Welcome. Thank you for joining us for this edition of the Modlin Global Analysis Podcast. This week we are focusing on inflation, what it means, and both inflation in the international sense, with a number of countries and regions we're going to focus on. As well as in the United States, again, we're going to be talking about this monetary phenomenon, what prices? Changing and what they mean for consumers and how we define that and we're not talking about inflated egos or the inflated value of my baseball cards. We're going to emphasize the consumer aspects and the costs that they experience through this, and this week, I'm glad to be joined again by Dan Modlin, who has a series of interesting questions on inflation.
Dan
Kevin, we hear a great deal of talk about inflation, obviously, and a lot of people when they're in the grocery store certainly feel they're seeing the effects of inflation, but. I wonder if it might be a good idea just to start with an actual definition of inflation.
Kevin
Great question. First off, I feel that sentiment as well. I'm one of those penny pinchers and I go through the grocery and I notice when butter and bread go up $0.10 and think about ways I can compensate for that. But inflation is about the increase in prices. And they're different people that have debates about what causes inflation. And everything, but it's first important to note that this is about the increase in price across the board. For consumers, so if. The price of gasoline, or the price of Wheaties increases dramatically. That is not inflation. That is a phenomena related to the supply and demand dynamics of those goods. This is an across-the-board phenomena where a large basket of goods. Have increased in price overtime and that it is noticing that. It's a distinct phenomena that has to do with the supply and demand for goods and services, but how this intersects with the quantity supplied of money and we know throughout history and we know throughout American history. Inflation is caused by a lot of extra money in the economy, so that individuals need to use more money to buy a similar amount of goods that they could buy a few months earlier.
Dan
Let's talk a little bit about that. We hear obviously the partisan politics a lot discussing this. Your legislation causes inflation and your legislation causes inflation and these kinds of accusations float around a lot. But let's talk about the basic causes of it. What do we see as primary causes of this trend?
Kevin
Yeah, that's a great question. And what's important with that also is, is that there's a rich debate about this. And so it's not just a debate among policy actors. There's a debate amongst the academic classes and what they think about that. One of the things is it relates to the conversation, the points that we just had is people will associate increases in prices and say that that is all inflation when in fact it can be changes in supply and demand. If producers decide to dramatically reduce the supply of oil or reduce the supply of Wheaties. We can expect the price to increase, and that is related to. And to the global market, having the demand for those products, that is a very different question than the global supply of money and specifically the supply of money within the United States and now which is circulating throughout the economy. So our both our policy actors. In the Federal Reserve. We'll try to regulate the supply of money in an effort to control inflation, and we'll have to have a very serious conversation to explain what went off the rails in the last few years. But it is true that certain policies can contribute to inflation. Both the two big effects are how much a country is spending and how much are they taxing. So how much is basically being put out there in the economy and circulating around? What are the trillions of dollars doing that and how much is being taken in through taxes that also regulate that, so that perspective? Is an argument of what we call fiscal policies, so that taxing and spending of the federal government. The other arm that has very significant influence, is what they call monetary policy, and that is interest rates that are put on savings and the amount that we borrow throughout our economy, so the interest rates are going to influence how much money is circulated. So if it's more expensive for me to buy a house or to buy a car and everything, this has a way of taming down the amount of activity and economy and therefore taming down the circulation. So it's both the quantity of money and the amount that is circulating that both these instruments that we call fiscal policy, which again is congressional and presidential action and then Federal Reserve regulating the supply of money.
Dan
OK, now we tend to focus on inflation domestically in a lot of our conversations with, as you say, when we go to the grocery store or buy Wheaties or whatever, we're buying. But what about the situation in Europe?
Kevin
So what's interesting in many regards is both the United States and the EU. We started to see an increase in inflation around the same time period, and we both continue to struggle with this problem. What's also fascinating is the policies chosen to address it have differed, and the policies around which may have contributed to it have differed. So it's very difficult to know all the causes of this, right. So if we really want to know what's going on. And not just what the arguments are, but to really unpack what's going on? It's more difficult. What we do know is that both areas, the European Union and the United States had as to the whole world experienced a pandemic, but many of those other regions don't seem to have had the same inflation effects, right? So that's a hard thing to control for, is it? The policies that both regions instituted during the pandemic that could be in place so. Particularly the amount of fiscal stimulus, meaning more government spending on a whole host of things. So we know that both in the healthcare sector, but especially providing relief for workers throughout the closure period and afterwards played a significant role in the federal balance sheet and maybe that is circulating a lot of money. It was kind of in excess to that. It meant a social need, but that didn't mean that it created extra money in the system, especially in a system where people were probably spending less money to begin with because they had fewer activities and social choices and opportunities to spend money. That is something that does mirror the European experience overall. That is a background, but Europe has had a much more difficult time taming inflation than even the United States had high single digit inflation. Throughout the last few years. Now it's tamping down to about 4%. Again, the goal is to have about 2%, so it is making some progress and the Federal Reserve came out and announced that they a few days ago that they were not going to raise interest rates, but in the announcement and another signals a lot of people anticipate at a quarter point increase will happen in the next time. So we're seeing the United States policy be incremental and measured and still, conveying a commitment to addressing inflation, whereas the European side has increased rates more slowly than the United States and they are being more cautious with this policy and they still have about 9% inflation across the board. Another challenge they have and they did raise rates recently as well is the experience that is going on in Germany or what's going on in Europe, or in Spain. All of these different countries are experiencing inflation differently. So you have one tool that has different effects throughout the European Union and this creates different pressure points that basically encourages incrementalism and increasing rates, which will likely sustain higher inflation, longer than maybe socially desired, and definitely not desired even by the policymakers. But again, this is really challenging to understand because I would argue that if you read the biographies of central bankers and you and academics. There was a sentiment that the economic class had figured out how inflation happened, so this was a complete surprise to all across the board in that regard. So it's both interesting to look at. Europe and the United States and compare the experiences and also notice how different their approach is, and I think Europe is going to have a much more difficult time climbing out of this inflation trap, whereas the US is slowly, maybe not as desired, but is getting to a place of maybe a more normal inflation rate.
Dan
So Kevin, if you could give us a summary here, what's going on economically in China?
Kevin
So just as it's important to know, the economic activity in the United States and in Europe. Other economic powerhouses are also not stagnant, and they're having effects on our global order, and there is increasing amount of reports. There was a story in the Wall Street Journal recently about expectations that economic slowdown is more persistent and maybe deeper than what some had anticipated for China. And there's talk of there being a greater fiscal stimulus program for China throughout. The system and this approach is expected to mirror what previous programs have instituted to try to boost up the economy. So a lot of this is going to involve borrowing, which is going to be problematic for the balance sheet throughout the Chinese system, both at the national level. And also importantly, at the provincial and the local. Levels how they will. Deal with this round of debt, but it's going to try to spur more employment and more spending through infrastructure projects and local initiatives like that. So it's kind of this confluence of many economists and. And China went to school in the United States, and they learned Canadian stimulus. But they're also adhering to the principles and the systems within China. What that will mean for China going forward is going to be really important again. China is this unique economic engine that seems to produce about 30% of the global products of the world. They're consuming a lot more of those that share and they are expected to consume more of that going forward through their dual circulation. But this slowdown is going to make it harder to hit those targets, hit those objectives going forward. So we're going to have to keep a close eye on. How that develops and we're going to have to keep a close eye on how these things affect policy going forward. I think everybody's going to ask more serious questions globally about what inflation looks like, because in fact, when I look at it, there were a number of mistakes made about what they expected. Inflation would be, maybe because it's confidence. And assuming what it looked like and what causes it, and we're going to have to revisit some of the ideas that academics that have had around this idea, they call fiscal dominance that even though we haven't a monetary arm, the Federal Reserve have some autonomy in decision making. It's always going to be subject to. What the federal government taxes and what they spend, it's the Federal Reserve always has to internalize. The choices and that's the idea of fiscal dominance. So we'll have to revisit those arguments as well as. Really try to see how that's going to affect policy. But I do think it's important to note just these distinct changes in each of these regions and how they're going to affect things going forward.
Dan
Very interesting subject to taking a look at inflation, not only domestically but also in a global perspective. Kevin, thank you very much for giving. Us that update.
Kevin
Thank you very much for your time and thank you all for your questions.
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