SPEAKER_01 0:00

The views expressed in this video are those of the panelists and do not necessarily reflect the views of U.S. Money Reserve.

SPEAKER_03 0:10

Welcome to America's Gold Authority Podcast. My name is Mike Barnes. Today we're talking about inflation. It impacts all of us and it has a number on it. But is that number always accurate? And where does it come from? Let's talk to a couple of experts and find out. Philip Deal and Brad Chastain join me now. And Philip, as the 35th director of the United States Mint and president of U.S. Money Reserve, you've dealt with inflation for a long, long time. And it seems like it often has a four-letter word associated with it. But it's not always a bad thing.

SPEAKER_00 0:39

Is that correct? Well, that's right. It's not always a bad thing. If it's uh moderate, it's under control, uh relatively stable, uh, then it can be a good thing. Uh it encourages economic growth, uh, it uh maintains stable expects economic growth expectations, and that's good. It's certainly a lot better than uh than falling prices. That really leads to uh economic contraction and can lead to recessions and even depressions when you have deflation. Uh so uh steady uh inflation of around 2% or so is is good, and even a little above 2% is not a bad thing. But when it begins to spike, become uh erratic, when inflation expectations begin to rise and and stay steadily above a target rate, whatever it's has been set, and traditionally here in the U.S., the Federal Reserve has set it at 2%, then it really becomes worrisome.

SPEAKER_03 1:46

Brad Chesting, with the research that you do for U.S. Money Reserve, you deal with inflation all the time and talk about it all the time. I find it very interesting that 2% is the magic number. Where do you think that came from?

SPEAKER_02 1:59

Uh the story is a little less uh interesting than people would find. There wasn't a lot of research that went into it, actually. Um the uh Bank of New Zealand, I believe, is the one that actually was the first to implement that target um well long ago, back in the 70s or 80s or something like that. But gradually other world central banks started adopting it. Um but there wasn't a lot of empirical evidence that even went into Bank of New Zealand's um implementation of that policy. It was what they really kind of felt was a stable, predictable inflation rate that allowed things to not get out of control while uh avoiding the deflation possibilities that Philip just mentioned. And then the the US was one of the later adopters. Um they started kind of informally adopting it in the late 90s and then um formally made it policy uh around 2010 or so, I want to say. Forget exactly. But um overall, I think central banks have generally felt like it has worked and they have stuck with it. And I'm sure there's more research since then around it, but the origins were not a rigorous academic um um debate or study.

SPEAKER_03 3:08

Well, people seem to like the 2% expectations all the time, but expectations is the key, Philip, because people expect different numbers each and every month. And how do they come up with those numbers?

SPEAKER_00 3:20

Well, I think what's happened is that since 2010, since that uh number, 2% kind of became baked into business and consumer expectations, then uh it became a self-fulfilling prophecy. Where um uh when the numbers were reported, then people gauged uh those expectations and the numbers, how they came in against those expectations, as an indicator of whether or not the Federal Reserve and fiscal spending uh by Congress and the President were in line with keeping uh uh inflation under control, and whether also whether or not the Fed was meeting its mandate of keeping uh employment growth at a uh at an appropriate level. And during the 2010s, the Federal Reserve had an outstanding uh record of doing that. In fact, it struggled to keep inflation up to that 2% margin for years upon years. Inflation rate uh lay below that 2% margin. So that cemented that 2% uh target in even deeper than it might have been. Uh and that 2% below 2% paradigm lasted until 2021. So it lasted for almost a decade and was only broken with the inflation spike that occurred with the inflation surge of the pandemic era, with the supply chain surge and um and bottlenecks that occurred during that time. And of course, now we've had a five-year period in which inflation has remained above that 2% goal. So that has really reset the uh expectations, consumer expectations. Consumer expectations has now uh have been reset uh above that 2%. They uh they no longer expect uh the Federal Reserve to be able to hit that target. They uh the mindset still is that that is the appropriate target or something close to that level. Uh I think there is some wiggle room that a reasonable level is near 2%, maybe 2.5 percent. There's some forgiveness uh in that rate, but it's not as high as the uh inflation rate has been running for the last five years. And I think that's the concern these days that uh the uh inflation rate has been running uh above the 2 percent. In fact, it's been running above uh 3 percent for about four years, uh the CPI rate anyway. And that's the CPI rate is really closer to what consumers see. So I think what we're seeing is inflation expectations beginning to become entrenched into the economy, and that's where you really become concerned about inflation. Um and I think that's one of the things that worries me about all the chatter and talk that you see in the media among the commentariat, is because when you and really uh I uh encourage people to watch what's being discussed in the media and on the newspaper. What is being discussed is the minutiae around these reports, uh how they compare to last month or year-ago numbers, or they go into the details of the monthly reports, and they don't take the step back to uh what the trend lines have been over the last four or five or ten years, and it's only in those long-term views that you really get an understanding of how these uh how these expectations are getting baked into the economy. And that's where the trouble uh really gets embedded into the economy, is with these baked-in expectations.

SPEAKER_03 7:57

Brad, I have a feeling that you deal with this all the time. Do you look at the numbers each and every month and the future numbers, the expectation numbers? And do you have to look at them in different ways because of what you do and where you're foreseeing the future?

SPEAKER_02 8:11

Yeah, we do look at them. Um I always want to keep an eye on. We look at a number of things, surveys, what businesses and consumers are saying, as well as what is the market saying. We've seen inflation break-evens where the market has been pricing in lower inflation for quite a while. It's ticked up again a bit more recently, but um but but absolutely. And and Phillips right on the and there's there's even conflicting data within that. The market is kind of saying one thing. Um they're not as conflicting longer term as they are short term. There's a little bit higher kind of expectations, short-term, long-term expectations, consumers and businesses haven't become what we call unanchored in any way. But we do have to look at all of those because it affects asset prices, um, the entrenched expectations matter when businesses and consumers both in the line. Right now, businesses haven't come afar come as far as consumers in terms of expectations, at least longer term. They're facing more price pressure increases immediately, but the surveys show that they also expect that to kind of abate over time. And it's when they become aligned that you see the entrenchment really take hold that Philip's talking about, because you know, one of the concepts people talk about a lot is a wage price spiral. Wages go up and then it fuels higher costs for businesses and they charge more, and then it spirals into higher consumer prices. And you to get that, I think you do kind of need both of those aligned. I mean, last I checked, workers don't really command or decide their wages. Most people would prefer to have higher wages outside of collective bargaining agreements in certain industries. They need businesses to actually write the check. And right now, that has that the business side has been moving actually the opposite direction. We see the productivity has picked up quite a bit with unit labor costs. So, how much are they paying for labor per unit of output has been falling? And so their businesses right now are getting more productivity with less labor currently. Um, so they're not seeing that long-term part of it, but you really need both to align for them to agree to higher wages and kind of get into that and get a trend. So we'll see if that changes over time. But right now, that's the other side of the consumer side that's keeping that more anchored. But I think it feeds into what consumers are probably feeling as well, because it is, we have very strong overall economic growth right now. If you measure business activity, Atlanta Fed GDP forecast for Q3 is right now around 4% on an annualized basis, which is quite strong. Um, you see a lot of the PMIs, what purchase manufacturing indexes are saying about business activities and new orders and things are all quite strong. Uh but what you see is a softening in labor market right now. Not a weak labor market, you just don't see much hiring or firing going on right now. So there's opportunity loss kind of felt at the household level. And real wages, so uh adjusted for inflation, are pretty stagnant right now. They're not moving at all. So wages aren't keeping or not at least gaining on inflation. So you can kind of feel that households feel that stagflationary kind of effect before the actual economic numbers um are ever reflecting it. So while it's not being reflected economically, households are starting to feel it more broad-based uh at this point.

SPEAKER_03 11:25

You brought up the word stagflation, and Philip, I want to talk to you about that because that's kind of a more dangerous term than inflation, correct?

SPEAKER_00 11:32

The economy that we have setting up is one in which we're not there yet, uh, but it's one that really concerns me. And that is we have an economy that is drifting toward higher inflation, I believe, and one in which we have uh a slowing economy, especially for that lower branch of the K, and uh in which there is uh weakening employment, weaken definitely weakening uh income, and um and uh weakening job prospects, especially with AI on the on the horizon. And that part of the economy, I think, is headed for recession. And the question becomes how high up the income level does AI have an impact on employment and income? Does it begin to eat into the economy that is uh currently on the lower part of the upper K? And if it begins to erode the income of that upper K, upper end of the K, then I begin to believe it begins to tilt the entire economy into a recession. And I think it does pose a danger to that part of the economy. And in that case, if where you have a rising inflation and uh and rising unemployment uh and a weakening economy, that sets up a stagflationary economy. And of course, the last time we had that was in the 1970s. Now that was uh as the people who own gold and have owned gold for a long time and know the gold market was one of the hottest periods for the gold market. We saw gold prices explode over the course of the 70s in that stagflationary economy. Those people will also remember that was an extraordinarily difficult period for the economy. In order to break that stagflationary spiral, it required uh the uh interest rates to soar to break the back of that economy. And um I and if the government today, if we were to enter that economy uh today, I don't think it would be as painful, but it would still be painful uh unless the government were to wait so long. We waited way too long last time to break the back of uh those expectations. But nevertheless, it would be painful, and we'd have to raise interest rates to fight that, and there's a a a big recession that would have to come out of that. Um and I'm afraid that we're headed into that because right now we're whistling through that graveyard. I think we need to recognize the political realities that center around uh these bond rates that are being pushed by the combination of enormous deficits. That's the other headline issue, is the debt has passed $40 trillion this week and headed higher and higher with these enormous deficits that are being run up by the government. And we just had a you know a request going to Congress for another $67 billion emergency appropriation for the Defense Department to restock the stockpiles of missiles and armaments that we've expended out of control, out of the president's knowledge. And we're discovering more and more the uh the level of expenditure of these missiles. And now we have the strategic petroleum reserve brought down below, I think it's now at 290 million barrels, uh, now below the 300 million barrel level that had been set as sort of the top end of the minimum level, it should be brought down to. And the president has an exec standing executive order to bring it down to 243 million barrels, which is below the minimum level of 250 million barrels that uh has the watchdogs have said it should not be brought below. And if this war continues to go on with the Strait of Hormuz uh continue to be blocked, I have no doubt that this administration will continue to bring the reserves below 243 million barrels, irrespective of the threat that that represents to the reserves. And those reserves will have to be refilled for over the course of several years, and that will have to be done at the same time that we are hoping that the price of oil and gas will come down, and it will prevent oil and go uh and oil and gas prices from going coming down for years to come. So consumers should expect those prices to stay up as a result.

SPEAKER_03 17:04

You've thrown so many topics out at us. Brad, I have to throw it over to you, and there are so many things we could talk about right now, but you hear everything that Philip just said about interest rates, about inflation, about the deficit, about bond rates, so many things. Is there one thing in particular that we the consumers should be watching for right now to figure out what's coming next financially, economically for us?

SPEAKER_02 17:27

Yeah, well, they're all the same thing at the end of the day. They're all very related in terms of how they interact. And so, yeah, what happens with rates, what happens with the deficit, all it literally all matters. It's uh, you know, the Federal Reserve wrote a paper a number of years ago describing the this concept here, which is um something called fiscal dominance, but it affects what the Treasury and the Fed does and how they work together. And what Philip just outlined, you know, about buying long-term bonds. I mean, this is we're now into two years of this program. What they announced yesterday is that of the long end curve, they're gonna buy twice as much as they were buying before, but they've been buying for more than two years. It started under under Janet Yellen. And so what happens ultimately is the fed as deficits continue to rise, and that ultimately leads to more and more debt, we end up having larger and larger interest payments on the debt that the government pays. Well, those interest payments are government spending. That's fiscal spending into the real economy, which ultimately boosts the economy to one extent, but it drags in other areas, but then it it also um contributes to inflation. And when they started this program a few years ago, they ended up buying these their their um longer-term stuff and they're issuing short-term bills at the short end of the curve. Right now, over the last 12 months, about 87% of new treasury debt issued is one year or less debt. And so that means about a third of the U.S. debt is coming due in the next year. Well, the Federal Reserve, they don't control long-term rates. Market does that work for them, as Philip mentioned. They control short-term rates. And as the Federal, as the Treasury is issuing more and more short-term debt, if the Fed raises short-term debt, that means their interest payments go up and have to be refinanced even faster, which then leads to more debt in the system, more fiscal spending in the system, more inflation. So there we're in this situation at this point, and the Federal Reserve talked about it years ago, where Federal Reserve policy is largely driven by fiscal policy. And there's very few things in this world where you can say, no matter which way we go, we take care of debt or we take care of inflation, you get ultimately end up with the same outcome. This is one of those situations where ultimately you, no matter which way we go, ultimately we end up in the the same with the same outcome. Because if the Fed raises rates right now, and um and to get a hold of inflation, well, what do they do? They end up raising interest payments, more spending, and they also slow the economy. Inevitably, the other side of that is always intervention of some sort, quantitative easing or whatever it is to get the economy going again, which is more money printing. And it's ultimately we've seen that be very, very good for gold. And if they don't, if they don't raise rates, they um and get inflation under control, then what do we see? More inflation over time, which is a drag. So it's kind of like long-term, we're at this stage where we're borderline, what the Federal Reserve described a long time ago, where we end up with the same outcome where we are. It's a it's a debt and deficit problem, as you just mentioned. It's spilling into the the bond market as a symptom of that.

SPEAKER_03 20:50

And Brad, for everyone who owns gold or is thinking about buying gold, isn't this a good thing?

SPEAKER_02 20:56

Absolutely. I mean, we've said this for a long time. We love owning the asset that central banks who actually print the money are also buying to protect themselves. So um this is what the law this long-term trend now of gold has partially at least been about. There's geopolitical risks there as well. There's a lot of reasons um where gold is well positioned for the future.

SPEAKER_00 21:18

I have to say the proof is in the pudding. Gold was at it was like it was at $4,000 an ounce a week ago? Was it just a week ago? And today is at $4,500 an ounce. So up 10%, better than 10 percent in a week. Yeah, the market has responded extraordinarily well to um to the Federal Reserve's act to what this political act to lower the price of long term debt. And so uh, yes, this the market has responded very well to this political act. This action was designed to lower interest rates. And that's exactly what it did. And that serves the political purposes of the administration. And that's great for gold. So, you know, just gauge these acts on what they do. And likewise gauge the acts of the Federal Reserve and the Federal Reserve Chair on the same yardstick. And the Federal Reserve Chair talks a tough game on price stability, but he so far has refused to act in any way that controls interest rates, even in giving guidance on how what his plan is for how to control interest rates. And he's going to have another opportunity in a major speech coming up in Jackson Hole, Wyoming, on August 26th, in which his feet are going to be held to the fire again to lay out a plan for how he's going to control interest rates. It's going to be really interesting to see what he has to say. And then he's going to have another policy setting meeting of the Federal Reserve on August, I mean on September 14th and 15th, and a press conference after that, in which he's going to have, he's really going to have his back against the wall to explain what his policy setting agenda is. And he has a president who's watching him very closely, whose agenda is not to raise rates. So watch him. And if we get a sign from him that he uh intends to take action, he has plans, realistic plans to take action to control rates and maintain price stability. That's really good news in terms of keeping us out of a stagflationary uh spiral. But if he does not act before the midterm elections, he has several opportunities to do that, then I'm really concerned that it'll be too late after the elections. The uh confidence in the Federal Reserve's resolve will have been lost by then. Uh the next opportunity will be for the Federal Reserve to act, will probably come in December, unless they have an emergency meeting in November right after the election. And it would be so transparent at that point uh what their agenda had been. The other thing is it's not exactly clear how he musters a majority uh of, and a majority is seven members of the FOMC, the uh the open markets committee, uh to to get, and you know, he has to build a majority. I I can count how he gets to seven, but um it's it it takes him a little while uh to to muster that majority. I can even see the former chair Powell uh being in the majority, uh which I think is is counterintuitive. I think most people, uh most handicappers would put him in in a minority as a dove, but I can see him among the hawks. I mean, he's already been in the chair for uh months now, and by the end of the year, uh his his time will uh his opportunity will may have passed.

SPEAKER_03 25:42

And Brad, I guess the hard part for him is he's got inflation, and some people say inflation is gonna keep going up, and if that happens, he may have to change the interest rates, correct?

SPEAKER_02 25:52

Yeah, that's right. If uh and you know, we've already seen members of the Federal Reserve point to this in the in the last meeting minutes and saying that if inflation remains high, they definitely see a rate hike kind of they didn't say on the horizon, but that it may warrant um rate hikes. So they are they're still watching incoming data as it comes in. We've got um last month's PCE comes in next week um at some point, and then um get one more CPI before the next Fed meeting. And so I think those will go a long way in in telling what we see.

SPEAKER_00 26:25

Yeah, and and let me say this about uh that last vote, that last nine to three vote, uh the three dissenters wanting to increase rates now. There's not an appreciation of what a remarkable split that was. First of all, it's unusual for the for uh there to be dissenters at all. And a three a nine to three split is a huge split. A seven to four split indicates a deeply divided uh um FOMC. Uh and it's it's hard to imagine a uh FO a Fed willing to go public with a 7-4 split, an 8-4 split, excuse me. And that that is just uh a level of division that a uh, and especially with a new chair, uh that they would want to avoid that at all cost. And so there I suspect there was another dissenter who would have, or maybe two, who would not have wanted to cast a vote with the dissenters and show such a deep split at this point. And it's one of the reasons why I think there's so much interest in the minutes coming out of this board meeting to see what the discussions were. This is a very complicated situation, a lot of cross currents going on behind the scenes, under under the table, that have nothing to do with uh rate setting at this point.

SPEAKER_03 28:12

Well, I think those votes are just more numbers we need to keep our eyes on. So many things affecting all of us right now. Thank you so much for your expertise today, Brad Chastain and Philip Beal. Thank you, Mike. Thank you, Mike. Inflation. It's not a four-letter word and it affects us in many, many ways, sometimes good, sometimes bad. We need to keep our eyes on it right now. That's all the time we have for today's episode. On behalf of all of us here in the U.S. Money Reserve Studios, thank you so much for tuning in. If you have any questions or you want to learn more about today's episode, you can call the number in our episode description and speak with one of our friendly account executives. They're going to be more than happy to answer any questions you may have about precious metals and the strategic role they can play in achieving a secure and comfortable financial future. I'm Mike Barnes. We will see you next time on America's Gold Authority Podcast.

SPEAKER_01 29:07

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