Join Danielle DiMartino Booth as she delves into the complexities of inflation. Discover the forces that shape our economy, from Federal Reserve strategies to unprecedented government spending. With Danielle’s clear insights, understand how these factors influence your daily life and financial future.

CHAPTERS:
0:00 Danielle DiMartino Booth
2:14 Pandemic
4:20 Transmission Mechanism
9:00 Disinflationary Forces
14:40 Consumer Spending
17:50 Wage Disinflation
20:19 Rate of Inflation
22:52 Truflation
23:53 AI Substitution Factor

TRANSCRIPT FROM VIDEO:

00:00
Danielle DiMartino Booth, she’s CEO and Director of Intelligence for Quill Intelligence LLC, a research and analytics firm and the author of the amazing bestseller, Fed Up, an insider’s take on why the Federal Reserve is bad for America. Danielle, it’s the front page of the Wall Street Journal above the fold. Fed may slow interest rate high pace. She is considered one of the best in the street and I happen to respect her judgment as much as anyone else.

00:29
here today with my great friends at ITM Trading. This is going to be the first in a series of what’s going on in the economy, what’s happening in the financial markets, and how you should be framing a lot of what you hear, whether that’s on social media or you’re seeing it in the press or you’re talking about it with your friends, colleagues, and family. So let’s start off by saying what caused…

00:57
this current bout of inflation, because I think that it’s really important that you put in your mind the term transmission mechanism. I’ll be bringing that up over and over again, because it’s critically important. Tiny bit of background, in January of 2012, then Chair Ben Bernanke at the Federal Reserve, my former employee, rolled out a 2% inflation target. The goal of the Federal Reserve was to get to this ideal

01:26
2% per year inflation.

01:29
A lot of us at the time I was I was working at the Fed at the time disagreed with this. We felt that the best inflation rate should have been zero. No price movement at all such that the buying power of your dollar doesn’t decline as a factor of time. But Fed officials were pretty confident that they they wanted that 2% target. And over the course of basically the next decade nothing happened and the Fed was not able to hit that 2% target in what we measure

01:59
U.S. government. We measure the consumer price index. We measure the cost of shelter and food and energy and the things that we buy and the services that we consume.

Pandemic

So what happened after the pandemic? This first slide I think really helps understand the magnitude of what occurred in terms of spending.
02:25
by the federal government and how that differed historically, as well as the transmission mechanism of all of this great federal spending that we hear about all the time that has been a very real phenomena. If you will go back to the 2009 great financial crisis, the amount of GDP that was spent by the US government,

02:51
to address what at the time was the greatest financial calamity since the Great Depression to hit the United States economy, but 6.1% of GDP. That was what was expended. If you want to go back further to your high school class in history and learning about FDR and the Great Depression and the New Deal and all of the many things that were produced during the New Deal, whether you’re talking about

03:19
the Holland Tunnel or the Hoover Dam, a lot of great big infrastructure projects that came out of that era. But over that span of time, 40.1% of US GDP was expended. And we had a lot to show for it over a substantial number of years. Now go to the post pandemic era and you see how long that green bar is. 50% of US GDP was spent.

03:49
amount. If you look at the last two administrations and what has been spent at the federal level, it really does wipe out anything that we’ve seen in U.S. history save the New Deal era and World War II mixed together.

04:05
But when you combine the persistence of what the government has spent with the depth of what’s been spent, right, 50% of GDP, we’re talking about upwards of $12 trillion.

Transmission Mechanism

But remember what I said first, transmission mechanism. In all those years that former chair Ben Bernanke was trying to hit an inflation target, the easy monetary policies of the Federal Reserve at the time that concerned many would generate

04:35
did not. We could not hit that 2% target. The reason was the money was being made cheap to the banks and to lenders think of car lenders and and companies that that underwrite mortgages so you can buy a home. That money was cheap for them. And then they had to go and extend it to you the borrower at a low enough rate to entice you to borrow

05:05
and spend money. What happened after the pandemic was that we revolutionized the transmission mechanism. We gave money directly to U.S. household. And when I say directly, I mean cash, direct deposit in U.S. household bank accounts. And that completely flipped on its head how

05:29
Cheap money policies typically work by giving money directly to individuals with the highest propensity to spend. We created inflation. Inflation rose to upwards of 10 percent at the headline. This is the Federal Reserve’s preferred inflation metric. Right now, the difference between how the Fed prefers to measure inflation, which has a much lower input for shelter,

05:59
which you and I both know, right? That’s the biggest expense that we have month in and month out. But the Fed’s core price personal consumption expenditure, that gauge is almost one full percentage point below the core consumer price index CPI. But you see that great big spike that happened after the pandemic that drove inflation well off of an established trend line.

06:29
was the reason was because we gave money directly to individuals. There were lines around Gucci stores and Chanel stores. There were kids in their basement doing day trading with day portnoy. But money was everywhere. It was conspicuous in its presence and flowing whether it was unemployment insurance benefits that continued to be extended and extended or the

06:59
months. That was a ton of money that was put in your pocket if you were taken out of the workforce but quickly returned as we saw that V-shaped recovery with people flooding back into the workforce but yet the US government did not stop spending money. And in the end one of the biggest sources of money that was sent out was the, we’ll call it two trillion some odd dollars and what we

07:29
other loans that the government extended that were completely forgiven. You add all that up and you got to a couple of trillion dollars and then the party started to end. You see inflations come down dramatically as the government slowly stopped sending cash out and actually started asking for cash to be repaid. Upwards of 9% of student loans repayment started

07:59
But 9.8% of those student loans repayments that started were higher than $500 a month. 9.4% were all the way up into the thousands per month. So instead of…

08:15
US households being awash in cash and liquidity after having a moratorium on paying those student loans back. They actually had to start paying them back. Of course, this November the 1st, it really counts because for anybody who has chosen not to repay their student loans since November 1st of 2023, of course, all of those late payments will then be reflected poorly in their credit report as being in arrears.

08:45
seeing the same phenomena when people had to start paying their auto loans back, or when people had to start paying their rent. We’re seeing evictions go up. We’re seeing foreclosures rise. We’re seeing auto loan defaults at the highest that we’ve got on records. These are the opposite of inflationary impulses. These are disinflationary forces that are now percolating through the economy. Why do we care?

Disinflationary Forces

09:15
Why do we care about what we’re spending and how we’re spending and if we’re spending more? It’s because U.S. gross domestic product, the economic output of the United States is 70% consumption.

09:31
We are as a nation, economically speaking, what we consume. The top 20% of income earners in the United States are responsible for almost 40% of consumption. Not many of them, of course, have student loan payments that they’re concerned with. They’re making more than $250,000 a year on average. But what about the cohort?

09:54
right underneath them that’s responsible for another 20% of U.S. consumption, a very viable, large share of U.S. households. That particular cohort, they’re the ones that now have a mortgage to pay. They have rising property taxes. They have homeowners insurance premiums that have gone up tremendously, especially in the cases of Florida, Texas, no-income states that were flocked to

10:23
to get a cheaper way of living without having to pay a state income tax. And now all of a sudden these COVID refugees who moved to states where they could have a lower cost of living after the pandemic have seen their cost of living begin to skyrocket. A lot of people who left urban centers, as we know, car insurance is up 21% year over year. And the reason I’m showing you this second income cohort,

10:53
They make between $125,000 and $250,000.

10:57
they really are in the crosshairs of repaying student loans, having larger obligations than other Americans who make less money and are able to get continued assistance and assistance from the federal government in the form of transfer payments in one form of another. I bring up this next chart to show you how dramatically government spending impacted things

11:27
think about. I certainly don’t fall asleep at night wondering, gee, what’s the price of a used Rolls-Royce these days? I just can’t imagine. And yet, we saw, and you see with that green line, that following the forgiveness of some $757 billion of paycheck protection program proceeds, that the cost of a used Rolls-Royce went quite, quite high. And that’s, of course, because people were taking the money that was

11:57
designed to keep their employees on the job. Millions and millions of Americans were instead taking this money and putting it into whatever it is that they had been wanting to buy. And so you saw reports come out that said luxury car sales are at record highs and luxury car prices are at record highs. But note in the last slide right we were talking about the top quintile. That’s the top 20 percent. And then the second quintile the second.

12:27
20% that top 40% that’s responsible for together 61% of us consumption but it’s that second quintile of earners That make between again 125 250 thousand dollars somewhere in there. It’s that Quintile and you say to yourself they make good money

12:51
But if you look at that fourth set of bars, you see that their net worth, the money that they’re worth when you look at their assets has actually decreased. That yellow bar is lower for that quintile since the pandemic hit. The orange bar is for 2019 before the pandemic hit. The purple was kind of right snack. And of course that third big stimulus check for $1,400 went out in.

13:21
in 2021, Trump’s first two checks, $1,200. Then he could only get the $600 of that $2,000 that he wanted to spend in December of 2020. That balance was made up with that first check that President Biden mailed out for $1,400. But all of that cash flowing through the system taught Americans to live a different lifestyle. Some of them even flaunted the fact, right?

13:50
I took out my PPP loan and I bought a Lamborghini.

13:54
Because why not brag, right? Why not brag about ripping off U.S. taxpayers? But again, the prices of everything went so high because of the transmission mechanism. The money was not going from the Federal Reserve making interest rates lower and saying, banks, money’s cheap, extend loans at will because it’s cheap for you to borrow banks so you can lend at really low rates. That transmission mechanism broke down after the pandemic

14:24
people money in cash and boy did they spend it on whatever their heart desired including a fancy black Lamborghini in the palmetto state of

14:34
of South Carolina. But now we see what the other side looks like. So this is kind of the last 52 weeks of spending. And as you can see, going into the most recent holiday season and into the beginning of 2024, we really have seen what we consume falter and come down appreciably even even looking at Bank of America’s proprietary data on what

Consumer Spending

15:04
credit and debit clients are spending. So this is very real time, very real data.

15:10
the teal and the fuchsia lines, you see that even online shopping has dipped below the zero line in addition to brick and mortar spending, which we know has has been dying a slow death, right? 2024 has started out with announcements of thousands upon thousands of stores across the United States being closed. As we segue more and more away from a brick

15:40
sending a friend a link and saying, hey, what do you think about this? And buying it online, but even online shopping has turned down. And again, we’re talking about inflation today. These are very disinflationary impulses, very disinflationary pressures that are being exerted on the US economy. Another part of why we’re spending less is because if we have a paycheck, if we’re not part of the 250,

16:10
25,000 people who in the first quarter of this year have received an announcement that they’re going to be laid off and losing their job. So I’m speaking now of people who are collecting paychecks. We’re spending more than we ever have. This data goes back to 1960. But we’re spending

16:31
record levels, record percentages of our income, of our paychecks servicing the debt that we have. The United States government gave households tons of cash, but they also kind of revitalized the way U.S. consumers framed their spending habits. And when the U.S. government money went away, they said, but I want to keep spending like I was spending. So they took out credit card debt.

17:01
and they took on auto loans, and they took on buy now pay later, and they took on personal loans. In any event, around $1,750 per capita is being expended on interest. These are really extraordinary numbers, again, at a time when the biggest driver of inflation is, of course, what you make. The more you make, the more you can spend. The more you can spend,

17:31
As an aggregate U.S. economy, as all U.S. households combined the sum of that, the more that we can all spend, the greater the demand. And if supply holds constant and demand increases, then we’re going to see prices go up. That’s exactly what we saw. But when the price of things goes up, when the demand for widgets and things and new back decks and new furniture and a new wardrobe.

Wage Disinflation

18:00
because I’m working from home. Most of us are no longer working from home, right?

18:06
But all of the things that we bought during the pandemic, all of the goods that we consumed, all of the vacations that we took, all of that excess demand required that companies go out and spend more on employees. And as you can see that lilac line, indeed.com is way more than just an aggregator of employment information and job postings. They also have a fabulous wage tracker that breaks down.

18:35
If you’re a low wage earner or a middle wage earner or a high wage earner, what your demands can be of your employer. And at the very peak of what Uncle Sam was handing us in cash and we were spending the lowest income earners, whether it was somebody to change the sheets in the hotels that were full of people spending all this stimulus money on vacations.

19:01
or whether it was individuals who were making so much money not working that they said, I don’t need to flip burgers anymore, I’m out of here. So you hear about Chipotle paying $18, $20 an hour plus benefits. So at the peak of that cycle the lowest income earners were demanding nine and a half percent wages for heaven sakes. That was just enormous and the highest income earners of course you you notice that they have the lowest

19:31
That green line on the right hand of the slide, you’re seeing the difference between the Atlanta Fed wage tracker for people with college degrees. Normally people with college degrees, going back a few years, that red line in a normal, under normal circumstances was above the blue line, right? You command more wages for having a higher education. But during the pandemic, again, that dynamic was flipped on its head.

19:53
We have started out in November 2022. We started with amazon.com cutting 10,000 jobs in technology and in their headquarters. Those are called white collar positions. So your highest wage payers, those are the ones who’ve seen their incomes hurt the most in the current labor market recession that we’re in and they are getting the least in terms of wage gains. What we hear a lot about today is whether or not

Rate of Inflation

20:23
current deficit spending can maintain the rate of inflation that we’ve seen in recent years. Because, again, we’re spending money right now as if we’re fighting World War III on three different fronts. We are spending more money than we have since World War II. And isn’t this spending, Danielle, going to end up manifesting as sticky inflation? Well, the thing is, it’s…

20:53
We’re back to that terminology of the transmission mechanism. So right now, the kind of money that’s being spent on electric vehicle initiatives, on semiconductor factories, on infrastructure, on DEI and ESG initiatives, we call that pork barrel spending. And we call it pork barrel spending because you have to go out and you have to hire unionized workforces. You have to pay somebody somewhere.

21:22
to get the permits, there’s probably some greasing of palms and corruption involved. And that’s why you never get the same bang for your buck as you do with government paying for projects as you would if you just stop somebody on the street and said, here’s $1,200 in cash, go spend it. Your transmission mechanism is much, much different. And I think that that’s why we have to appreciate.

21:47
why we’re seeing disinflationary pressures continue, whether you’re talking about.

21:54
what you’re paying for clothes or hotels. We’ve seen occupancy come down for a record number of weeks because people are running out of the discretionary portion of their budget is what’s being crimped the most. And that’s why we’re seeing disinflationary pressures outside of essential spending. You’re spending more at the gas pump than you want to. Many of you are spending more at the grocery store than you want to.

22:24
areas of inflation over which the Federal Reserve has absolutely no control. And the more that we’re spending for non-discretionary essential purchases, the less we can spend for everything else. That’s why Nashville has an average of four months free. If you’re getting into a new apartment, that’s why apartment rents are coming down. And that is why house prices, which have finally started to turn and come down.

Truflation

22:53
Truflation, which I suggest you track, T-R-U.

22:57
flation. It’s something you should bookmark and track every day. It’s real time inflation data based on millions and millions and millions of prices that are tracked on a day to day basis. I will leave you today with one more note, if you will, on inflation in the United States. 75% of firms that were queried in the last year have adopted automation to replace employees.

23:26
factor when you can substitute one input for another even if you’re talking about the input of labor which is the

23:35
biggest source of cost pressures for companies. But when you can substitute a cheaper factor for a more expensive factor, you’re going to cut costs, you’re going to make your shareholders happy, you’re gonna improve your profits. And that of course is the reason that companies are in business. This is a capitalist country. But we know from the Richmond Federal Reserve, Duke, CFO, Chief Financial Officer Survey, that 75% of companies in the last year

AI Substitution Factor

24:05
More than five employees have adopted AI to replace employees. About 45% of companies that are smaller.

24:15
than that have adopted AI to take down that wage inflation that had become so crippling for them. And obviously debilitating for-profit margins, 85% of those who adopted automation to replace employees did so for the purpose of cutting costs. And that is something that we are continuing to see in 2024.

24:41
You can always reach out to me, ask me questions, read the Daily Feather, learn more that way. And I look forward to any questions that you can get to me, as well as any feedback. And I thank you for your time today. Take care.