The Inflation Episode: What Will Happen & What Do We Do? w/ Dr. Tom Lehman

Doctor Layman, welcome back to capitalism dot com. It's been a year since we've hung out here, so thanks for coming back.

Thank you for having me. Glad to be here.

For anyone who didn't hear our first podcast episode Together, Dr. Lehman is the economics professor at Indiana Wesleyan University. That changed pretty much my viewpoint on the world. I think starting economics made me more of an educated person than any other field of study, besides maybe 15 years as an entrepreneur. But Dr. Layman, when we were here a year ago, we were right in the middle of the government's response to the pandemic. And my first question to you is, are you surprised in any direction about how the markets and how the economy has responded to the government policy of the last year?

Yes and no. I guess.

The surprising aspect of it is that as I look out over macroeconomic statistics and data today.

On the surface, the economy looks very strong and very good. And I guess over the past year the surprise has been just how quickly the dip. It was, of course, not a conventional recession. This was not a conventional. From the perspective of most economists, me included, this would not be your typical business cycle kind of recession. This was very much a kind of random exogenous shock outside the system, just disrupting things, government policy responses, disrupting on the supply side. But I'm, I'm pleasantly surprised at how things have responded very quickly. Now you'll notice I said, you know, on the surface, things look pretty strong, pretty, pretty good. So that would be the, that would be part of the surprising aspect of this, I guess, more recently.

What we talked about a little bit last year, and what is maybe not as surprising is the rise in inflation that we are now seeing, and for two reasons. One, because of.

Just the mathematical nature of how the price level is calculated, you're going to get some bump in month to month inflation rates, increases in the price level from last year to this year because of the reduction in the price level or the kind of, the flatlining of the price level last year at this time. And so with the robust bounce back that we've got, it's not surprising to see some inflation there.

Dr. Lehman, I want to make sure I heard that correctly, because what I think I just heard you say is that the inflation, as is being calculated, is compared to last year when there was a dip. Am I hearing you correctly?

That's correct, yeah. So if you have a price level.

About it usually means like we kind of assume prices are either staying flat or going up, but I've actually never heard it compared to the inflation compared to the dip of last year, which would actually make the inflation data less shocking to laymen like me who say 5, 6% and going up is kind of concerning.

It is. Well, I don't mean to downplay that because there's another factor behind this.

The supply constraints and the huge increase in demand on the demand side of the macro economy because of the major fiscal and especially monetary stimulus. So you, you've got two factors playing a role here. One is just the math, just the price level last year flatlining and this year going back to a more normal trajectory so that in the summer months this year we're seeing a bigger increase in year over year inflation. As you said, we're pushing, you know, 6% now in the CPI, 5% roughly that in the core, stripping out food and energy. You're seeing the same thing in the GDP deflator. But there's the other aspect of this. It's not just the math. It's not just this is what Powell is looking at at the Fed and saying, well, it's just transitory. This is just transitory inflation. We'll get out of this, it'll go down. I don't necessarily believe that because the other piece of this is the major increase in the M2 supply of money over the last year which we were talking about already, as you recall, a year ago at the onset of that, when we had a really aggressive return by the Fed to quantitative easing and we had a major, you know, kind of several successions of fiscal stimulus, ending the Trump administration and beginning the Biden administration which was financed, you know, let's be honest, by Federal Reserve monetary policy, you know, expansionary monetary policy.

And Dr. Lehman, would you, for us, for those of us who are, who are headline readers, would you help us understand the idea of printing money or creating money, the increase in M2, which as I understand it is new money that is now in the economy that didn't exist before. Would you help us understand where that comes from and where it goes?

Yeah, that's a pretty basic kind of macro econ 101 thing. So just to give you some numbers, in the last year, the year over year rate of increase in the money supply has been on the upside, quite an aberration. There's been, back in March we hit our peak year over year, From March of 20 to 21, we saw a 25% year over year increase in the M2 money supply, which consists of currency and coin in circulation and banking deposits, and banking deposits, savings as well as Checking account deposits are the biggest component of that.

Now when you say that, I think what you are saying is that government has debt. The Federal Reserve creates it in order to allow for what the government wants to do, like it or not. And that is new money that did not exist before that is flowing through bureaucracies. Is that the proper chain of command that Congress passes a budget? Federal Reserve essentially sends it through. Would you help me clean this up a little bit?

Yeah. So.

Theoretically the fiscal policy budgeting process of the executive and legislative branches is independent.

Theoretically, Theoretically, yeah. I call it the fourth branch of government, the Federal Reserve.

Right, exactly, exactly. So what the Fed then does to accommodate a major fiscal stimulus like the Trump and Biden administrations and the last two Congressional sessions have done to accommodate that is to, as you're saying, increase the supply of money. Now the way in which they do that is through what is called open market operations. The dominant means by which the Federal Reserve increases the money supply is to simply buy.

Financial assets, the large bulk of which is going to be existing and newly issued treasury securities. Okay, so banks, commercial banks, investment brokerage houses, they are the private market arbiters or brokers of treasury offerings. So they will buy treasury bonds from the treasury, okay, issued at the behest of Congress for additional spending above and beyond tax revenues. Of course, that's become the majority of spending. Now is all the spending well above tax revenues. We're going to have 3 trillion in tax revenues this year, give or take, and we're going to have 6 trillion or more in spending. So. So to make up that difference, the federal government has to borrow and add to the gross national debt. To facilitate that borrowing, the Federal Reserve will come into the private markets. As you recall, I kind of refer to the fed as the 800 pound gorilla. They are a market participant, just like an investor would be, except they have an unlimited supply of money to buy treasury bonds, open market operations. And by the way, in the last year they are not just buying treasury bonds, they are buying treasury bonds of different dated lengths, so anywhere from three months to five years. And they are also buying billions of dollars a month in mortgage backed securities, which are essentially stocks that are based upon the financing, the private sector financing of the housing market. This is a way in which the Federal Reserve, through its open market operations and expanding into what has been called for the last 10 years quantitative easing. This is the way in which they increase bank reserves in the banking system. And those reserves, of course, then a certain share of those reserves, say 80%, 70, 80% of those reserves are then loaned out out to the private sector people to borrow to buy homes or business firms to borrow to expand production capacity. And knowing that the Fed is always there to purchase treasury bonds gives the banking system an incentive to buy those treasury bonds on the open market from the treasury on the fiscal policy side, because they will always be. They know that they will always have a willing buyer in the Fed to sell them. And that increases bank reserves and unleashes what we call a kind of deposit multiplier effect, which very kind of generally.

Just means, as you're explaining this, this all makes sense how it works now, but it doesn't make sense in light of what you said at the top of our time, which was that it kind of seems like I would expect inflation to be much higher than it is based on everything that you just described. But I also know that what is reported as inflation sure looks different than what I see happening in property values and Bitcoin and the stock market. So I want to. I'm trying to understand why is there not more inflation based on what we have seen, or in your opinion, is it still coming or is it not measured yet? Because it's not factoring in the price of this paper boom that we see.

Kind of a lot there to unpack. Let me start by saying that an increase in the money supply never affects the overall economy or all markets equally the same. So a lot of the money that is flushed in can go to different sectors of the economy first. And that's where you'll see the price pressures emerge first. And then as it trickles through, it'll become watered down as it moves into other areas. So what we saw initially was a rebound in the stock market. So you get some asset appreciation there that's not even included.

Those assets are not included in your cpi, ppi, GDP deflator, any kind of measure. The price index does not include those equities asset values. Then there's home values. And we've seen the huge increase in real estate, both commercial real estate prices going up and residential real estate prices really rising. Median price of a home in the United States is now higher than it ever has been. Had a huge jump.

Earlier this year, last couple of months. So you're seeing that money that's going into the banking sector, either flowing into financial assets because the expectation is that the market will continue to appreciate there, or into housing as people are.

Taking advantage of lower interest loans. The increase in the money supply, of course, is specifically designed to push interest rates down and make it less costly to borrow. So homeowners are, or potential homeowners are scrambling, bidding competitively with one another over housing because of the lower rate of interest that they're off. So, and there's supply constraints. So when you have an increase in demand and constraint on supply, the price of housing will go up. But even in the cpi, housing is weighted as only about one third of that. So you see that going up, you see rents pulling up. In other markets, prices may not be rising as fast. And when you have some 80,000 different goods and services, say, included in the overall CPI, that gets watered down a little bit. On the other hand, I would say.

I'm hearing you say by that point, is that at least where it seems to be flowing is that there is definitely upward pressure on asset prices, but consumer prices haven't had the same effect. We don't know yet if it is first this, then that, or if they're independent of each other, but that the increase in the amount of money has affected asset prices more than consumer prices. Am I understanding clearly?

Yeah, yeah, that would be a good way to put it. But I would also caution that we are beginning to see those increases in consumer prices now in the last three months. As you have seen the CPI go very quickly since March, from around a 2% annual rate of increase to now up to a 6% annual rate of increase in just a matter of three or four months. We saw it progress.

3.5%, 4%, 5% now, 6%. The core rate is somewhat below that because core rate strips out energy and food prices, which are a little more volatile. But you're seeing this all across the board in all of the measures of the price level in the United States. You're seeing it in the cpi. You're seeing it in the Personal Consumption Expenditures Index, which is what the Fed likes to use as their preferred core. PCE is what it's called, is their preferred measure. That's heading up to about three and a half, 4% now. And you're seeing it in the GDP deflator numbers in the first quarter and the second quarter. GDP deflator increasing at a 4% and then a 6% annual rate of increase. So it's not that you're not seeing it, it's just that it's more pronounced in asset markets, as you're saying, somewhat less pronounced, but still quite visible in consumer product markets. And this is the part that's not surprising to me from a year ago, to go back to your original question.

That consumer prices are starting to rise at an accelerated rate. That's the part that's not surprising to you.

It's not surprising because you're seeing an increase in the supply of money. And standard economic theory and the kind of laws of economics, the basic, what we call quantity theory of, of exchange, going all the way back to Irving Fisher and Milton Friedman and even all the way back to Adam Smith, says that if you increase the supply of money faster than the output of goods and services, you're going to get inflationary pressures. The question before us now, I think, is is this going to be transitory, as the Fed argues that this is going to go away in the fall, or is this going to be a little bit more prolonged and going to continue? My bias is to say that it's going to continue.

You think that the existing inflationary acceleration will continue, and you disagree that it's.

Transitory like Powell suggests, Unless we define transitory to mean.

A number of years rather than a number of months. But when I hear the Fed speak, when I hear Powell speak and I hear him employ this idea of transitory inflation.

He is referring to a kind of several months of inflation. And he's changed his tune a little bit and said, well, now we think inflation is going to be around a few more months than we initially thought. But I'm saying this is likely to be more of a year, multiple years of potential inflationary pressures.

Than just months. Now, here's the thing. I hope I'm wrong. I hope I'm wrong in the sense that I hope inflation is not as pronounced. But the logic of economic laws and the empirical evidence of the major increase in the supply of money that has taken place in the last year suggests to me that inflationary pressures are going to continue to build unless there is some major countervailing force, meaning maybe the Fed pursues a more contractionary monetary policy.

And throws us back into a recession.

Yeah, I wanted to ask you exactly that question. Let's assume you're correct, and let's say Powell's wrong. Dr. Layman is correct, which I'd put money on. But if that trend continues, it seems to me like the only option.

From a policy perspective is to increase interest rates, is for the Fed to somewhat aggressively raise interest rates, which I think would.

Well, it would have dramatic effect. We'll just say that. So am I right to assume that that is the only response for the Fed to do and that it would impact the economy on a large scale?

Yes. Under kind of traditional monetary theory, the Fed has a dual mandate. So now I'm being evasive. I apologize. The Fed has a dual mandate. Full employment and stable prices. When we break that down, what that means is the Fed has a kind of catch 22. On the one hand, they must ensure that they're given the duty of ensuring that the unemployment rate is as low as they can possibly get it without at the same time experiencing inflationary pressures that are persistently above 2% or more. Okay? And the conventional monetary theory is that unemployment is fairly low is if the economy is at full employment, say 4% unemployment rate or less, and we are getting accelerating inflation as we've been talking about you and I here. But then the Fed would slowly ratchet back its buying of treasury securities and other financial assets, and that would then influence interest rates in an upward direction, and that would then constrain demand, hopefully without disturbing the labor market and without throwing the economy back into a recession. This is what is referred to by many pundits as bringing the economy in for a soft landing. Okay, we've got full employment, we've got inflationary pressure. Now the Fed should draw down its buying of assets, pursue what we would call not a contractionary monetary policy. I don't see the Fed doing a true contraction like Volcker did in the late 70s and early 80s, but instead a less accommodative policy which would then, as you're saying, put upward pressure on interest rates. Now, here's the interesting thing. Even if inflation continues, as I think it probably will, we'll see. I don't think the Fed is going to really do that. I don't think Powell is actually going to pursue a less accommodative or more contractionary policy to really deal with inflation. And here is why. Now, this is not a forecast, okay?

I hate to even call it a speculation. I'm just gonna call it a hunch. But my hunch is that even if inflation becomes the number one problem.

In the macro economy.

The Fed has its back against the wall because of fiscal policy. The federal government is very quickly. The gross national debt is very quickly approaching 29 and eventually $30 trillion. When and if they raise the debt limit, which they're starting to debate now, that is about 50% more than real GDP. Right now, real GDP is around 20 trillion. We've got a gross national debt outstanding of about 30 trillion. When you've got that much debt, even one small little one.

Basis point increase in interest rates increases the government's borrowing costs significantly. I don't think the Fed wants to force.

The Legislative branch, executive branch, to pursue a contractionary fiscal policy to pay higher, higher interest rates. So I think that what we'll end up with is more inflation than what most people anticipate and that the Fed will not react to that. Not to say that they won't taper because they're already talking about this tapering of reducing the amount of quantitative easing. They're talking about it well in advance so that they don't spook the markets. Once they start doing it, they might taper little bit, but I don't see a big increase in interest rates unless the bond market forces their hand.

So Dr. Lamy, that as a layman that sounds scary. What I interpret from that means that there would be sustained inflation for quite some time and that this kind of, in my opinion, exhausting bubble that where things just numbers just keep going up and there's a lot of like got to keep up with this. It seems like your hunch is that that may continue for quite some time, is that correct?

Yeah, I think so. I mean, I think.

There will be great resistance at the Fed and the Federal Open Market Committee to significantly increase interest rates in the face of rising inflation. The only thing that would force them to do so is if.

The bond market.

The 10 year bond market, is the benchmark here. If that yield starts to rise on its own because inflationary pressures are sustained and increasing, you don't want to hold a depreciating asset. You want to earn one and a half percentage points on a financial asset in nominal terms that is depreciating in real terms because of high inflation of 4, 5, 6, 7, maybe higher percentage private investors in the bond market may very well sell bonds and that will put.

Downward pressure on the price of a bond. The current yield will go up. But the Fed can counteract that by simply buying up those bonds and increasing the money supply to keep those interest rates low or to prevent what in technical jargon we call to prevent the crowding out effect government borrowing. And so I think to some extent they will try to do that. The only thing that would really force their hand is an extreme high and rising rate of inflation like we experienced in the late 70s, and.

A big increase in current yields in the bond market that would kind of force them to reverse course. And in that case, I think they throw the economy back into recession.

Interesting.

I think the recession would be kind of inevitable at that point, very much like we experienced in the early 80s.

So Dr. Lehman, my reaction to this is you better buy assets and hold on tight because that means it's like this only reasonable strategy. And I publicly admitted that I now believe I was wrong about bitcoin. Actually, I would say Jerome Powell convinced me that I'm wrong about Jerome Powell. Increased the demand for a bitcoin like alternative, let's say that.

Oh yeah, and just today, I mean, it's gone up. It's kind of gone up just today as we Talk here on August 13th. I mean, it's taken a big jump just today and over the last several days. Now that's not what you would call a hard asset because.

It'S a digital currency, but it's still. I think you're onto something. The big increase in that asset is a result of the expectation that inflation will continue, will persist. Gold is kind of similar in that respect.

Gold hasn't reacted the same way, which has kind of surprised me. But I'm curious from your perspective, if you're right, that inflation does continue to go up for longer than we expect and there is continued more desire for deflationary assets, things that hold their value. The way I see that playing out is for private individuals and private institutions to transact in cryptocurrencies or private currencies because the US Dollar is going down in value. Is that too.

Catastrophe of a viewpoint or is that actually a logical fear or logical.

I would say.

Don'T sell all of your dollar denominated assets, I would definitely say, but hedge against the depreciation of the dollar as you're talking about. When we start talking about the dollar depreciating, we have to be careful here. It is depreciating in terms of the prices of goods and services that we buy right now, at least for this summer and on into the fall, we're seeing this increase in inflation, price inflation. And so that means the, the currency buys less, purchasing power of the dollar is less. But because on international markets in a global sense, the dollar is the reserve currency.

You don't see it depreciating quite as much against other currencies. It's a reserve currency. And other central banks are mimicking the quantitative easing and accommodating policies of the Fed. So you have the same thing going on in the Eurozone. You have the same thing going on bank of England, you have the same thing going on with bank of Japan. And all around the world banks are, or central banks are highly accommodative. And so you don't see as much appreciation between the dollar and.

Say the British pound or the euro or the yen.

Because all of Those currencies are increasing in supply, in kind of lockstep. Not necessarily by saying magnitude, but in lockstep.

And what do you make of some smaller countries decision to legalize bitcoin as tender? And once again, I want to be very specific in how I say this. I believe that government policy increased the desire and the need for a bitcoin like alternative, which is why I was wrong. But what I'm asking in that is, do you see private currencies, Bitcoin or something else possibly emerging as a solution to government policy?

It's possible. I've debated this with myself for a long time and like you, I've kind of been. Well, at least for me, I speak for myself. I've been a little lukewarm. There are days when I think, man, I should have stocked up on a lot more digital currency or cryptocurrency. And then other days I think, man, the volatility of that and the acceptance of that, the universality of that is not such that it can at least yet be used as a common medium of exchange as a true form of money. I think potentially it has that potential.

There are other. When you talk about bitcoin, there are now other competitors with that. And you mentioned gold earlier. Gold has not responded as much to the inflationary pressures. I think that's because cryptocurrency has taken the pressure off of gold. People who would have otherwise bought gold bought bitcoin, Bitcoin instead, because they're substitutes as an inflation hedge. And so gold may not have gone up as much as it otherwise would have had cryptocurrency not been available. So I think definitely it's a hedge against inflation. I think that's the way people are seeing it. I don't think I'm out on a limb to say that whether or not it's going to become a useful currency in the future or whether it would be too heavily regulated or constrained by governments, by the federal government, or whether.

I mean, there's some talk about central banks issuing their own form of. That's right, of cryptocurrency or their own form of digital currency now.

So they can sector as well.

Yeah. So that they could compete in that sector.

I'm not sure what would keep them from debasing it further, but at any rate, I agree.

Dr. Layman, I would like for you to respond to a statement I made in a recent YouTube video in which I argued that Bitcoin itself is not a hedge against inflation. Our story about Bitcoin is a hedge against inflation. It's psychologically driven rather than economically driven. And that our story about it being adopted and being a hedge is what actually drives the value of that. And I would also make the case that all assets are hedges against inflation. Do you agree, from an economics perspective, would you agree with that or disagree with that?

Well, there's certainly a psychological element to it. And it's. I would say that in that respect, Bitcoin or other cryptocurrencies are not any different than other hard assets like gold.

There's a psychological aspect of that. The expectation of higher prices in the future drives demand for those assets. Now, gold has a particular.

Unique position in our history because it literally was money in our past.

It's seen as that hedge against the debasement of fiat currencies, which are just legal tender currencies issued by central banks. But the same thing that drives that is the psychology that you're talking about and the expectation that these assets will be worth more in the future than they are now relative to other potential investment vehicles or instruments.

Now, I'm not sure I answered your question fully there. Maybe you need to just flesh out what you mean by the difference between Bitcoin being an asset hedge against inflation versus a psychological.

Well, at its core, aren't all assets hedges against inflation?

Not necessarily. Well, let me use an extreme example. I mean, I could purchase a used automobile. That's an asset. I don't think it would make a very good hedge against inflation.

Well, in the last year, used cars.

Have gone up quite a bit.

I think that's more.

I suppose I'm biased in what I mean by an asset.

Yeah, there's a narrower class of assets that could be considered a hedge against inflation.

Interesting.

But there's a psychological element to that, as you're saying.

I would, I would like for you to take off your professor hat for a moment.

And.

I really just want to ask you, Dr. Layman, what's going to happen and what should I do about this? I really want you to be wrong and I really want things to settle a bit because I know just like as a consumer and as an entrepreneur, it's kind of exhausting trying to keep up with the pace of, of change and the pace of mostly price changes. I mean, I mean, the pace of change in the world is accelerating and there's no getting around that. But the price adjustments are giving me a little bit of whiplash. And I would like to know from your perspective if there is, besides just buying assets and holding on, is there Any logical response for business owners and consumers to have at this point in order to, well, shield themselves against the event in which prices continue to climb?

Well, let me keep my professor hat on for one second and follow up on what you mentioned. It's a very good point and we make this point over and over again in principals classes. The main reason why inflation, especially rising and somewhat unpredictable inflation, is so damaging to an economy is precisely for the reason that you mentioned. As you yourself are saying as an entrepreneur making investment decisions.

Deciding whether to spend retained earnings of millions of dollars or take out a loan for millions of dollars and invest in a certain business enterprise becomes that much more uncertain. It's already uncertain, there's already a risk of a failure or risk element to it. But it becomes the fact that the monetary regime in which you're operating is in flux. And you don't know what's happening with your input costs, you don't know what's happening with your output prices. You can't as easily forecast profitability or loss. That causes a kind of.

Chilling of investment. And that's the very investment in capital and technological innovation and research and development is all what drives economic growth in the long run. And so that's why inflation is damaging, especially when it's unexpected, unanticipated or volatile. And it just reminds me, your comment reminds me. We haven't really talked about the ppi, the purchasing of producer goods, the producer price index, but that is up now at around 6% year over year.

And it creates a dilemma for, especially for firms that sell consumer goods. Well, how are we going to pass this on to consumers? Are they going to absorb this? Are they going to stop buying the product? Some producers now are saying, well, we're just going to pass it on. And we'll either pass it on in the form of higher prices or we'll pass it on in the form of repackaging what's called shrinkflation so you get smaller packages. This is another reason why you don't necessarily see all of the inflation effects in the cpi because some of the packages are smaller that are tracked, so that's a kind of shrinkflation. Others are saying, well, let's wait it out, maybe the inflationary pressures will subside and we won't. And others are just saying, well, it's not the right time to invest. So I just wanted to make the point that this is why we call unexpected or unanticipated inflation potentially damaging to long run economic growth because it creates more uncertainty and greater risk than what already exists for the typical entrepreneur.

So now, so what do we do?

Keeping in mind that I'm not a.

Financial advisor, this is for entertainment purposes only. Doctor.

Yeah, yeah, there's your disclaimer. Okay, so I do think.

Two things are going to typically be advantageous during a higher inflation environment. Holding hard assets, real estate and commodities, or anything related to real estate and commodities.

And as long as the inflation is unanticipated and and nominal interest rates do not start to rise to offset it like they did in the late 70s, as long as we are still before that part of the process unfolds. Borrow. Because unexpected inflation will always benefit the debtor more than the creditor. And of course, the leading example of this is our federal government. In an inflationary environment, it's better to be a borrower than a saver or a lender. Now this is not good for the economy in the long run. But if you're asking me what you want to do to kind of protect yourself, borrow in dearer dollars now and pay back at fixed interest rates, hopefully in cheaper dollars in the future. Now if you borrow at an adjustable rate and the inflationary pressures in the economy build, then those nominal rates are going to go up and that won't work. But you see what I'm getting at that if you're a debtor in an inflationary environment, you gain, you get windfall gains because that inflation as yet not expected. Perhaps not as expected. Inflationary expectations are not where actual inflation is.

We'll see what happens here going into the fall. But yeah, borrow and hold hard assets that are in some sense fixed in supply relative to the amount of money circulating in the economy.

I mean, that was the entire thesis of what Michael Saylor did, where he borrowed billions of dollars in what he called basically worthless currencies and put them into Bitcoin, which has so far worked out for him. But that was his entire thesis behind that was to get trashy dollars now and buy appreciating assets. I would like for you to respond and tell me if you agree or disagree to something that Cathie Wood said recently. She's been saying it often, which is her argument is that we're actually in a deflationary environment. Cathie Wood has the same economics background as you have, comes from the same school of thought, if I remember correctly. And she's arguing that there's such a technological boom happening that it is increasing productivity so much that she expects a deflationary environment in terms of standard of living and purchasing.

Power.

Would you agree with her assessment or not?

I think in general, and overall I would probably disagree. But having said that, there are definitely some deflationary forces pushing back against the inflationary. I just happen to be of the the view that probably in the long run or over the next medium run, the inflationary forces are probably going to out. But there are, and I wanted to. I'm glad you asked this question and posed this because I wanted to get back to this.

There are a number of forces in the economy.

That are pushing back against the rise in prices. Which again goes back to your earlier question. Why aren't we seeing more inflation? We're seeing a rise in inflation, but it's maybe not as much as we would have anticipated. Why aren't we seeing more of that? Well, you've got what's called the China effect. You've got a very globalized economy to the extent that we don't further constrain trade, the development of manufacturing in developing middle income, developing economies like China and India.

Have the effect of putting downward pressure on consumer prices at least. And, and then you have the technological advances that are probably best manifest by the Amazon effect. Online retailing and delivery. Anytime you've got the richest man in the world that says to his competitors, your profit margins are my opportunity, you're going to have some deflationary forces there. I mean, there's going to be.

Elements brought about by technological advances and globalization. Those are the two big ones that will constrain the otherwise inflationary pressures. To say that we're in a deflationary environment I think ignores the big increase in the supply of money and the very much expansionary fiscal and monetary policies that we've had. So I don't think I would maybe go that far, but definitely agree that there are countervailing forces pushing back against inflation. Yeah, no question.

I want to end this conversation with a debate with you, Dr. Layman. I believe when we recorded last year you made the argument that people will likely flock towards cities.

If we go in the direction that we have, there'd be a flock towards cities. I am of the opinion that if we continue down this road that we will have a flock out of cities and that there will be a boom in Arkansas, Missouri, places where there is land that is cheap, readily available and warm, you can live in. You can buy 100 acres in Arkansas for a million bucks. It'd be beautiful and you can move your friends and family there.

You sent me an article backing up your claim. My anecdotal evidence suggests that I see lots of people flocking out of cities. So who is right?

Yeah. This is a very interesting question. I'm glad that you've asked it. It gives me a chance to kind of just throw a little urban economics in here along with all the macro theory that we've been talking about. But my. Let me just clarify my.

Hunch again or speculation. At the beginning of the pandemic, a lot of people were saying, maybe you include yourself in this. This changes everything. The metropolitan area is no longer valued because the virus creates too much of a risk and people just want to get out and get away from that. There's congestion, externalities, there's pollution, there's, you know, whatever, you name it. People don't like cities anymore and they want to. Cost of living is too high. Real estate, can't buy a home, can't afford to buy a home. All of those things. Valid points. And for a while, during the early stages of the pandemic, we did see that. We saw people leaving cities. They were remotely working people who could remotely work, had the kind of job that would allow that. They were saying, why would I stay here in the city? Yeah, let's go out to that farm in Arkansas or let's, you know, buy that property in the middle of, you know, Montana or someplace, or let's go where there's nice environmental amenities and telecommute. You know.

My. To get back to your kind of argument here, my view is that.

Once we have the biological elements of this kind of licked, if that we're going to end up living with this Covid is never going to go away. We're going to live with it. But to the extent that enough people become vaccinated and that we have something approaching, you know, herd immunity, whatever that is.

I think the attraction of cities to most people is so great on the social and consumer side.

That those cities will continue to grow. Maybe not as rapid a pace, but I think they will. And that's because I think people are lured back by the presence of other people. The technical term for this is just what urban economists call an agglomeration economy, but really it just boils down to the fact that people like to be around other people. And unless you're really kind of a hermit, sort of kind of like I am, all right.

I don't mind living in rural Indiana. It doesn't bother me. For most people, they want to be around other people. And I think the wage opportunities, the income, salary opportunities will be, will be greater in urban areas and the social aspects.

The economies of scale and socializing, if you will, being around other like minded people, being around other people of a certain age or a certain demographic is very appealing.

And so I think that will eventually overcome.

Any kind of the congestion, externalities or other negative aspects of metropolitan or urban living. It was in the 1990s when the Internet really kind of exploded on the scene, the World Wide Web. And I remember this very well. People were saying, well, this is the end of the city, this is the end of the urban area. This is, we will now see cities become depleted of population and people will move out. There will be this massive sprawling into the rural areas exurban.

That actually didn't happen. The opposite happened.

Opposite happened. Yeah.

And I'm thinking based upon that history that the forces in favor of large urban areas are still on balance, greater than the forces working against them.

Well, I'm going to stand by my prediction and I'm going to take it one step further and say that poor people will live in urban areas and rich people will move out of the cities and build their own mini cities with like minded people. That's where I think this is going to go. Dr. Layman, always enjoy hanging out with you. It's great to see you. Thanks for spending some time with us@capitalism.com well, thank you.

It's good to see you again, Ryan as well. And thank you so much for having me. Always enjoy it.

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