbia Bar Association.

Rosenthal holds an AB and JD from the University of California, Berkeley, and an MPP from Harvard University.

Tax Fairness: President Donald Trump, a Case Study (Steve’s testimony before the U.S. House Ways and Means Oversight Subcommittee)

Buy, borrow, die: How rich Americans live off their paper wealth (WSJ article)

Thanks to the show’s audio engineer Josh Crotts for his assistance in producing the episode. 

Please get in touch with any questions, comments and suggestions by emailing us at or sending a voice message via Economics Explored is available via Apple Podcasts, Google Podcast, and other podcasting platforms.

Economics Explored Live

US inflation and Aussie jobs data – 15 October 21 livestream

Economics Explored Live for 15 October 2021, the first edition of what I’m planning to be a weekly livestream, covered:

  • the growing concern internationally about accelerating inflation, prompted by the latest US CPI figures (see chart below;
  • the September ABS Labour Force data revealing big drops in hours worked and workforce participation in the locked-down economies of NSW and Victoria; and
  • my state of Queensland’s relatively low vaccination rate (72% for 1st dose vs 84% nationally) and what it could mean for the state’s reopening and the economy – it’s pretty obvious the Queensland Premier should set a date for re-opening ASAP to encourage people to get vaccinated promptly, as suggested by the Queensland branch of the Australian Medical Association.

Here’s the video of the livestream, which was streamed to YouTube and LinkedIn Live:

Regarding inflationary pressures in advanced economies, I quoted leading market economist Stephen Roach from his recent Financial Times op-ed The sequencing trap that risks stagflation 2.0:

As brilliant and lucky as they have been, today’s generation of central bankers is afflicted with the same sense of denial that proved problematic in the 1970s. Due to a lack of experience and institutional memory of that tough period, the risk of another monetary policy blunder cannot be taken lightly.

Certainly, central banks have been running a massive monetary policy experiment with ultra-low interest rates and Quantitative Easing, which have been associated with double-digit growth rates in money stocks. I agree with Roach regarding the potential for a “monetary policy blunder”.

Other links relevant to the livestream include:

Pete Faulkner’s post Labour Force; national data hit by lockdowns while QLD powers ahead

QEW post featuring my The Other Side interview on Australia’s economic suicide

Vaccination numbers and statistics

ABS: New data shows lockdown impacts on business turnover

Cross-posted at Please get in touch with any questions, comments and suggestions by emailing us at Economics Explored is available via Apple PodcastsGoogle Podcast, and other podcasting platforms.

Podcast episode

EP106 – COVID lockdowns, vaccine mandates, and vaping with Dr Gilbert Berdine

A Texas physician, university lecturer in medicine, and affiliate of a free market think tank Gilbert Berdine MD explains why he thinks COVID lockdowns have been “a disaster” and why he does not support vaccine mandates.

At a time when the COVID pandemic continues, and cities such as Sydney and Melbourne remain locked down, Gilbert Berdine MD from Texas Tech University Health Sciences Center shares his views on lockdowns and vaccine mandates with show host Gene Tunny. The conversation also explores Dr Berdine’s views on regulations regarding vaping or e-cigarettes.

About this episode’s guest – Gilbert G. Berdine MD

Associate Professor of Internal Medicine, Texas Tech University Health Sciences Center, Lubbock, TX

Faculty Affiliate, Free Market Institute, Lubbock, TX

Dr. Berdine earned his B.S. degrees in chemistry and life sciences from the Massachusetts Institute of Technology in Cambridge, MA and his M.D. degree from Harvard University School of Medicine in Boston, MA. He completed residency in Internal Medicine and fellowship in Pulmonary Diseases at the Peter Bent Brigham Hospital (now called Brigham and Women’s Hospital) in Boston, MA.

Dr. Berdine was a faculty member at the University of Texas Health Sciences Center in San Antonio from 1983-1989. He was in the private practice of medicine from 1989-2009 when he returned to academia as a faculty member of TTUHSC.

Dr. Berdine’s current teaching activities include lecturer for the respiratory blocks in the 1st year Major Organ Systems course and the 2nd year Systems Disorders 1 course. His clinical duties include staff attending physician for the inpatient Pulmonary Consult Service, inpatient Internal Medicine Floor Service, and the outpatient Pulmonary Fellow Clinic. He also sees patients in the Pulmonary Clinic for Texas Tech Physicians.

Dr. Berdine’s research interests include the application of Austrian Economics to health care delivery and consumption. Dr. Berdine has published articles on these topics in peer reviewed journals and is a contributor to the Mises Daily Wire and the American Institute of Economic Research.


Links relevant to the conversation

COVID-19 Vaccines and the Delta Variant – AIER article by Gilbert Berdine MD

Lockdowns of Young People Lead to More Deaths from Covid-19 – AIER article by Gilbert Berdine MD

Covid Misclassification: What Do the Data Suggest? – AIER article by Gilbert Berdine MD

Sometimes hesitancy is justified by Gilbert Berdine MD

Vaping Laws and the Treachery of Good Intentions by Gilbert Berdine MD

EP100 – Incentivizing Vaccinations or Cash for Jabs

Correspondence from Dr Berdine on COVID mortality rates

…the mortality rate has a range of over 1000:1 depending on your age. The average mortality is heavily determined by the number of people over age 80 in the population. 

Based on latest census data and current CDC figures for COVID deaths

Mortality expressed as 1/mortality : 

Age: Mortality

Under 5: 124,126

5 to 14: 283,027

15 to 24: 32,461

25 to 34: 7,850

35 to 44: 2,845

45 to 54: 1,087

55 to 64: 475

65 to 74: 213

75 to 84: 87

85 +: 31

Cumulative Age

Under 5: 124,126

Under 15: 199,917

Under 25: 64,258

Under 35: 20,120

Under 45: 8,681

Under 55: 3,880

So, for 35 and younger, the cumulative mortality including the overcounting is less than 1/10,000. If one looks at annual mortality, the figure  for Under 45 including overcounting is likely less than 1/10,000. If one adjusts modestly for overcounting, the  figure for Under 55 is likely less than 1/10,000.

Please get in touch with any questions, comments and suggestions by emailing us at Economics Explored is available via Apple Podcasts, Google Podcast, and other podcasting platforms.

Podcast episode

EP99 – Carbon border taxes

The European Union intends to impose a carbon border tax and the US is also considering one. What’s the justification for a carbon border tax and what could it mean for international trade? Episode 99 of Economics Explored features a conversation regarding the European Union’s proposed Carbon Border Adjustment Mechanism (CBAM), i.e. a carbon border tax, between show host Gene Tunny and his colleague Ben Scott, Research Officer at Adept Economics.

Links relevant to the conversation:

Please get in touch with any questions, comments and suggestions by emailing us at Economics Explored is available via Apple PodcastsGoogle Podcast, and other podcasting platforms.

Podcast episode

EP98 – Political legitimacy with Prof. Phillip LeBel

In Risk and the State, Professor Phillip LeBel argues the political legitimacy of governments worldwide is “under trial from questions of borders and national identity, from rising economic inequality, from the way in which information is gathered, managed, and disseminated, and from varying perceptions of risk.”

In EP98 on political legitimacy, host Gene Tunny interviews  Prof. Phillip LeBel about his new book published earlier this year by Brown Walker Press: Risk and the State: How Economics and Neuroscience Shape Political Legitimacy to Address Geopolitical, Environmental, and Health Risks for Sustainable Governance.  

Phillip LeBel is Emeritus Professor of Economics at Montclair State University, NJ. With a career combining academic research and teaching with professional consulting, Professor LeBel has accumulated a record of economic expertise in a variety of domestic and international fields. Over the years, he has lived in and/or worked in 30 countries, including Africa, East Asia, Central America, and Latin America.

Please get in touch with any questions, comments and suggestions by emailing us at Economics Explored is available via Apple PodcastsGoogle Podcast, and other podcasting platforms.

Podcast episode

EP89 – CPI inflation concerns with Darren Brady Nelson

There are growing concerns over CPI inflation after all the money printing associated with the pandemic response.

Episode 89 of Economics Explored features a conversation on just how worried we should be about future inflation in this time of MMT and QE between Economics Explored host Gene Tunny and returning guest Darren Brady Nelson, chief economist of the Australian libertarian think tank LibertyWorks and a policy adviser to the Heartland Institute.
Charts of data referred to in this episode:

Charts on CPI, money supply, US 10 year bond yield, and asset prices

This is the classic book by Milton Friedman and Anna J. Schwartz mentioned in this episode:

A Monetary History of the United States, 1867-1960

Please send through any questions, comments, or suggestions to and we will aim to address them in an upcoming episode. Alternatively, please leave a comment on this post.