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Moody's Talks - Inside Economics

Episode 34
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November 23, 2021

Once and Future Inflation

Mark, Ryan, and Cris discuss inflation throughout the history of the United States and whether we're in the midst of an era.

Full episode transcript here.

Mark Zandi:                      Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics, and I'm joined as per usual by Ryan Sweet, director of Real Time Economics. Hey Ryan, all is well?

Ryan Sweet:                      Everything's well. Busy weekend, but everything's good.

Mark Zandi:                      Good. We just chatted on Friday, and I'll come back to this in a second. This is a little bit of an unusual podcast, so we talked a couple days ago. So, you had a good weekend?

Ryan Sweet:                      I did.

Mark Zandi:                      Good.

Ryan Sweet:                      Until I had to fill up at the pump. It's getting expensive. 

Cris deRitis:                       For sure indicator.

Mark Zandi:                      We'll come back to that.

Cris deRitis:                       That's your indicator.

Mark Zandi:                      We'll come back to that. 

Cris deRitis:                       What'd you pay? $3.40? $3.50 for a gallon of...? Oh no, you get premium [crosstalk 00:00:55].

Ryan Sweet:                      You got to get the premium in these SUVs now, so I'm over four.

Cris deRitis:                       Oh really? I didn't know that. Really? You have to get premium? I didn't know that.

Ryan Sweet:                      Well, maybe not in your SUVs, but you should be.

Mark Zandi:                      Oh really? Huh. Okay. Cris, do you get premium? Oh yeah, you're the [crosstalk 00:01:11].

Cris deRitis:                       Oh, I do not.

Mark Zandi:                      You get the super octane plus.

Ryan Sweet:                      No, Cris plugs his cars in.

Mark Zandi:                      Oh, does he?

Cris deRitis:                       Nope.

Ryan Sweet:                      Oh, you don't?

Cris deRitis:                       I get the cheap stuff.

Mark Zandi:                      Oh, and that's Cris deRitis, deputy chief economist. Hey, Cris.

Cris deRitis:                       Hey, Mark.

Mark Zandi:                      And you had a good weekend also?

Cris deRitis:                       I did. I did, yep. It was a little on the cool side.

Mark Zandi:                      [crosstalk 00:01:31]. I know, geez. It's already winter here. I wrote a piece on inflation, so apropos to the conversation today, because we're going to be talking about the history of inflation. This podcast is going to be different. This is going to air the week of Thanksgiving, so it's a little over a week from now. So, this is more of a kind of evergreen. We're not going to do the statistics today like we normally do. We're just going to dive right into the topic at hand and inflation. This is really, we're going to take a step back first here and talk about the history of inflation, inflation since the nation's founding. Hopefully learn some lessons from our experiences of inflation past, and then talk about inflation now, because obviously, that hair on fire kind of moment. Everyone's really upset about the six percent plus CPI inflation report we got last week, so want to talk about that.

                                             This is a little bit different. I will say, if you really do miss us week of Thanksgiving, you can always follow me on Twitter. @markzandi.

Ryan Sweet:                      I knew it was coming.

Mark Zandi:                      Just an advertisement. I'll be tweeting for sure during this period, so please feel free.

Cris deRitis:                       I just want to know who wins the wallyball.

Ryan Sweet:                      Exactly. That's what [crosstalk 00:02:54] say.

Cris deRitis:                       Right? That's why I'll be tuning in. For the post it.

Mark Zandi:                      Yeah, [crosstalk 00:02:57] we're all gearing up for that, the wallyball. For folks that weren't listening a couple podcasts ago, wallyball is what the Zandis do on Thanksgiving. We go into a racketball court set up as a volley... Volleyball in a racketball... I think it's racketball court. Yeah. It allows the old guys to play with the young guys, the women to play with the men. We can all kind of be equalized, so it's a lot of fun. Someone always gets injured. Hopefully it's not me, but someone always gets injured, but I'll let you know.

                                             Okay, let's dive in. So, the way I was thinking about framing this conversation, at least around the history was I've identified half a dozen inflation eras, let's call them, and I'm hoping that we can talk a little bit about the era, and then what we learned about inflation and inflation dynamics from that experience. Very quickly, maybe I should just name the eras, see if you guys agree or disagree with this kind of breaking up of history. So, era number one, pre-Federal Reserve. The Federal Reserve was put on the planet back in 1913, so anything from the beginning of the nation's founding, let's say 1770s through early 1900s. That's the pre-Federal Reserve era, that's an inflation era. Second, the Depression, the '30s. We saw inflation during that period, so that's a period unto itself. That's the second era. 

                                             Third era, WWII, Korean War, so that was the '40s through most of the '50s, at least the mid '50s. Moderation and shortages and talk a little bit about that. Then, the fourth era is the period, what I call great inflation. That was, really actually began in the mid '60s and then inflation steadily accelerated through the '70s, kind of peaked in the '80s, and it didn't really normalize until late '80s, early 1990s. That's the fourth period. The fifth period I call the great moderation. That's the 1990s through 2010. That was a positive supply shock, the tech boom and the impact that had on inflation. Then, of course, the low inflation period after the financial crisis, that's the most recent period. And then now, here. 

                                             So, that's six different eras, and then now here today, we're talking... We're in the middle of the pandemic and we're starting to see inflation again, and we'll talk about that as well. Do you think that's a generally pretty good way of thinking about the history of inflation in the context of the United States? Does that make sense to you guys?

Cris deRitis:                       It does. It's a lot. But I think that's the right... Those certainly are all the major eras. We may spend more time on some versus others.

Ryan Sweet:                      Yeah.

Mark Zandi:                      Yeah. There's one period I could not fit into the frame. That was between 1955 and 1965. It's not influenced by wars, Korean War kind of ended by then but inflation was kind of moderate during that period. That's the 10 year period that I didn't put anywhere, so I'm not sure what to do with that one. 

Ryan Sweet:                      So, this is a walk down memory lane of your professional career as an economist?

Mark Zandi:                      Exactly, yeah. It's so funny, because just perchance I picked up a book on Andrew Jackson. I was reading a little bit about the Second Bank of the United States, and this gets to the first period, pre-Federal Reserve. Do you guys want to take a crack at characterizing that period? I mean, I got a sense of things, but do you want to characterize that period, in terms of the inflation performance and what was going on? Anybody want to take a crack at that? I feel like a little like a teacher.

Ryan Sweet:                      There wasn't a lot of inflation, except around the War of 1812 and then the Civil War, when we had to finance the wars. But overall, inflation wasn't it moderate?

Mark Zandi:                      It was all over the map.

Cris deRitis:                       Yeah, it was chaos.

Ryan Sweet:                      Volatility was high, but if you average...

Mark Zandi:                      Lots of inflation, lots of deflation, lots of inflation, lots of deflation. I mean, the business cycle, lots of business cycles. It was economic chaos.

Cris deRitis:                       You had the wildcat banking era. Those are just up, down, all around.

Mark Zandi:                      Yeah. There was really no anchor to inflation at that time. It was really all over the place, and I think that goes to the lack of a central bank. I think that's the lesson of that period, and the US government set up the First Bank of the US soon after the Revolutionary War. That had a very short charter, and then there was a brief period before they set up the Second Bank of the United States. I think that was early 1800s to 1840, something like that. It was kind of loosely managing monetary policy. It was issuing bank notes that were backed by gold, so they were relatively stable. But, of course, this is where Andrew Jackson came in. He did not like the Second Bank, because I think it's probably true, there was a bit of corruption there. The Second Bank would give credit and loans to curry favor to politicians, and finance Jackson's opponents, and I think he took, as you would expect, umbrage to that. 

                                             When the charter for the Second Bank came up again, I think in the 1830s, he vetoed it. He didn't vote for it, and I think... Actually, I think this helped him win the election of 1832, because he railed against... This is age old, rail against the New York banks. In this case, it was a Philly bank, the Philadelphia Bank. Second Bank was in Philadelphia.

Ryan Sweet:                      The building's still there.

Mark Zandi:                      Yeah, it's still there, right. I think it's a museum, right?

Ryan Sweet:                      It is.

Mark Zandi:                      I've never been. Have you been to that museum?

Ryan Sweet:                      I don't think so.

Mark Zandi:                      No. That sounds bad, though.

Ryan Sweet:                      Sounds awful. As economists, we didn't go and visit there.

Mark Zandi:                      Yeah, we should really do that.

Cris deRitis:                       All right, field trip. 

Mark Zandi:                      Maybe field trip for the whole...

Ryan Sweet:                      Road trip for the podcast.

Mark Zandi:                      I'm sure people will appreciate that field trip.

Cris deRitis:                       We'll set up the podcast booth right there.

Mark Zandi:                      Exactly. Exactly. But then, I think we were completely rudderless. Without anything that approached a central bank through the Civil War, the late 1800s into the early 1900s. And then, we had the Panic of 1907, and that was a doozy of a panic. I think that it spooked people and they said, "We need some stability here. We need a central bank." So, by 1913, they had set up the Federal Reserve. I think the lesson from that period would be central banks play a key role in terms of inflation. Agreed? [inaudible 00:09:46].

Ryan Sweet:                      Yeah. Well, I think you can take both approaches. [inaudible 00:09:51] central banks play, from some economist's perspective, a key role in keeping inflation low. Other economists have argued central banks are the root cause of inflation, because they're just printing money. Austrian [crosstalk 00:10:04].

Mark Zandi:                      Even if inflation's too high, they...

Ryan Sweet:                      Yeah.

Mark Zandi:                      Yeah, I suppose. I mean, I guess this goes to crypto somehow, doesn't it? This goes to the... We're talking about the Federal Reserve in the US inflation, but certainly central banks overseas aren't showing less discipline, and as a result, have not had stable inflation. That instability has created demand for alternatives, like now crypto. So, if you're in El Salvador, the central bank of El Salvador is not... Well, they dollarized, I guess, but that...

Ryan Sweet:                      Yeah.

Mark Zandi:                      I guess you're right. Central banks are good and bad, depending on where you sit, I suppose. Well, you say, Ryan though, that the Federal Reserve has done a good job. I mean, if you look at a chart of inflation or growth since the beginning of the country, you can clearly see when the Federal Reserve was put in place. Before that, it was, as Cris said again, chaos. After that, it's been a period of relative stability.

Ryan Sweet:                      Yeah, I would agree with that.

Mark Zandi:                      Yeah, okay. All right. Any other lessons from that period? Well, the other lesson... I'm not sure it's related to inflation is that pay your debts. Alexander Hamilton decided early on that he was going to pay off the Revolutionary War debt, even though it was trading at pennies on the dollar at the time because no one thought that the US government would ever pay back the funds that they borrowed to finance the Revolutionary War. The fact that he did that established the credit of the United States, the central government, and we've been reaping benefits from that ever since. Another good lesson from that period, I think.

                                             Okay, let's move on. Second era, the Great Depression of the 1930s. How would you characterize that period? Anybody want to take a crack at that?

Ryan Sweet:                      Chaos.

Mark Zandi:                      Chaos. Okay, all right.

Ryan Sweet:                      Well, you had deflation.

Cris deRitis:                       Different type of chaos, yeah.

Mark Zandi:                      Yeah. When we say deflation, that means falling prices. 

Ryan Sweet:                      Persistently. Persistently falling.

Mark Zandi:                      Persistently falling prices, and I think they fell from the 1929 crash through the mid 1933, I believe, they were deflating. Roosevelt came in early 1933, and he took the US off the gold standard, and the economy reflated pretty quickly. What's the lesson...? First, let me ask you this: what's the problem with deflation? Why such the fear of deflation? What's the economic rationale for why we don't want falling prices? I mean, if I'm a consumer, I kind of like falling prices, don't I? I can buy the same amount of stuff with less, so what's the problem with deflation?

Cris deRitis:                       Yeah, sure. Falling prices are good, but the problem is that they keep falling. There's a negative spiral that occurs. So, if I think that price is going to fall further, I'll keep delaying my spending, keep delaying my investment because oh, tomorrow I could get a better deal. So, the issue is how do you break that psychology? It's really difficult. We don't actually have tools, or it's initially not well understood how to get out of that spiral without letting it come to its own natural fruition. It's dangerous from that perspective. On the other end, inflation, we actually have some tools. We know what to do, been through some cycles. Might be painful, I'm not saying it's a good thing to go through an inflationary cycle, but on deflation it's really unknown. It's hard to break that psychology, because it gets ingrained that tomorrow will be... Everything will be cheaper tomorrow, so just keep delaying.

Ryan Sweet:                      Yeah, it's just economically debilitating.

Mark Zandi:                      Because?

Ryan Sweet:                      Because of what Cris is talking about, the deflationary psychology. I mean we can fast forward and talk about the housing bust after 2008. Deflationary psychology gripped the housing market, and it took a long time to break that.

Mark Zandi:                      Right, but so-

Ryan Sweet:                      So, people were delaying buying a home because they thought it was going to be cheaper next quarter, next year, two years from now. You can see how that psychology feeds on itself and just becomes economically debilitating.

Mark Zandi:                      Right. So, what you're saying is deflation and depression go hand in hand. They're intertwined and feed on each other, and therefore, if you're experiencing deflation, pretty good shot your economy's going to hell at the same time.

Ryan Sweet:                      Yeah, I always think of the three Ds of depression. You have the depth, the duration, and deflation. All three of those are characteristics of a depression.

Mark Zandi:                      Yeah. I guess the other reason the... And this is kind of a corollary of what you said, is that if you're a debtor that's a problem because the amount you use, that doesn't tend to go down. You've got to pay that. No creditor is going to let you off the hook. You owe that money, but if you're in deflation that means the prices for everything, including probably your wages or whatever your source of income is, that's falling, too. So, you have falling source of income to pay off your debt, and that's the prescription for default. "I can't pay my debt, so I default," and that just exacerbates the economic problems. The creditors who lent you that money, they have a problem. Those are obviously the banks and other creditors, they can't extend credit to anybody else, and everyone's going down into this deep, dark cycle. Vicious cycle. That'd be, I guess, another way [crosstalk 00:15:52].

Ryan Sweet:                      Yeah, that's precisely what happened with the housing market during the Great Depression.

Mark Zandi:                      Yeah, exactly.

Ryan Sweet:                      People had to use balloon payments, and there was no way they could pay them off.

Mark Zandi:                      I think the other lesson in that period, at least one of my take aways, I'm curious what you think... Pegging your economy to gold is probably a bad idea. It takes monetary policy out of your hands and hard to react. In fact, going back to the Depression, I think the British, they went off the gold standard first and their economy reflated first. I think that's what Roosevelt saw, and pretty soon after he got elected, I think almost immediately... I think he got into office early 1933 and he had the bank holiday immediately when he took office.

Ryan Sweet:                      Yep.

Mark Zandi:                      And I think in the summer of 1933, he took us off the gold standard, and that was the beginning of the end of the deflation. There was another bout of deflation later in the decade. We had kind of a second round of problems in the late 30s. Not as brutish, a little bit more brief, but I think gold is certainly a fetter. That to me is a cautionary tale for anyone who wants to go back to anything consistent with the gold standard.

Ryan Sweet:                      Yet the gold bugs haven't gone away.

Cris deRitis:                       They have not.

Ryan Sweet:                      Some law makers still want to put us back on the gold standard.

Mark Zandi:                      Yeah, they need to read the sister... Listen to this podcast.

Cris deRitis:                       There you go.

Ryan Sweet:                      Yeah, there you go.

Cris deRitis:                       Yeah, they keep coming back. I don't get it.

Ryan Sweet:                      It's every time the national debt keeps rising. They're going to come back out of the woodwork soon.

Mark Zandi:                      Yeah, because they just don't trust that we won't see inflation. Yeah. Then the next period up, WWII, Korean War. We had pretty high inflation, kind of a negative supply shock, I guess. I don't know how... It's just a supply shock. Your economy, all the resources of your economy are going to be diverted to building military equipment and financing the wars, so that means shortages for everything else. And demand, generally, is pretty strong because people are working, the economy is fully employed. That's obviously one of the key reasons why we got out of the 1930s Depression deflation, because we had this huge, massive influx of government spending to fight the war. But that was a period of rationing, supply shortages, generally higher prices. Not consistently, but generally. I'm not sure what lessons to take from that, other than... Well, the good thing is it got us out of the Depression, the bad thing is obviously, people had to live with rationing and everything else, so that wasn't a great time.

Ryan Sweet:                      A lot of people are drawing parallels of what's going on today to after the Korean War and WWII.

Mark Zandi:                      Oh, is that right?

Ryan Sweet:                      Because of the supply shock, and they're kind of pointing to that to show that it is transitory, it's temporary.

Mark Zandi:                      Oh, interesting. Really?

Ryan Sweet:                      Mm-hmm (affirmative).

Mark Zandi:                      Well, I don't know that history very well. In the Korean War, did we have shortages? Were there a lot of shortages? I suppose there was, but I don't know that history very well.

Ryan Sweet:                      Neither do I.

Mark Zandi:                      Yeah. Interesting.

Ryan Sweet:                      Well, I know we had shortages around WWII.

Mark Zandi:                      Yeah, then I [crosstalk 00:19:15] for sure.

Ryan Sweet:                      Yeah, for sure.

Cris deRitis:                       So, that's the event you're pointing to, I guess.

Ryan Sweet:                      [crosstalk 00:19:21] Yeah. And also, people are pointing to after the Korean War, so I assume there were some shortages. I just don't know. I haven't looked at it.

Mark Zandi:                      Yeah. I don't know that history as well. It's interesting, the Korean War, there was a lot of American troops overseas fighting that war. It's shocking. If you look at the percent of the labor force that was overseas, it was very high. People kind of not focus on Korean War, but that was a pretty all-encompassing war for us. Much of our economy was wrapped up in that war, so very important. Okay, here's the fourth era of inflation. So, we're now up to the mid '60s. I call it the great inflation, and I don't think people recognize, but inflation started to really take off in the second half of the 1960s, and then went stratospheric in the '70s and peaked in the early '80s. I believe CPI, consumer price inflation, peaked at close to 15% in the early 1980s before Paul Volcker stepped in. 

                                             I've got a few take aways from that period that I think are good lessons. What are yours? Anything you would point to that are helpful in thinking about inflation?

Cris deRitis:                       Certainly a lot of lessons for macroeconomics. All the models broke down. They didn't contemplate these types of oil price shocks, reliance on the Phillips curve and whatnot, so certainly there were a lot of lessons learned. Or, hopefully they were learned. It seems like...

Mark Zandi:                      Maybe this a good time to explain to the listeners the Phillips curve, because we'll come back to that.

Ryan Sweet:                      Oh, we're getting to the Phillips curve already?

Mark Zandi:                      Well, just because Cris brought it up, so people are asking about the Phillips curve. If you're not an economist, you may not know what that is. What is the Phillips curve?

Cris deRitis:                       It's a relationship between unemployment and inflation. There's a trade off between the two. Or, I guess there's a presumed trade off. Prior to the early mid '60s, there was a quite strong trade off, but then over time things have broken down a bit, and the theory has been revived in various fashions. Had to tinker around short-term versus long-term Phillips curve. There's a lot of debate whether this relationship actually exists anymore between the two, or if it takes so many heroic assumptions to maintain.

Ryan Sweet:                      Well, I think it still exists. I just think the relationship is much weaker than it was in the '60s and '70s.

Cris deRitis:                       Okay, fair enough. More dynamic, I guess.

Ryan Sweet:                      Exactly.

Cris deRitis:                       Or the measurement is also questionable. How should you be measuring slack? Is it truly unemployment? Is it employment population ratio? What's the [crosstalk 00:22:05]?

Ryan Sweet:                      Prime age. Prime age, Cris.

Mark Zandi:                      Well come back to this in the context of current... Our discussion about what's going on now, but my sense is the Phillips curve, that relationship between unemployment and inflation is what I would call very non-linear. There isn't much of a relationship until unemployment gets to a certain point, and at that point things change very quickly. Wage and price pressures develop very rapidly. So, nothing yet. You're at six percent unemployment, obviously, no problem. Five percent unemployment, no problem. Four percent, not a problem. Three and a half percent unemployment, nothing really. Three percent, boom. You got a problem. You kind of hit some tipping point in labor markets and psychology, and you're off and running. It feels very, very non-linear to me.

Ryan Sweet:                      The other two lessons from that period with regards to the Fed, is don't let inflation get out of control or it's really, really painful to tame inflation. And then-

Mark Zandi:                      Well, what does that mean, to get out of control?

Ryan Sweet:                      Consistently above their... 

Mark Zandi:                      Why?

Ryan Sweet:                      Because it dislodges inflation expectations and [crosstalk 00:23:15].

Mark Zandi:                      There you go. Inflation expectations. That's the key.

Ryan Sweet:                      Yeah, that's the key. That's the lesson from the '60s and '70s and early '80s.

Mark Zandi:                      Okay, so what is inflation expectation?

Ryan Sweet:                      There's all different measures of inflation expectations, but it's basically what people or businesses anticipate inflation to be one year from now, five years from now, 10 years from now.

Mark Zandi:                      Right. Right. So, in that period inflation expectations rose, and that's what you meant when you said the Federal Reserve lost control...

Ryan Sweet:                      Correct.

Mark Zandi:                      ... and at that point, it's very difficult to get those expectations and thus, actual overall actual inflation back down. 

Ryan Sweet:                      He had to get them back down, Volcker, who was chairman of the Federal Reserve, had to jack up interest rates very, very quickly, get them very high to bring realized inflation and inflation expectations back down.

Mark Zandi:                      Yeah. Okay, here's my historical narrative of that period. So, you go back into the mid '60s, late '60s. That was the period of Vietnam and of the Great Society. Lyndon Johnson, the president, ran what they call a highly expansionary fiscal policy. That is, "I'm going to spend a lot of government money." It's kind of the debate we're having now around inflation. Deficit finance, I borrow money to do it, and at that point, the economy coming into that period was pretty close to full employment. Unemployment was very low. The Phillips curve was working fine, but he really pushed on the accelerator and the economy started to overheat. Then, you get into the early '70s and all of a sudden, you have oil price shocks. That's the oil embargoes, there was one in '73, I believe, and of course another one in 1980. 

                                             That was a very significant supply shock. It hurt growth, but it really jacked up inflation. At that time, the economy was very dependent on energy. We consumed a lot much more energy that we produced, so that really jacked up inflation. And then, this is when inflation expectations come in, the Fed decided, "Oh, I'm going to focus on the weaker growth created by the higher oil prices," the negatives of that, "and not focus on inflation." And therefore, they kept interest rates very low for a long period of time. Let those higher inflation expectations become entrenched, and then you're in this vicious wage price spiral, where everyone thinks inflation is going to be high so workers demand higher pay increase. Businesses say, "Fine. No problem, I'll give you that pay increase," because they know they can pass that through to their customer in the form of higher price. 

                                             Workers see that. They say, "Okay, you got to pay me more. You got to raise my wages even faster." You can see how you get into this kind of very dark wage price spiral. This dynamic I just described sounds kind of familiar, doesn't it? Around the pandemic.

Ryan Sweet:                      Mm-hmm (affirmative).

Mark Zandi:                      Same kind of dynamic. People are arguing the same kind of dynamic. I don't believe it to be the case, and we'll come back to that in a few minutes, but that's... When people worry about inflation today, many of them are hearkening back to that period of great inflation in the late '60s, all the way going up into the 1980s.

Ryan Sweet:                      I mean, that's why people are talking about stagflation, because that's the last time we had a period of stagflation, which is very high inflation and low growth, or high unemployment. That's a central bank's worst nightmare, like you were discussing. Do you focus on inflation, or do you try to stimulate the economy? You can't win both.

Mark Zandi:                      Yeah. Of course now, the nice thing that we learned from that period that we're using now and the Fed is using now, is that inflation expectations matter. Back then, inflation expectations rose. Well, back then nobody was even talking about inflation expectations. That wasn't even on the nomenclature. They weren't even thinking about it. So, they had no way of measuring it, and they had no way of thinking about it, and they didn't respond to it. But today, we know inflation expectations matter a lot, and so because they're stable and low, the Fed's saying, "Hey, I still feel comfortable that inflation's going to come back in. I should be focused on the negative shock created by the pandemic." The ill effects on the labor market, the fact that unemployment and underemployment are still relatively high. So, the big difference between now and then, there's many, but the big one is inflation expectations.

                                             Just even focusing on them is a big difference, but measuring them and then basing policy on them are also a big difference. Okay. Of course, as you pointed out, Paul Volcker who became chair of the Federal Reserve in the late '70s, figured out that the only way that they're going to wring out these inflation expectations to bring inflation down was just to kill the economy. So, he jacked up interest rates, they went into double digits. Mortgage rates were 15, 20% back in the early '80s. Did a number on the economy, that kind of wrung out inflation expectations. Not completely. Alan Greenspan, the chair of the Fed who took over from Volcker in the '80s, had to do more work in keeping interest rates relatively high to further wring out inflation and inflation expectations. But Paul Volcker did all the heavy lifting during that period.

                                             And that got us into the early '90s and mid '90s, and this is a period of relatively low and stable inflation. I call this the period of the great moderation. From 1990 through 2010, and here we benefited from a positive supply shock. Right? That was a period of the technology booming. 

Ryan Sweet:                      Yeah. You had tech.

Mark Zandi:                      That's when we had IT. So, we had a positive supply shock. The internet came on, generated a lot of economic activity, increased the productive capability and the size of the economy, which took the pressure off inflation. This was a period of very strong growth and relatively low and stable inflation. It was kind of a nirvana period that took us into the early 2000s. Was there any lessons from that period? That you would take away from that period?

Cris deRitis:                       I don't know about a lesson, but I would throw trade in there, as well. This was a period of trade globalization. We had NAFTA, we had lots of trade deals around the globe. Presumably, that helped contain the costs as well.

Mark Zandi:                      Yeah, of course China entered into the WTO in 2001, and that really changed a lot. That really brought down goods prices, because a lot of goods manufacturing globally got pushed into China, where the costs were lower, and that brought down goods price inflation. That's a good point. That's a very good point. So, you had a technology boom, and you had this increase in globalization. I guess deregulation might have also played a bit of a role, right? Wouldn't you think, in terms of...? I mean, you go back to, I guess the seminal event was... I guess this is kind of anti-union, when Reagan broke the air traffic controllers union back in, I think it was 1980 or the early '80s. You had a period of deregulation in lots of different industries. That also, I think, affected labor's negotiating power, helped to reduce inflation expectations, and also caused prices in different sectors to, at least the rate of growth slow, or decline in some sectors. 

                                             That might have played a bit of a role then, too. I think a lot of reasons for that slowing and moderation in inflation, but regulation might [inaudible 00:30:53] a role. [inaudible 00:30:54]. 

Ryan Sweet:                      I'm just throwing this out there, do you think income inequality or wealth inequality over that period played a role in keeping inflation low?

Mark Zandi:                      How so?

Ryan Sweet:                      Just get the distribution of income skewed away from people that have a high marginal propensity to consume toward those that have a high marginal propensity to save. I'm just throwing that out there, because that's another thing that occurred in the 1990s and early 2000s.

Mark Zandi:                      I think that was certainly a result of the globalization, the deregulation, the technology.

Ryan Sweet:                      The decline in the unions.

Mark Zandi:                      The decline in the unions all played a role in the skewing of the income and wealth distribution, but I don't know. Can you connect the dots back to inflation? At least directly connect the dots?

Ryan Sweet:                      Not directly, though maybe through income, wage growth. Things like that.

Mark Zandi:                      Yeah. I don't know. Cris, what do you think?

Cris deRitis:                       Yeah, I think the causality...

Mark Zandi:                      Yeah, I'm not sure.

Cris deRitis:                       Naturally, I think it goes the other way, but those other factors caused inequality, but inequality leading to lower inflation? 

Mark Zandi:                      I don't know.

Cris deRitis:                       I don't know.

Mark Zandi:                      It's a stretch.

Cris deRitis:                       I will say one other key take away... Oh, go ahead.

Mark Zandi:                      No, go ahead.

Cris deRitis:                       Just looking through the whole list here, as we were talking to this, psychology is such a large component of this. Really, if you want to be a student of inflation, it sounds like you have to be an armchair psychologist to really understand what's going on. I think the great moderation, you also had a period of fiscal discipline. I think people felt pretty comfortable during that period that inflation was not going to take off, or deflation was not going to creep in. I wonder if that also played a role here, just that consumer psychology was pretty stable during that period.

Mark Zandi:                      Yeah. Yeah, I think you're right. It's like sentiment, psychology, which I wrap up into expectations.

Ryan Sweet:                      Expectations, yeah.

Mark Zandi:                      Yeah, I think they're very critical. Going back to the technology boom, that was a period of pretty rapidly declining prices. Remember? There was outright deflation for chips and other internet technology, and that, I'm sure, had a role in bringing down inflation in a very significant way.

Cris deRitis:                       Well, on that note, another issue here is measurement throughout this whole period, as well. When we...

Mark Zandi:                      Yeah, go ahead.

Cris deRitis:                       ... are measuring inflation as well, so that's another issue just in terms of the whole discussion here, is how can you measure prices over time, and how do you do that consistently? How do you account for those quality changes? Just a little grain of salt. I think we've got all the arrows right, but a little grain of salt, that how we're measuring inflation-

Mark Zandi:                      Explain what you mean there. So, what are you referring to? When you talk about the technology boom and measurement, what are you referring to?

Cris deRitis:                       Inflation overall is a measurement of general price levels over time. How do you control for changes in the quality of the goods over time? It's a really challenging technical issue. We're not just talking about apples in one period versus apples in another period, we're talking about Apple computers in one period versus Apple computers in another period, which have a very different set of capabilities. If you just look at the list price of those two goods, or those two computers let's say, they might be the same but one is substantially more powerful. So, how do you control for those changes in quality over time? That's something that the BLS has struggled with. I think any economist struggles with to make those types of quality measurements. When we're looking at some of those inflation figures during a period of rapid technological change, it could be difficult to really grasp the true underlying price changes.

Ryan Sweet:                      On a similar note [crosstalk 00:34:43]... Oh, sorry.

Mark Zandi:                      No, go ahead, Ryan.

Ryan Sweet:                      In that period, the Fed shifted their focus from the consumer price index to the personal consumption expenditure deflator. They're essentially measuring the same thing, consumer prices, but they have different methodologies, they have different weightings. One uses fixed weights, which is the CPI, and Greenspan argued, I think it was in the mid 1990s, that the CPI was overstating inflation. That change, going away from the CPI to the PCE deflator doesn't seem to make a big difference, but it does today and next year it's going to be really important. We can talk about that down the road.

Mark Zandi:                      Yeah, yeah. Good point. Just to strike the point home though, for the listener, the Bureau of Labor Statistics, which is the keeper of the CPI data, the consumer price inflation data. I guess it's the Bureau of Economic Analysis who uses the CPI and the producer price indices from the BLS to construct the core PCE. They do make quality adjustments, you're just saying, "That's pretty tough to do in any time, but particularly a period of rapid technological change, because things are "improving" and measuring that's pretty tough to do," is what you're saying.

Cris deRitis:                       That's right. Yeah.

Mark Zandi:                      Yeah.

Cris deRitis:                       I have a lot of respect for the work they do, certainly. It's just very difficult to disentangle. 

Mark Zandi:                      Okay, this brings us up to the last historical inflation era, and that's the period of low inflation during the [inaudible 00:36:10] decelerating price growth. There were some [inaudible 00:36:11] deflation concerns. This was after the financial crisis in the last decade before the pandemic. It's weird to think about it now, but just before the pandemic hit, the Federal Reserve and every central bank in the developed world, was struggling with how low inflation was. It was just consistently below their targets, and they were trying to get it up. What's the lesson learn from that period of, let's call it low inflation period? I mean, what caused that? What's the lesson from that period? Any views on that?

Ryan Sweet:                      Well, we had a very, very slow recovery after the financial crisis, which the catalyst of a recession can also factor into the strength of the recovery. When you have a financial crisis, usually the recoveries are much slower. I think that's one reason why the central banks were struggling to get inflation higher.

Mark Zandi:                      Yeah.

Ryan Sweet:                      We still had a lot of slack in the labor market. 

Mark Zandi:                      Yeah.

Ryan Sweet:                      I mean, we didn't get a lot of improvement in the job market for years. 

Mark Zandi:                      This goes back to the Phillips curve.

Ryan Sweet:                      Mm-hmm (affirmative).

Mark Zandi:                      What you're arguing is that you came out of the financial crisis, the economy grew very slowly, didn't absorb all the slack. Unemployment was high, other measures of slack in the labor market signal a lot of excess capacity there. People weren't working. That kept wages down and prices down. That's one reason why you had low inflation. Of course, China and globalization were still playing a key role there keeping inflation down. Inflation expectations, they were starting to migrate lower. They held in pretty well, though, and I guess that's one reason why we never experienced outright deflation, because people still believed at the end of the day, the Federal Reserve and all the central banks would get what they wanted, so inflation expectations held firm. But that was a period when it was... And I think we came to the conclusion that, one you mentioned earlier, Cris, that we have pretty good tools for bringing down inflation. We don't have really great tools for bringing inflation up, or certainly if we're in a deflationary environment, ending that deflationary period. That's another lesson, I think, from that period.

                                             The Europeans, I don't know, and Japanese. I'm not so sure that... I think we all kind of feel we're broken free from low inflation period. I think we feel that way at the moment, I'm not sure if that's how the Europeans and Japanese think. I'm very curious.

Ryan Sweet:                      Well, the other lesson is don't flinch when you see inflation for the first time. For central banks. I mean, that's what the Fed did. They were very, very patient waiting for inflation to accelerate. Other central banks, as soon as they saw the white of inflation lines, they panicked and they started raising interest rates and then their economies backtracked.

Mark Zandi:                      This is coming out of the financial crisis, you're saying.

Ryan Sweet:                      Correct. Mm-hmm (affirmative).

Mark Zandi:                      The Fed waited, waited, waited, waited and inflation, even though it was low here in the US it was much stronger than it was in Europe and Japan, where the... Well, particularly in Europe where they kind of reacted immediately to the high inflation, cut off the growth and never got back to a place where they felt good about inflation.

Ryan Sweet:                      Yeah. I think the other lesson during that period is our economy is much less sensitive or reliant on energy prices. In the past, if we go back to the '70s, we talked about it. That led to a lot of higher inflation, persistently higher inflation. Now, fluctuations in energy prices have a very temporary impact on consumer prices.

Mark Zandi:                      Right. Hey, one other quick thing before we get to inflation in the current context, why two percent? Why does the Federal Reserve Board have a two percent inflation target? I got my explanation, I'd be curious to hear what your explanation is. Why two? Why not 1.56897? Or 3.4582? Why two percent? Any explanations?

Ryan Sweet:                      You want to go first, Cris?

Cris deRitis:                       I'll go ahead. I guess we're asserting yeah, everyone agrees that it should be greater than zero, should be some positive number, right? Because zero is too close to the bound, deflation, we already established that. But why two versus three? 

Mark Zandi:                      Yeah.

Cris deRitis:                       That's a... I don't have a strong opinion on that. I think you have to choose something.

Ryan Sweet:                      [crosstalk 00:40:26]. I don't think there's a lot of rationale. I mean, two percent's the golden rule. Most central banks in developed economies is that they aim for two percent inflation, because it's far enough above zero where you don't worry about deflation, and also it's far enough above zero where if you get these measurement issues, that you're actually not targeting too low of inflation.

Mark Zandi:                      I'll give you two substantive reasons. One, if you're at two that means some industry, some businesses are pretty close to zero. It's not a great thing if any business or industry is experiencing outright deflation, for the reasons we articulated before. So, you want inflation set high enough that no industry or business of consequence is in a deflationary environment. I think that's part of it. Second is, if you have two percent, it's high enough that you have the Federal Reserve and other central banks have a little room to lower it. If you have low inflation you have low interest rates. If it's too low, you have no room to maneuver. If you set it at one percent, then interest rates are going to be very low through even the best of times, and the Fed doesn't have a lot of room to react when things are tough. That's why there's a move afoot, or at least there's been a lot of data that maybe two is too low. 

                                             Maybe it should be three, because if it's three that means the growth in the economy is strong enough in the good times and interest rates are high enough in the good times that when the bad times come, when you have a recession you have enough room to lower rates and don't hit the zero lower bound and have to engage in quantitative, easing bond buying and that kind of stuff. I think there are some pretty good reasons why you'd want to keep inflation around two percent.

Cris deRitis:                       I think there's also lots of discussion around whether the two percent target has been interpreted as a ceiling or as a median.

Mark Zandi:                      Hm.

Cris deRitis:                       Previously, it had been, really, the market ceiling.

Mark Zandi:                      Yeah, which made no sense. But yeah.

Cris deRitis:                       You go to two and a half to get two. I think that's the...

Mark Zandi:                      Well, if it's two now... Correct me if I'm wrong, Ryan, because you follow the Fed closely. I think they changed the monetary framework back in last summer and they said, "Okay, two percent's not the ceiling, two percent is kind of through the side [crosstalk 00:42:40]."

Ryan Sweet:                      Yeah.

Mark Zandi:                      If you're below two for some points of time, you have to be above two for some point of time so that on average, through the business cycle you're two. Which, if you think about inflation expectations for a second, if you don't do that, if two percent's your ceiling, inflation expectations will always be below two which means you'll never get to two.

Ryan Sweet:                      That's right.

Mark Zandi:                      And that's simple arithmetic, I think, if you think about it.

Ryan Sweet:                      Mm-hmm (affirmative).

Mark Zandi:                      Anyway. Okay, we're real time. We're talking about inflation today, and obviously, inflation is up a lot. The consumer price index is up six percent plus year over year, the highest in over 30 years. There's a lot of debate and discussion around this, and we debated it on our last podcast a little bit. Maybe we should reprise that and see where people stand. Just to summarize the broader theories around inflation and inflation dynamics, we began with the pre-Fed period. That goes to the monetary theory of inflation that, with the Fed does ultimately determines inflation, which I think is the case. But the view here is that the Fed controls the money supply, and the money supply ultimately controls the rate of inflation. We talked about the Phillips curve, the relationship between unemployment and inflation as another way of thinking about inflation. 

                                             We've talked about supply shocks, we talked about negative supply shocks, oil price increases. Positive supply shocks, the technology boom. Of course, the pandemic is a negative supply shock. We talked about inflation expectations. These are all key elements about how people are thinking about inflation dynamics today. You add it all up, and we're sitting here today. They key question is, and it's the question everyone's asking, is this six percent inflation temporary? The first question I have for you is, what does temporary mean? Or in Fed nomenclature, transitory. Another way of saying temporary. What does that mean to you, temporary, transitory?

Ryan Sweet:                      All right, well I'll go. Cris is checking his notes.

Cris deRitis:                       I thought you were all over this one.

Ryan Sweet:                      Oh no, I wanted to let...

Cris deRitis:                       Go ahead.

Ryan Sweet:                      There's no time element to transitory, so you don't want to say it's six months, eight months, 12 months. It's whether or not the underlying fundamentals are going to support persistently high inflation, and that is just not going to happen.

Mark Zandi:                      Cris, do you have a definition of temporary, transitory?

Cris deRitis:                       I think Ryan's is a good one, but I would throw the acceleration element, kind of that second derivative in there. If you see that the inflation rate is still high but is falling, i.e. that it's going towards that two, two and a quarter percent target, that to my mind indicates something that's transitory. If it's accelerating or if it's maintaining, then that's more of a permanent effect.

Mark Zandi:                      Well the current context, the first derivative is certainly positive. That's the rate of change is positive.

Cris deRitis:                       Right.

Mark Zandi:                      And the second derivative, which is the rate of the rate of change, is also positive. It's accelerating. So, that would not be consistent with the idea that it's transitory, temporary by your definition.

Cris deRitis:                       Well, [crosstalk 00:46:00].

Ryan Sweet:                      That's for the next quarter, right?

Cris deRitis:                       Yeah, exactly. Next year, that second derivative is going to be-

Mark Zandi:                      But I want a definition that is functional, that helps me. You're saying... What are you saying?

Cris deRitis:                       It comes back down to psychology then, I guess. It's the belief that the rate of change is going to decline over time.

Mark Zandi:                      Okay. That's the answer in my view.

Cris deRitis:                       Okay.

Mark Zandi:                      It's inflation expectations.

Cris deRitis:                       Yeah.

Mark Zandi:                      If inflation expectations are low, people believe inflation's going to come back down, then it's transitory. It's going to be transitory. They're going to come back down, it's just a matter of time. It may not be next month or next quarter, [inaudible 00:46:38]. Expectations are rising, that's no longer transitory. That means we're not going back to where we were. Make sense?

Cris deRitis:                       Yeah, I think we're in the same spot. 

Mark Zandi:                      Same spot. Okay.

Ryan Sweet:                      People believe it's transitory because of what we're going through. You have supply chain shocks, they know that's going to get wrung out and that will be disinflationary next year.

Cris deRitis:                       Right.

Mark Zandi:                      Okay. There's a few theories of what's going on here that have important implications, in terms of inflation and whether... By the way, I'll say unequivocally I think this inflation is temporary, transitory. That by this time next year, inflation may not be all the way back to the Fed's target, but to your point, Cris, second derivative, it will be decelerating to the point that I don't think we're really going to be talking about inflation. Certainly not in the public discourse. Economists will be, but no one else will be. Are you guys on board with that? Anyone disagree with that perspective? Or you're both on board with that?

Ryan Sweet:                      Yeah, I'm on board.

Cris deRitis:                       I think it could be even faster.

Mark Zandi:                      Okay, and maybe this is a good time to reprise our debate...

Ryan Sweet:                      Oh God.

Mark Zandi:                      ... which we had in a podcast early on. It was our second, third podcast back in the spring of this year, and correct me if I characterize this wrong, we were focused on consumer price inflation, and our forecast was for it to settle back into around the mid two percent. Two and a quarter, two and a half percent, something like that. That's our baseline and still is, and that's where you landed, Cris. You said that's where we're going to go. 

Cris deRitis:                       Mm-hmm (affirmative).

Mark Zandi:                      Back to two and a quarter, two and a half. I was saying no, it's probably going to end up being higher than that. Probably north of two and a half.

Ryan Sweet:                      You were closer to three.

Mark Zandi:                      Three, but I didn't think it was going to land there forever at three. 

Ryan Sweet:                      No.

Mark Zandi:                      Yeah, that was kind of where we're headed. Two and a half to three, and you were less than two and a quarter. You were like two, maybe one three quarters to two and a quarter or something like that. Right, Ryan?

Ryan Sweet:                      Cris was two to two and a quarter, right?

Cris deRitis:                       I think so.

Ryan Sweet:                      [crosstalk 00:48:54] got it written all... Yeah. I think that's [crosstalk 00:48:54].

Mark Zandi:                      So, we were all looking at the core consumer expenditure deflator then?

Ryan Sweet:                      Correct.

Mark Zandi:                      Okay, fine. All right. 

Ryan Sweet:                      Now [crosstalk 00:49:04].

Mark Zandi:                      In terms of the core consumer expenditure deflator, there was two to two and a quarter for Cris. I don't think I was at three for the core consumer expenditure deflator. I was north of that, you were south of that. I know we're getting bogged down in the numbers, but bottom line, is everyone still happy with where they're forecasting inflation to go?

Ryan Sweet:                      No.

Mark Zandi:                      Okay, so where are you now, Ryan? By the way, I'm very happy with where I am. I'm assuming Cris is happy with where he is.

Cris deRitis:                       Oh, yeah.

Mark Zandi:                      Yeah, Cris is happy.

Ryan Sweet:                      Remember the bet was average over the next five years.

Cris deRitis:                       Oh, I forgot about that part.

Mark Zandi:                      Okay, I don't remember that.

Ryan Sweet:                      We got to check the tape. I thought we were talking about average. 

Mark Zandi:                      [crosstalk 00:49:46]. All right, so what are you saying, then? You're not happy with your forecast?

Ryan Sweet:                      No, because I think... [crosstalk 00:49:53]. Getting back to the psychology and inflation expectations, they're going to get pinned where the Fed wants them to be, and that's a little bit above two, so I think we'll be closer to what Cris is saying.

Mark Zandi:                      Oh, you know what, this is very crafty on Ryan's part. 

Ryan Sweet:                      What's crafty...?

Mark Zandi:                      He's very nuanced. What he's saying is, "I wasn't wrong. What happened here is the Fed changed its framework of monetary policy, therefore I'm changing my forecast." Like on the Keynes-

Ryan Sweet:                      The Fed was wrong. They did. When the facts change, you got to change your opinions.

Mark Zandi:                      Actually, that's very creative. Very good of you. [crosstalk 00:50:28].

Cris deRitis:                       That's a great quote.

Mark Zandi:                      That's interesting. Good point, though. That's a really good point. Okay, so-

Cris deRitis:                       Well, wait, wait, wait. But you're right. Your argument, as I recall, was demographics. You were arguing [crosstalk 00:50:41].

Ryan Sweet:                      It was demographics. It wasn't the Fed. 

Mark Zandi:                      He's changing his view, but...

Cris deRitis:                       Well, that's okay. The Fed is certainly part of that argument, but I wonder if his demographic outlook has changed at all. Is that...? No.

Ryan Sweet:                      Nope.

Cris deRitis:                       Okay.

Mark Zandi:                      You still think that's the big deal?

Ryan Sweet:                      And I think productivity's going to be a lot stronger than people think. As we talked on the past podcast, that's the firewall between a strong economy and inflation.

Mark Zandi:                      Right. Again, this positive supply shock lifting, and... What's that? Work from anywhere kind of situation?

Ryan Sweet:                      Yeah, work from anywhere, businesses during the pandemic invested a ton in equipment and software, so I think productivity's going to be stronger than it was. Much stronger than it was pre-pandemic.

Mark Zandi:                      Yeah, so that's a supply shock argument.

Ryan Sweet:                      Mm-hmm (affirmative).

Mark Zandi:                      That we're getting a positive supply shock, which is kind of... First, the pandemic initially is a negative supply shock, but we are going to get some positives out of this on the other side of it. Yeah, interesting.

Ryan Sweet:                      Yeah, I think to your point we're not going to be talking about inflation this time next year. It's going to be heading back towards the Fed's target, and then we're going to undershoot. We're going to fall below two percent for a period of time, and then come back up.

Mark Zandi:                      Our collective view on... I may be mischaracterizing this. Correct me if I'm wrong, but what we're saying is the pandemic is a negative supply shock, it obviously hurt growth and is causing inflation to rise, but it's not going to be permanent or persistent because inflation expectations remain well anchored. And moreover, a lot of the inflation is related due to the effects of the pandemic, and as the pandemic fades supply chains, labor market issues will iron themselves out and inflation will moderate and come back in. Where it actually lands, give or take, we're debating whether it's a little higher than the Fed's target, or the Fed's target a little bit below, but we're all still saying basically that inflation is going to get back down to something we all feel comfortable with that we're not going to be talking about. Is that a fair characterization?

Ryan Sweet:                      Yep.

Cris deRitis:                       Yeah, that's right.

Mark Zandi:                      Let me try one other thing out on you, because this is another strain of thought in the current debate and discussion around inflation. That is that fiscal policy is the cause of the higher inflation. That the American Rescue Plan... We've had a lot of fiscal support during the pandemic, beginning with the CARES Act back in March of last year, extending through to the American Rescue Plan March of this year, five trillion in total. 25% of GDP, that that is the cause of this higher inflation. What do you think of that argument? You didn't bring it up, so I don't think it's on the top of your list, but do you think this is playing much of a role here? Or any of a role? Having any impact whatsoever?

Ryan Sweet:                      I think you're talking a little bit of an impact. I think it helped exacerbate the supply chain issues, because there's economic payments. I think they should have been spread out over a period of time. There was just too much money going to people's pockets, and goods spending went through the roof and that exacerbated the supply chain problems that we have today.

Mark Zandi:                      Cris?

Cris deRitis:                       Yeah, I'd buy that. Some effect, but I would say actually pretty minor.

Mark Zandi:                      It's small.

Cris deRitis:                       Pretty minor.

Mark Zandi:                      Yeah. I can't connect the dots, to tell you the truth. I mean, the ARP, the American Rescue Plan really juiced things up when we needed it back in March of this year into April, maybe into May before the Delta variant of the pandemic hit. By the time the Delta variant of the pandemic hit, which was beginning in June and really, in July, August, and into September, the American Rescue Plan had really turned into... It wasn't a supportive growth, it was actually turning contractionary. It really wasn't providing much support whatsoever. The bulk of the stimulus from that was back in the spring. By the summer, that stimulus was largely gone and fading pretty quickly. Right now it's turning into a bit of a head wind to economic growth. The other thing is that demand is the channel through which the ARP, the American Rescue Plan, the fiscal support would influence inflation is through demand. 

                                             You're saying fiscal support, government spending, tax breaks, demand means inflation. But demand growth got hit hard in the summer. Demand growth came to a standstill because of the Delta variant. It's hard for me, in terms of the timing of all of this, and even the intuition behind it that you can connect those dots. I just don't see it playing a role of any consequence here.

Ryan Sweet:                      But what about this argument? You get the economic stimulus, which means a lot of demand, reduced inventories. And then when the summer came, Delta variant hit, supply chains got worse, there's shortages of things. That drove the prices of those things higher.

Mark Zandi:                      Yeah, I think that's a real stretch. I think the supply chains were getting back online. There were still problems. Labor markets were still a bit scrambled, but they were getting back to normal, and then the Delta hit and just exacerbated everything. Rescrambled everything. I don't know. I think that's a pretty weak thread, which actually is important, because the Build Back Better agenda, which is being debated now in Congress, people say that's going to be inflationary, which...

Ryan Sweet:                      Mm-mm (negative).

Mark Zandi:                      I don't know. Certainly not what's going on now is anything related to what's going on with Build Back Better. Anyway, we're running out of time and I promised that we'd keep this to the time. So, I'm going to stop right there, unless there's anything else you wanted to add. I thought that was a pretty good history lesson. What do you think? Should we do this again?

Ryan Sweet:                      Yeah. For sure.

Mark Zandi:                      I think the final point here I'd make is, and I've said this a few times on this podcast about different things and maybe about inflation, but we've got to be humble about this because inflation is a very... Everything economic is complex, but inflation is a particularly complex phenomenon, because Cris keeps pointing out it's also related on psychology and sentiment, which very difficult to measure, very difficult to gauge. So, we've got to be humble here in terms of our understanding. It's rather limited, and it makes this a particularly uncertain period going forward.

Cris deRitis:                       Well, I'd say we have to be humble, certainly, but we also have to learn lessons.

Mark Zandi:                      Didn't I say humble? Did I say humble?

Cris deRitis:                       You did say humble. Yeah, I'm agreeing with you. We have to be humble, but we also have to learn the lessons from the past. Like the gold standard, we shouldn't be spending any more energy on that topic and focusing on the future.

Mark Zandi:                      Agreed.

Cris deRitis:                       But here we are.

Ryan Sweet:                      Also, that the money supply causes inflation. That used to, but that's no longer the case.

Mark Zandi:                      Yeah.

Ryan Sweet:                      So, you got to learn that these relationships... We talked about the Phillips curve, M2 money supply growth, those relationships change over time. You don't want to get wedded to your models.

Mark Zandi:                      Totally.

Cris deRitis:                       A long run M2, right? You're on board with that?

Ryan Sweet:                      Yeah, long run, but not now.

Mark Zandi:                      All right. With that, Ryan, I'm looking forward to the field trip to the Second Bank of the United States.

Ryan Sweet:                      I like this field trip idea.

Mark Zandi:                      [crosstalk 00:57:55]. We got to get going. We're going to call this a podcast. Hopefully you have a wonderful Thanksgiving, and we'll see you on the other side. Take care now, bye bye.