Transcription
So, we're sitting on top of all these bubbles right now, and I think you are going to start to see some of those pop over time. Again, it's not going to be a time bomb, more of just a slow unraveling. And unless there is something that I don't know, a black swan effect where it's just hard to predict what that might be. But I think you're just going to continue to see numbers like our fourth quarter 0.5 GDP number. You're going to continue to see flat job growth numbers. And none of that's going to be good.
>> Welcome everybody. I'm Lyanna Petrobo with a new episode of World Atherrorism Context. Today we're joined by Ryan McMacken, an economist, author, and senior editor at the Mises Institute. Ryan is widely known for his work in the tradition of Austrian economics where he focuses on monetary policy, economic history, and the role of government in markets. Ryan is the author of Breaking Away: The Case for Secession, Radical Decentralization, and Smaller Polities and Call Me Cowboys: The Bourgeoisie and the Nation-State in the Western Genre. In today's conversation, we're exploring his perspective on the current economic landscape, the risks facing global markets, and what history can teach us about where things may be headed next. Ryan, welcome back to the program. It's great to see you again.
>> Thank you. It's great to be with you. It's great to have you. Let's begin with the issue that our policymakers are completely ignoring. The Federal Reserve says policy is restrictive, yet the money supply is surging to multi-year highs. In one of your recent articles, which I found absolutely fascinating, and I will link it for our viewers in the description below, you write that the money supply grew by a trillion dollars in seven months from July of 2025 to February of 2026. What is the real story here?
>> Yes. Well, whenever we start throwing around these these dollar amounts, right, 500 billion, a trillion, I think it's hard for a lot of people to wrap their minds around these sorts of things. But just for some context, we're talking about $20 trillion in total in the money supply when we're looking out into the economy. And it's important to keep in mind that a third of that was produced just since 2020. So you're thinking about all of the dollars created in the history of America and it's up to 20 trillion now and a third of that just in the last few years. So that gives you an idea of how much growth there's been in the money supply here.
Now, you'll hear from a lot of Keynesian and post-Keynesian and even neoclassical people about how the money supply doesn't really matter that much, that it really comes down to velocity of money and all of that sort of stuff. But really, if you're going to try and understand the concept of inflation, that is price inflation, it's and you ignore monetary inflation, you ignore increases in the money supply, you're just it's all just wishful thinking. You can't really get a grasp of what's going on with rising prices and price inflation unless you take some notice of what's going on with the money supply. And the money supply, in spite of all these claims that there's a dollar shortage, that policy is restrictive, that you're hearing out of Powell and things like that, that's just not the reality, because you are seeing these significant increases in the money supply, 44-month high in terms of the growth rate, and what? Five of the last six months have all seen month-over-month growth in the total money supply. And in recent months, you've seen the total money supply head back up to its all-time high because it had reached, it had really accelerated during COVID. We're talking about huge, huge increases during 2020, during 2021, and then it reached up over $22 trillion or so. They backed off that a little bit, there was a period of flatness, but now in recent months, it's heading back up again.
And so, unsurprisingly, now we're seeing that price inflation, which the target, it's this arbitrary 2% target that the Fed has made up, even though the statute says the target is 0% inflation, but the Fed decided unilaterally, "No, no, 2% inflation is the correct amount." So, we could debate whether that's good or not, but they're saying 2% is the target, but they're nowhere near that. In recent months, it's been all over 2.5%, and then now, in their all preferred measures of price inflation, is heading up toward 3%. It seems that the real de facto target is now 3%, because even though it's not even headed toward 2%, they continue to engage in the sorts of policies that promote more monetary growth. So, we're in a situation right now where there's significant monetary growth. It's not shrinking. It's not slowing, even in terms of monetary growth. You could hope for maybe, oh, just a smaller amount, a 1% year-over-year increase or something like that, but it's over 5% now, which again is, boy, almost a four-year high in terms of overall growth. So let it not be said that the money supply is shrinking, that it's slowing, that the Fed is engaged in all sorts of restrictive activities, because there's just simply no data that that is taking place.
The Iran war has so far had a stagflationary effect on the US economy. We've got slowing growth, weaker job numbers, and of course, falling consumer confidence. So why is the money creation accelerating instead of slowing down in this environment?
>> Well, I think you're seeing that then in the Fed's unwillingness and in the Treasury's unwillingness to do anything that might actually constrict the money supply, which could cause a credit crunch and could cause more acceleration in the current recessionary environment that we seem to be heading into.
Is the US in recession?
>> That's always hard to say because they always backdate recessions, right? The Fed was telling us no recession on the horizon in mid-2008, even though the recession at that time had already started in late 2007. So, we don't know for sure, but as all those things you just noted, right, in terms of consumer confidence, in terms of, boy, if you look at job growth in recent months, that's all stagnating significantly. It, we're in, even, even Powell admits that that we are heading into 2026 with functionally 0% job growth, that it's a, a no job growth situation, which also has been called the no higher, no fire, economy, where there's not all these huge layoffs. Although we continue to see news of big layoffs from Facebook and other organizations like that, those numbers haven't been high enough to make people panic in terms of mass layoffs. However, at the same time, when you look at the hires, the new hires, there's nothing going on there. So, yeah, not huge numbers of people losing their jobs, but if you are just coming onto the job market for whatever reason, um, you graduated high school or college, you need to enter the job market, or you need to now get into the job market after say, taking 10 years off to raise your children or something. There's nothing out there for you in terms of new hires. So that's, that's a significant problem, too. They see that, and so they're, they're not going to want to do anything that's going to really slow monetary growth because they're hoping for a stimulus effect from that. So the best they could hope for is some sort of stimulus from monetary growth because, as you noted, the Iran war, that's cutting production, and that's not anything you want.
They revised the fourth quarter GDP growth to 0.5%. After telling us for a long time that it was going to be closer to one and a half, two, 2.5%. They were throwing out all these, you know, at least moderately okay numbers. Turns out that was all wrong at 0.5%. And be sure that they're going to give you the best number they can get away with giving you, right? So it's probably in reality even worse than 0.5%. But that's what we're looking at now. And meanwhile, all of these oil production facilities have been bombed in the Middle East. You've got fertilizers not coming out of the Strait of Hormuz. You've got all sorts of production problems that we're now facing. So that's going to cut the overall production of new goods, and that's going to make then the monetary growth situation produce even more price growth, right? Because now you've got a, maybe even declining amount of production in the economy, but you've got a growing number of dollars. So even if you, even if production was flat and you had a growing number of dollars, you'd have more dollars chasing a fixed amount of goods. That would produce more higher prices. But now we may even be having a situation where there's more dollars chasing fewer goods. So that's going to cause even more price inflation. So, if we're looking at in the official numbers, 2.93% inflation right now, price inflation in the numbers, pretty much everybody expects that to get even worse in the coming months. Unless the war magically ends tomorrow and we start rebuilding all of these production facilities really, really quickly, but I don't know anyone living in the real world that thinks that's about to happen.
>> Exactly. Yeah. I don't think it, I don't think it will happen just because we know that certain objectives will not be abandoned, and those objectives are being dictated by Washington, by a, actually, a foreign actor. So, um, it doesn't seem that that war is going to end, and it's just probably on pause.
Um, now talking about the US labor market, I think there are many, many reasons to be extremely concerned. First of all, AI-driven layoffs have increased, and we have companies like Microsoft and and several other big tech giants laying people off, tens of thousands of employees. And, um, I know that the CEO of, um, I think, I forget, but one of the top, top companies, and I will probably include a clip for our viewers here, he said that he would rather hire someone who is capable of working with AI than a new hire who doesn't know how to do it. So that seems to be sort of, that's on track to become one of the basic requirements, it seems, for any person entering the market in a variety of professions. But then, on the other hand, we also have inflation increasing again, and of course, businesses, small to mid-size businesses, are in a position where they have to cut operational costs, and payroll is often one of those things that, um, is is kind of a higher ticket item. So they want to address that, probably first. So again, that's slower hiring.
Are you concerned when you look at the labor market in the United States? Are you concerned now? And what do you expect to see if things continue as they have been? What do you expect to see maybe in the next, let's say, six to 12 months?
>> Well, I think we're just going to see a continuation of the trend that seems to be in effect since about 2009, 2010, is you've got this economy that's geared more and more toward a small number of very large tech firms, and there's not any real investment going into that beyond what you can generate in terms of borrowing through the financial sector. In a real healthy economy, you have people saving. You have people investing in actual things that you can use for production. But there's so little of that going on in the economy right now. The economy needs to transition from this period of endless, endlessly falling interest rates where, that now that's been going on for decades, but it really accelerated after 2008, 2009, when they decided that the solution to the financial crisis in that period was to constantly ensure that interest rates would remain extremely low, and that was the policy used by the Fed under Bernanke, under Yellen, and to a lesser extent, but still to an extent, under Powell. And it's only been in recent times that the Fed seems to be losing control in terms of forcing down these interest rates.
What is, what was the effect of that in terms of the private sector? Was it just rather than investing, rather than becoming more productive, you could just simply borrow more money and you could roll over your old debt. So it created a lot of what we call zombie companies, where these companies exist because they could simply borrow more money at low interest rates to pay off the old debts, and they didn't actually have to find ways to innovate and become more productive. Now, the official numbers about productivity look pretty good, but when you start to look out there in terms of actual economic growth, GDP, real production, especially when you're comparing it to actual money supply increases, it doesn't seem to be nearly as healthy. And I think we'll start to see a lot of those effects coming to the fore in coming years as it just turns out that, oh gee, we can't borrow more money to keep things going. We have to actually make things. But that's hard. That's expensive. We haven't been investing as we should have. So I think you'll start to see some, some significant layoffs because of that.
>> Talking about the money supply, what role are central bank policies versus private banks playing in the surge in liquidity? Is there a way to distinguish between the two and say, this is what's driving the surge in liquidity? Whether it's the central bank policy or maybe the money creation that's the result of just private banks lending, lend-making loans effectively.
>> Yes, we should always note that it's not just the central bank that creates new money. That historically, it's been mostly commercial banks that have been the main engine there. And the reason being is that the central bank essentially is backstopping this process of loaning out more money than they actually have in reserve. So it's this fractional reserve sort of banking where we have $1,000 that people have actually deposited into the bank, but we're actually going to loan out many times more than that $1,000, and it's going to pyramid up. And so what you've got is a lot of new dollars entering the economy as they're they're loaned out from one bank, and then those dollars are deposited in other banks, and then they pyramid on top of that and loan out more dollars there. That's just how the fractional reserve banking system works, where you've got money that's being withdrawn from deposit that's being loaned out at the same time, and you have essentially what was supposed to be $1,000, you've actually got people spending two or $3,000, just as an example, out of that original thousand dollars of real money. And so what that does is that creates a lot of monetary inflation in practice.
And the reason you can get away with it is because if it turns out that you might have a bank run, everybody wants to withdraw their money, the Federal Reserve will simply provide the liquidity to ensure that that doesn't happen. And so there's an incentive then to engage in this, to loan out more money than you can actually provide to depositors. And that's, this has just been the way it's been working since really the 1920s, essentially. And ever since the Fed came along and promised to be the lender of last resort. But in recent decades, especially since 2009, the Fed has been adding to that significantly and has become much more of a player because the overall weak economy, there's actually been less commercial bank activity in terms of lots of loans being made. There isn't as much private sector activity compared to relative to the sorts of actions that the central bank is taking in terms of buying up mortgage-backed securities, buying up Treasuries, and how, and putting those on the, the Fed portfolio.
That's really relevant now because what happened after 2008, the economy was extremely weak. They wanted to make sure that banks stayed solvent, that all of these bad mortgages that were on the books of these banks. How can we make sure that those don't go bad? That even though people aren't paying their mortgages, how do we make sure that all that the bottom of the mortgage market doesn't just fall out and then all these banks go bankrupt? The central bank just started buying up mortgage-backed securities in order to backstop the mortgage market. Bought up trillions of dollars of that. That was essentially a bailout for the whole mortgage industry and for big banks that held mortgage-backed securities and other mortgage assets in general. This was a, this was a bailout for billionaires and trillionaires and for for banks. And at the same time, in order to make sure that interest rates didn't spike as federal spending increased, they also bought up a lot of Treasuries as well, trillions of dollars in that. So much so that combined, you were reaching near $9 trillion of overall assets purchased by the Fed by the COVID period, because every time it looked like you might have a crisis situation, they just bought up trillions of dollars more in these securities, whether Treasuries or mortgage-backed securities. Where did that money come from? It was essentially newly created. It was newly printed money, so to speak, and that is where a lot of that monetary inflation and where the price inflation has come from. It wasn't just the normal commercial bank activity with fractional reserves that you got historically. Now it was active purchasing of stuff with newly created money that the central bank was doing. So that continues to be a major factor in the economy, and that is something that the Fed has never really addressed. They've talked about, oh, what are we going to do? Are we going to somehow get rid of these assets? Are we going to let them roll off the balance sheet? When are we going to ever normalize the economy and return back to trend, to pre-2009 trend in terms of monetary growth? And they've never done that and never even had a plan for doing that. So as long as that continues, I think you can expect to see big price increases, and you're never going to get any of that value back because, remember, Americans have lost, or holders of dollars have lost 25% of their purchasing power just since 2020 because of that monetary inflation. You're never getting that back unless they allow deflation to happen. But we can see from what it is they're doing in recent years that they have no interest in allowing any sort of deflation to take place.
>> I do want to talk about the US dollar, but let's do that in a minute. Um, there's a really interesting sentence in your article and you write, "In an effort to further pump asset prices and somehow counter our growing economic stagnation, the Fed again wretched up Fed Treasury purchases paid with newly created money." So, it is a vicious cycle, isn't it? And that's exactly what you just described.
>> Yeah, they, you know, they've been saying that they were going to unwind the balance sheet for 18 years. I was in the mortgage industry as an economist in housing back in 2009, and I would go to meetings and presentations being made by the Kansas City Fed because they have a Denver branch at the time. You go to these breakfasts they would have, and they would have economists up there and they'd say, and this is in 2009, and they're saying, "Yes, we've bought up trillions of dollars of assets, but soon we're going to start unwinding it. Soon we're going to figure out how to go back to a normal sort of monetary policy situation. We're going to end this extraordinary monetary policy," as they would call it. And then 2010, turn to 2011, 13, 14, 15. And then when they start talking seriously about it in 2019, they're like, "Well, now the economy is now strong enough for us to finally unwind the balance sheet." It's 2019. Then they get this repo crisis. Suddenly, there's a problem with short-term liquidity, and banks are having a serious problem meeting short-term obligations, and then it looks like you're going to get a recession out of that. And then a few months later comes COVID, and then the Fed just is back in crisis territory again and then buys trillions of dollars more of stuff. So, you can see how for years and years the Fed keeps talking about normalizing things. They keep talking about ending all of these newly invented powers that they came up with in 2008 in terms of monetary inflation, and there's there's no sign that that is going to happen.
>> So if current trends continue, what breaks first? Is it consumer finances, the job market, or asset prices fall?
>> Boy, I have, I have no idea. Um, I think we still need to figure out what are the real impacts of the Iran war going to be because we clearly haven't felt any of the real impacts here, at least not in the United States. Because, I mean, the truth is, the US trade doesn't depend that much, as the rest of the world does, on the Persian Gulf and Strait of Hormuz. I mean, yes, it's going to drive up oil prices, and that's going to drive up production, and that's going to drive up price inflation, and it's going to be a problem. But because the US only imports a fraction of its energy compared to say, most European states, and certainly compared to Asian states, which are going to see massive impact from this sort of thing, it's not going to be nearly as quick of an impact. But the, the one important thing to keep in mind though, is even if the US weren't importing any oil, the world price of oil is going to go up significantly because suddenly there's going to be less oil, and all these Asian and European countries are going to be buying up as much as they can, including from America. So unless Trump outlaws oil and energy exports from the United States, which he could do, I mean, obviously this guy doesn't care anything about like free markets or anything like that. So he could outlaw that. That would come with other problems. But unless you were to outlaw oil energy exports, Americans are going to have to compete on this global market for energy like anybody else. And that's going to drive up the price of making things for everybody, not just the price of transportation.
So, how's that going to play out? Until we have some sense of what that's going to look like, it's going to be so hard to predict what industries are going to be most impacted and what's going to break first. I think we can just see that based on just general credit that the consumer is using and the overall job market, the asset price inflation that continues, the housing affordability index continuing to show that housing hits new all-time highs in terms of unaffordability. You're seeing this in various indices. So that's going to be a significant problem for a lot of households. So far, if you're at the higher end, of course, of income, you already own a bunch of assets and you can profit from asset price inflation, you're doing okay. So you're seeing older, wealthier people, they're not complaining much. But for younger people who don't already own a bunch of assets, they're going to be probably seeing a lot of trouble in coming months.
>> Um, some economists argue that we are effectively sitting on a long-term financial time bomb, and, you know, with most of the money supply created since the Great Recession, that appears to be the case. Would you agree with that perspective, or do you think that's just an overly dramatized view, and there are ways to effectively mitigate the risks associated with the money supply increasing and the purchasing power decreasing and everything else sort of kind of weakening as well in the US economy?
>> Well, the problem with the time bomb analogy is that time bombs explode very, very quickly. And obviously, it could. So, probably a better analogy is is a bomb that explodes very, very slowly, but destroys just as much, right? You could say maybe a grass fire or something, something that continues and it destroys things in its path, but maybe if you're lucky, you could even outrun it for a time. And that seems to be probably more what you're looking at. And some, and there have been a few comparisons made in the media acting as if this may be the US's Suez Canal crisis. So that may be a good analogy. So in the '50s, the United Kingdom entered into a situation where the sterling, pound sterling, was already in decline, but the UK could count on, because it's, its money was still a very important part of global reserves, it could still count on a lot of help from foreign countries to essentially support sterling and continue to make it easy for the British estate to finance itself because sterling remained very strong. Now, of course, sterling did go into decline after 1945 when the US entered into Bretton Woods, but it was still the dominant global reserve currency until about 1956, which is when the Suez crisis occurred. And that, and that was probably significantly accelerated then by the crisis in which the UK wanted to ensure that the canal remained open, even though Egypt was trying to close it. You can see how this, of course, this would seem to be an appropriate analogy here, right? You've got this Arab country, well, I guess Iran isn't an Arab country. You've got a Middle Eastern country that is closing an important trade channel. This imperial country, in that case, the UK, in this case, the United States, wants to keep that trade avenue open. Now, the UK had to go to the US and say, "Hey, can you make sure and support sterling in this so that the bottom doesn't fall out on it? Because we're going to have to spend a whole bunch of money and we're going to have to issue a whole bunch of new government debt in order to fund our military operation here." And Eisenhower came back and said, "No, we have an anti-colonial policy, and so we don't want to support your colonial endeavors in Egypt. So we're not going to help you. We're not going to support sterling in this." And so, that had a massively negative effect then on the value of sterling. It went into steep decline in terms of sterling's use as a global reserve currency, and really jump-started, in a lot of people's views, the decline of the UK in terms of its empire. So a lot of people date the end of the British Empire to the Suez crisis in that period, because essentially they ceased to have their dominant role in global finance at that point, because with endless military spending that the UK had to be, that the UK had to be involved in, they didn't have the same supports anymore because the US wasn't helping out. And it was like a snowball effect where, well, in the past, the US might have said, "Well, we're not going to support you in this," but it didn't matter that much because the sterling might have been stable or in a state of increasing in terms of its global prowess, but at that point, it was in decline and it wasn't going to improve. And so a lot of people are saying, "Well, maybe the US is entering into this as well," because what you're seeing now are other major countries trading in either the Chinese currency or the Iranian currency. They're trying to find ways to get around global sanctions. You see the BRICS countries that are trying to move away from the dollar as well. And I think any of these all by themselves wouldn't have a major global impact on the dollar, but altogether, and the fact that the US is going to have to spend a lot more in order to deal with this war. There's another impact we haven't seen yet, is just what's the full extent of the cost of this war going to be, and how much borrowing is the US going to have to do? These all combined, I think, could have a major impact then on the dollar as a global reserve currency, and then just on confidence in the US overall. Those things will take a few years to even become clear that that's the trend, and then will take even more years to finally unravel, just like it did with the sterling. It took years for that whole thing to unravel. But you, I think you can point to certain things that are probably headed in that direction, and the US has a good reason to be concerned about what's going on.
>> Oh, absolutely. Um, is there a link between an increase in money creation and the US dollar dominance as a global reserve currency?
>> Yeah, I think you need to just, this is just common sense, right? If you're flooding the world with dollars, each individual dollar is going to have less value. This is just true of any good or service. You just create a bunch of it, dump it into the marketplace, and there's going to be, people are going to be willing to spend less to get it. And so that's why I think you're facing some stubborn upward pressure in yields, that is interest rates for government debt right now, right? The Fed has attempted to bring down interest rates through its own monetary policy, but this has not been very successful. And in spite of Trump's promises that he would bring down long-term debt, especially on mortgages, he was going to make housing more affordable by somehow bringing down the mortgage rates. That hasn't happened very much either. And part of the reason for that is they just continue to dump more and more Treasuries into the marketplace while also undermining overall confidence for the medium and long term by spending more and more. They, they continue to spend. They're looking at, let's see, so far this year, we're six, six months, we have data, six months into the fiscal year, and I think we're already about $1.6 trillion deficit so far for the year. Even accounting for inflation, price inflation, if you adjust for inflation, overall spending for the fiscal year is at the highest ever. And so, in spite of all of Trump's claims about, "Oh, we're going to cut back, we're going to spend less, we're going to abolish all of these departments through DOGE and so on," none of that's happened. So there's been two things that I think are making, that are endangering the dollar. It's just continued more spending, and that's driving a need for more to dump more Treasuries into the market, but that then is going to require, so it's a step-by-step process. We spend more. We have higher deficits. We need to now put more Treasuries into the market so we can finance those deficits. But that's then going to drive up interest rates because people are going to demand higher interest rates as you flood the market with more and more Treasuries. So how do you deal with that? Well, the Fed then intervenes. It's going to be expected to intervene. It has been intervening because it's been buying up more Treasuries. It's going to be expected to buy up more in order to control upward pressure in the interest rate. And how do they do that? They buy Treasuries with newly printed money. So, we're back in this whole, "Oh, let's, let's put more stuff on the balance sheet, more Treasuries on the balance sheet. How do we buy these Treasuries? We print more money." So that's adding more dollars out there. And it's all closely connected to government spending and to deficit spending. And so, so we can't act like there's no connection there. They have to accept that so long as Trump allows this runaway spending to occur and continues to engage in these extremely expensive wars, the bond market is not going to be fooled by that. They're going to see that you're adding more and more pressure upward in terms of yields because you've got more and more Treasuries into the market. So, you're probably going to see continued upward pressure in long-term interest rates over time, and maybe even in short-term, too, depending on how it all plays out.
Trump wants lower rates, and the incoming Fed chair, Kevin Worsh, is likely to be more open to Donald Trump's economic advice. Let's just put it that way. Um, Trump also wants more influence over the Fed, and so he's likely to use that opportunity to, um, especially ahead of the midterms, right? Um, he's going to sort of take that opportunity to to benefit his own agenda with how Trump's foreign policy choices are going. Um, I don't think that him controlling the Fed or having more control over the Fed's decisions is necessarily a step in the right direction. But, but the Fed should be independent, and it should not be driven by politics. It should not take orders from the White House in any, in any shape or form. Ideally, do you think that Kevin Worsh, if he's confirmed and he's a Trump's pick, do you think that he would manage to be independent, or do you think that would be jeopardized if he is confirmed?
>> Oh, I think he could be the same, the same amount of independent as Powell, or Bernanke, or Yellen, which is to say, not very independent. They, none of these people, they all had their own interest groups, right? The Fed operates with its own group of special interests that it has to address because it's much more closely connected to the financial sector, but it's also very closely connected to the Treasury. Because the reason central banks get created, and this is true everywhere, not just in the United States, is the reason Napoleon created the Bank of France in its current iteration was to make it easy for the central government to borrow money, was to finance the central government's activities. And in Napoleon's case, and certainly in the US case, post-1945, it's there to finance war, that is the most expensive, most important thing. And nobody thinks that a Fed chairman coming in is going to come in and say, "Well, I'm devoted to more sound policy. I'm going to let interest rates go up, and I don't care what the government says. If the central government starts a new war and they come to me and they say, 'Hey, we need to borrow another trillion dollars, and that's really going to make interest rates go up. So please intervene and push down interest rates back to more normal levels so we don't have some sort of sovereign debt crisis.'" There's no way a Fed chairman is going to say, "Buzz off. I'm not going to do what you're asking in terms of helping to finance these deficits and finance these wars and so on." So, there's always that baseline level of no independence in terms of the central bank.
Worsh is talking about, "Oh, we need a new accord, similar to the 1951 accord," which sort of, which created this current, I don't know, it's, it's a certain illusion about how the Fed and the Treasury are supposed to interact with each other, even though there's tons of data showing that especially during the 1970s, the Fed was more than happy to help finance those new deficits and the massive amount of federal spending that was occurring during Vietnam, for example, and afterward. And I just don't see that there's going to be any departure from just the general policy in terms of if the central government comes to the Fed and asks, "Hey, interest rates are too high. We need some help with that." Unless it's a situation where interest rates are really, really already low, and the Fed thinks, "Okay, if we push them even lower, it's going to really mess up the financial sector. Wall Street's going to be furious with us, and it's going to make the bottom fall out of the economy and so on because of massive amounts of new price inflation." Unless that's the situation, the Fed is always just going to accommodate the central government. The only thing that would push back on the Fed to prevent them from allowing, or to prevent them from agreeing to lower interest rates, is if it looks like there's already a major problem with price inflation. That's, that's what goes against the Fed monetizing even more debt, against printing even more dollars, is it becomes at some point politically unfeasible to continue monetary inflation because price inflation is so high. That's, that's the political check, if you will, on monetary inflation, is they get worried about price inflation. And that's why they turned around in 2022, when you got these 40-year highs in price inflation, where they finally allowed interest rates to go back up, and it caused some downward pressure in price inflation. They, of course, got away from that as soon as they could and went back to more inflationary, easy money type policies, and that's why we now have basically 3% inflation instead of their their target rate. This is all just, this is all how it works. This is all just the central bank doing its part to make sure that it can continue to help finance a very expensive federal government. As you've noticed, they get up every now and then, and Yellen used to do this, and Powell does this. The Congress should do something about all of these giant deficits, but that's all I can say, right? They're always saying, "Well, I'm not going to tell the Congress how to do that." But they'll say, "If you continue to have these huge deficits, that's going to be a problem." They'll say that, but in the end, they're always going to show up and help whenever asked to in terms of keeping interest rates under control through easy money. So, that's just what I expect from Worsh. I just don't expect any sort of significant departure from what's been going on for the last 18 years.
Um, a recent New York Times article talks about Kevin Worsh wanting to change things up a bit at the Fed, and apparently he wants the Fed to have a smaller footprint in financial markets and for there to be closer coordination with the Treasury Department on what the Fed holds in its portfolio, on what the government issues in terms of debt to fund itself. And Kevin Worsh has argued that reducing the central bank's holdings will give officials more space to lower interest rates, which is something that Trump has been demanding for, has been demanding for a long period of time. What is your take on this idea? Do you think it is feasible? Do you think it is something that may work out? Why or why not?
>> Well, in the absence of politics, you might be able to pull off something like that. I think the New York Times article actually does a pretty good job in pointing out that the only way the plan works is if you don't have to worry about short-term political situations. This, the idea was that, yes, we'll allow, we'll get the Fed to allow more of its portfolio to run off. We'll shrink the balance sheet. We'll have less of an ownership share in the financial sector. Again, this is the, all the exact same stuff they've been saying since 2009, right? This is just back to the old, "Oh, we're going to unwind the balance sheet any day now." And they've been saying that forever. So, Worsh is saying that now, and we're, we'll get out of this, and this will then allow for us to push up long-term interest rates a little bit, and then it'll make room for us then to push down short-term interest rates. I think was the plan that they, was the reasoning that they were using. The problem, of course, is that first of all, Trump has been promising to get down long-term interest rates because they affect mortgage rates. And so, this isn't a quick fix. And so, as the article noted, he would need time then for all of this to work its way through. And what's he going to do in the meantime, especially with midterm elections coming up this fall? It's already a disaster for the Republican party in terms of midterm elections, right? But now, what are they going to do? Deal with rising? They're going to try and implement this war plan and also have rising mortgage rates at the same time. That's going to be a big, big problem. That's going to be a hard sell to congressional Republicans who are already fighting for their lives thanks to the Iran war and other disasters coming out of this administration. And then again, as the article notes, there's even no guarantee that that's how that's going to work. It sounds like it's nicely tied up in this neat little bow that, "Oh, we'll replace long-term debt with short-term debt and it'll all work out nicely, and then the Fed can push down the interest rates because it'll be short-term debt." That it's nice that you think that might play out, but the economy is a lot more complicated than that. And they're acting like central planners. They're just acting like, "We'll push on button A here, and then this lever over here will do this thing." And there is no reason to believe the Fed has that sort of grasp of the US economy and how it's going to play out. And then, in the end, I just really don't think the political demand there is to do anything in terms of letting the balance sheet get smaller. As they noted in December, it looked like they were going to finally let stuff start to roll off the balance sheet, and it did go down for a little while, but then in December, they started buying up $40 billion every month again in terms of Treasuries. So, the balance sheet has been going up over the last six months. So, where's the political, I don't know, wiggle room, I suppose, for actually doing that. I don't think there's any more ability to do that now than there was in 2013, where they were afraid the economy was too weak to allow interest rates to go up anywhere either in short-term or in long-term. I think they're just too afraid in terms of the weakness of the economy to embark in any sort of thing where they're going to actually suck liquidity out of the marketplace. I just don't see that happening.
>> Yeah, I would agree. I think with with so many disasters happening at the same time, and of course the Iran war being the main one, they are probably less likely to experiment with new policies and changing things up at the Fed and what it does with its balance sheet. Yes, I, I think you're right. It, we need to note that the, the time for doing those sorts of things where we're going to get stuff off the balance sheet, where we're maybe going to let interest rates go up a little bit, that's during serene times in terms of international politics, in terms of war. Maybe you even have declining deficits for a period where things are relatively well, right? That's the time where you could get away with these sorts of contractionary monetary policy schemes. But we're in the opposite situation. We're in a zero job growth situation, as Powell says. We're in a wartime period of declining production. We've got extremely weak GDP growth. So, it just strikes me as a fantasy that they're going to now, yep, we're going to, we're going to start doing deflationary monetary policy to get everything under control. I'll believe it when I see it.
>> Ryan, and the last question for today. I know that nobody likes to make predictions, but let's just fast forward, let's say, 12 months, because all of us want to know what to expect. We all want to know what to prepare for. What is the most likely scenario for the US economy? What do you predict?
>> Well, I think it's going to continue to really flatten out. It's going to continue to slow down. I think the consumers are onto something when we look and we see at how consumer confidence is at these multi-decade lows, and it's going to be, there's going to be a lot of noise in the data because what we've got in many ways is a bifurcated economy where you've got a lot of, as I noted earlier, you've got a lot of people, they own assets, they're doing well for themselves, they're maybe mid to late career, and things are in place, and that sort of stuff. I think will keep a lot of the overall numbers looking like it's not so bad. But when you start to drill down into the numbers in terms of what is the income growth of people at lower levels, what are the abilities of these people to save, to invest? The small business economy is facing major headwinds, even though, sure, the stock market's great. I think that's, that's maybe just the most interesting illustration of our time is how the stock market just keeps booming. It's just gangbusters, and meanwhile, consumer confidence continues to go in the tank. And I remember I had a co-worker, he was my boss.
Back then, when I was working at the state U as an economist there, and he was, he was very much in that demographic of about a 60-year-old person who owned a lot of assets and was nearing retirement and was doing pretty well. And this was in 2013, when the economy was really quite weak. And people forget that the economy was weak all the way from about 2008 all the way to 2013. And then you started to see some significant growth after that. 2011 was a very bad year in terms of economic growth and job growth.
And he would always come into the office and say, "The stock market's up x number of dollars today. Things are going great. Why do you keep saying that there's a weakness in the economy? Stock market's fine." In his mind, as in the mind of millions of Americans, whatever the stock market's doing is an indication of what the economy is doing. But there's, that's not true at all. This is just simply a reflection of the number of dollars that are entering the economy. Just like Zimbabwe had one of the best performing stock markets in the world back when it had hyperinflation. Right now, I'm not saying the US has hyperinflation, but what I'm saying is that stock markets are a function of dollar creation in many ways. And so, we got a lot of liquidity. A lot of that money is going into, uh, stocks, also into lots of other investments too. Uh, maybe Bitcoin, and that may be a reason for continuing growth in Bitcoin even as there's a lot of dollars out there. I'm interested to see what happens in a recession with, say, crypto.
Uh, so we, we do need to actually return at some point to, to a more normal economy that is not based on endless infusions of new liquidity as we have been doing since 2009. So what, what should have happened is in 2019, when you started to see, uh, the Fed scale back a little bit in terms of new liquidity, in terms of easy money, you saw a worsening in the economy. You were probably going to have a normal recession in 2020, uh, that was coming out of that, and you didn't get it because then, thanks to COVID, they printed up $6 trillion and you ended this huge inflationary type bubble economy then. Well, I don't see how they can get away with that again without triggering major price inflation. So, I think they're going to have to, uh, back off on monetary inflation. Not enough where there's going to be any significant deflation. But as Ludvik Vanme's and other Austrian economists pointed out, is you don't need necessarily a declining money supply in order to trigger a recession. You just need a slowing in the money supply. You just need to have not enough monetary growth to keep all of these bubbles going, to keep these zombie companies going, to keep all this constant churn going in terms of money going into the stock market and into portions of the economy that benefit from newly created money.
So, we're sitting on top of all these bubbles right now, and I think you are going to start to see some of those pop over time. Again, it's not going to be a time bomb, more of just a slow unraveling. And unless there is something that I don't know, a black swan effect where it's just hard to predict what that might be, but I think you're just going to continue to see numbers like our fourth quarter 0.5 GDP number. You're going to continue to see flat job growth numbers, and none of that's going to be good. And that's going to take a significant toll on the Republican party into coming into this, this next election. I mean, unless something turns around majorly, Trump is basically going to leave office as one of the most unpopular presidents of all time because two years, three years from now, the economy is just going to be hobbling along. Uh, and younger people especially are going to be facing significant, uh, employment, uh, trouble and stagnation.
So, uh, you never want to predict any sort of like major dramatic thing, right? Well, the bottom's going to fall out and it's going to be this huge giant depression sort of thing. Uh, and, um, uh, what else? So, job unemployment rate is going to be 20% or something like those sorts of things could happen, but, uh, I'm not willing to make those sorts of predictions. It just seems the safe prediction right now is to say, look, there is nothing in the economic data to suggest a significant revival, right? Where can we look around and see, oh, there's been all this investment here. There's been all of this economic growth that just hasn't yet permeated out into the larger economy. I don't see anywhere where that is happening except in those industries that benefit from lots of VZY money. And so really, the, the more logical conclusion is that those are just bubble sectors of the economy. That's not real economic investment and growth, uh, and savings going on there as the real engine of an economy. So I think we're going to have to see a lot of those bubbles pop. Uh, a lot of those sectors, uh, face significant unemployment, and that doesn't mean the whole economy is going to be a disaster, but I think you're going to have to see, uh, some portions of it enter into really bad shape for a time, and the aggregate effect of that's going to be certainly bad news for a lot of people at the more moderate income levels.
>> I'm so glad you discussed the stock market because that's one of the questions that I see in the comment section very, very frequently. People say, "Well, you're saying the economy is not doing very well, but the stock market is hitting new highs, so you must be lying." And, uh, I've responded to a couple, but, um, you know, there are always new ones popping up. And I think that's why, and it's not, it's not a bad thing. I think people just get confused because it, it, it, it doesn't make logical sense. But, uh, I'm really, really glad that you addressed that and hopefully that will help people understand what's actually going on and, and how to look at these things. Ryan, thank you so much for joining us today. This was a fascinating conversation. I would love to continue it again, and, uh, I look forward to having you on the program again soon. Thank you very.