Grant's Current Yield Podcast – Episode: "NOT SO GOOD NEWS"

Date: October 18, 2024
Host: Jim Grant, with Evan Lorenz
Guest: Lakshman Achuthan (Co-founder, Economic Cycle Research Institute - ECRI)

Episode Overview

This episode delves into the perplexing persistence of inflation in the U.S. economy despite traditional signals and theories suggesting a decline. Jim Grant (host), Evan Lorenz (deputy editor), and guest Lakshman Achuthan discuss the limitations of economic theory in predicting inflation, the cyclical nature of both economic activity and inflation, and the challenges policy makers face as they attempt to steer the economy amid uncertainty. The conversation centers on the ECRI’s forward-looking inflation indicators, the durability of current inflationary pressures, historical parallels, policy responses, and the risks of complacency.

Key Discussion Points & Insights

The Current Inflation Landscape

• Headline: Despite declining from recent peaks, inflation remains "on the simmer" and is not subsiding as quickly as hoped.

  • Lakshman Achuthan: "The not so good news is that inflation is still simmering. We've certainly had a come down in the pace of inflation, but it's just not subsiding as quickly as I think many have hoped." (02:31)

• Expectation Discrepancies: Many expect inflation to meet the Fed's 2% target soon, but leading indicators suggest upward surprises are more likely.

  • Lakshman: "The surprises are more apt to be to the upside. Especially if everybody thinks inflation is going down towards the Fed's target..." (06:27)

Competing Theories of Inflation

• Monetary, Fiscal, and Expectations-Based Theories: The group explores the intellectual confusion in the profession; no single theory has triumphed.

  • Jim: "Economic science has not yet solved the mystery of the basic cause of inflation." (03:05)
  • Jim (on multiple theories): "Inflation is always and everywhere a monetary phenomenon. That's Milton Friedman... And then we have a competing theory by John Cochran... who says that inflation... is a fiscal phenomenon... and then the phenomenon of expectations." (03:04)

• Critique of Economics as 'Physics Envy': The panel lampoons economists' desire for tidy predictive models in a world filled with unpredictable human behavior.

  • Lakshman: “Economists are burdened with this physics envy... they want to make a model that'll tell you everything... Fear and greed are alive and well and, and they're tough to model." (04:56)

ECRI's Approach: Monitoring Cycles

• Cycles Over Models: Instead of prescription, ECRI tracks recurring cyclical patterns using leading indicators across money, credit, bottlenecks, labor tensions, and more.

  • Lakshman: "...monitoring patterns that show up at cycle turns. Our premise is that there's a cycle in a free market-oriented economy where fear and greed is let loose." (05:13)

• Recent Track Record: ECRI’s indicators successfully called the upturn in 2020 and the downturn in 2022, now see inflation's descent "flattening out" and turning slightly up.

  • Lakshman: "Inflation gauge having duly nailed the upturn in 2020 and the downturn in 2022... right now, having come down, it's flattened out, it stopped falling." (06:07)

Why Isn't Inflation Falling Faster?

• No Hard Landing: Economic growth is slowing but not crashing; services and construction remain robust.
• Global Backdrop: Global inflation is also bottoming—U.S. is subject to international forces.
• Fiscal Profligacy & Labor Market: Large deficits, post-COVID labor disruptions, and “labor hoarding” by employers maintain wage and price pressure.
  • Lakshman: "A labor shortage collided with... more stimulus than any of us have seen before." (11:47)

Historical Context and Parallels

• Demographics Are Not Destiny: Example given of U.S. 1880–1900: population rose 50%, but prices fell 14%, countering demographic-inflation links. (10:02–10:15)

• Peacetime Inflation: The 1970s showed that peacetime, non-war inflation was possible for the first time in U.S. history due to shifting policies.

  • Jim: "Until that point, there had never been a serious protracted inflation except in a time of a GDP-scale war..." (10:17)

• Volcker’s Missed Predictions: Even noted figures (e.g., Paul Volcker) misread the persistence of inflation.

  • Jim (quoting Volcker, 1971): "The momentum of inflation has clearly been checked." (15:32)

The Future Inflation Gauge—What Leads Inflation?

• Not everything is predictive: ECRI’s gauge monitors what historically turns before inflation changes; not everything leads, e.g., wages are lagging, not leading.

  • Lakshman: "Wages don’t turn in front of a turning point in inflation. Those lag." (17:22)

• Early Signals: Money/credit, input prices, bottlenecks, labor market tensions, global currency moves.

  • Lakshman: "One of your favorites would be money and credit... There are some tensions in the labor market... quite a bit of interaction with the rest of the world..." (18:21)

• Monitoring, Not Modeling: “We don't predict the predictors, we track them... We’re monetarists with an i; we're monitoring the indicators." (18:26–19:22)

Societal Attitudes and Policy Response

• Recurring Labor Tensions: Society's tolerance for labor action shifts over time, as shown in '80s (Reagan and air traffic controllers) versus today (longshoremen).

  • Jim: "President Reagan says [to air traffic controllers] no you won’t... He fired the union… Now we have the longshoremen... President Biden said you go guys, we're with you..." (20:15)

• Political Echoes of the 1970s: Early inflation cycles lacked widespread disgust; it only grew when inflation’s impact was pervasive.

  • Lakshman: "There is a rhyme going on there... almost the Fed is, is kind of ready to do a victory lap, right?" (23:59)

Policy, the Fed, and What Lies Ahead

• Fed Cut Even as Data Is Mixed: The Fed has cut by 50 basis points amid persistent positive economic data and declining inflation.

  • Evan: "The Fed has two mandates. It's declared victory on the inflation front with a 50 basis point cut and it seems to be worried about the economic front..." (24:56)

• Economy Remains Resilient: Despite indicators of a slowdown or even recession, hiring continues, with wage earners squeezed but asset owners prospering.

  • Lakshman: "Wage earners are certainly squeezed by high prices... Asset owners... are actually doing really well." (25:34)

• If Lakshman Were Fed Chair: Cautious approach—wouldn't rush to cut further, as current indicators point to sticky and potentially rising inflation.

  • Lakshman: "Honestly, I'd resign... But... looking at the forward looking inflation indicators, they're not falling. So I would be quite cautious here." (28:01)

• Dangers of Complacency: The real risk is that a stronger economy plus further stimulus (from either party) could reignite inflation, undermining assumptions in markets—especially in commercial real estate and private equity.

  • Lakshman: "If you get a stronger economy and more inflation, you may get more inflation. And then many assumptions are challenged, including... the solvency of the great private equity industry." (29:56–31:22)

Notable Quotes & Memorable Moments

• Lakshman Achuthan (02:31):
  "The not so good news is that inflation is still simmering. We've certainly had a come down in the pace of inflation, but it's just not subsiding as quickly as I think many have hoped."

• Jim Grant (03:05):
  "Economic science has not yet solved the mystery of the basic cause of inflation..."

• Lakshman Achuthan (05:13):
  "Our premise is that there's a cycle in a free market oriented economy where fear and greed is let loose..."

• Lakshman Achuthan (06:27):
  "The surprises are more apt to be to the upside. Especially if everybody thinks inflation is going down towards the Fed's target..."

• Lakshman Achuthan (11:47):
  "A labor shortage collided with... more stimulus than any of us have seen before. And so what do you expect? Of course, it's going to get tight..."

• Jim Grant (15:32):
  "The momentum of inflation has clearly been checked. The year is 1971. Who said it? ...Paul A. Volcker..."

• Lakshman Achuthan (18:26–19:22):
  "We don't predict the predictors, we track them, we monitor them. And a horrible, horrible economist pun here is that we're monetarists with an i, we're monitoring the indicators."

• Lakshman Achuthan (28:01):
  "Honestly, I'd resign... But... looking at the forward looking inflation indicators, they're not falling. So I would be quite cautious here."

Key Timestamps

• 02:31 – Lakshman Achuthan: Core inflation remains sticky; upside risks prevail.
• 03:05 – Jim critiques the lack of consensus on the causes of inflation.
• 05:13 – Lakshman explains ECRI’s cycle-based monitoring approach.
• 06:27 – Indicators suggest surprises will likely be inflationary, not disinflationary.
• 11:47 – Lakshman on COVID era labor & fiscal disruptions' lingering impact.
• 15:32 – Jim notes Volcker’s premature inflation optimism in 1971.
• 18:26 – Lakshman: "We're monetarists with an i"—focus on monitoring rather than modeling.
• 25:34 – Lakshman: K-shaped economy explained—wages squeezed, asset owners prosper.
• 28:01 – Lakshman (asked about being Fed Chair): advocates caution, as inflation is cyclical and not beaten.
• 29:56–31:22 – Discussion of how policies, deficits, and easing risk reaccelerating inflation; implications for markets.

Tone and Style

The conversation is witty, collegial, and skeptical, blending deep historical context with irreverence for official theories. The discussion remains both accessible and intellectually rigorous, with frequent asides, inside jokes, and references to economic history, policy personalities, and academic debates.

Summary prepared for listeners seeking a deep but entertaining understanding of why inflation still matters and why easy answers remain elusive in 2024.