# Inflation Reacceleration and Structural Economic Shifts

**Podcast:** Odd Lots
**Published:** 2026-02-13

## Transcript

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I'm Joe Weisenthal.
And I'm Tracy Alloway.
Tracy, you know, future economy, it's always uncertain.
Path of the path of inflation, path of employment, always big debates.
I think what's really interesting right now, compared to a few years ago, maybe, is you know, at various times it's like inflation is gonna come down, but there's a fight over how fast, right?
And now you have a situation in which there are people who argue both sides.
Some people is like, oh no, we're on a you know, we're heading down, the sort of yield data camp, et cetera.
And others are like, look, we're re-accelerating, it's gonna get hot again.
And we're recording this February 11th.
We just had a fairly strong jobs print, et cetera.
And so some people are making the reacceleration argument.
We are so back.
So back.
Well, that jobs report.
I mean, it was a blowout number, so 130,000 jobs added in January versus expectations for 65,000.
And even if you drill down into it, like it looks pretty good, right?
But you're absolutely right.
So we used to argue about how far we would travel in one direction, you know, inflation.
Yeah.
Is it gonna be four percent?
Is it gonna be five percent?
Whatever.
And now we're sort of arguing about which direction we're actually gonna go.
Totally.
And I think like if you just look like, okay, one jobs report, can't, you know, take it with a grain of salt.
There is, there does seem to be a lot of evidence of some softening in the labor market by a lot of different measures, et cetera.
Housing market continues to be fairly soft.
On the other hand, look at various commodities, you know, look at copper, look at a bunch of other stuff, look at trucking prices, freight picking back up, et cetera.
I wrote about this in the Ot Lots newsletter.
Yeah, there's uh lots of things that are going in the other direction, and you would say, look, this looks like reflation.
Yep.
So we are gonna be speaking with someone who had a non-consensus call about a month ago.
But again, I think it's becoming maybe more consensus by the day, by the hour as we get these types of reports.
Totally.
Well, we really do have the perfect guest to sort of give us an a a different take, a sort of, I would say it's still a little bit out of consensus call, but um definitely um not the direction that uh a lot of people want to see.
Definitely not the direction if you think that the Fed should cut rapidly this year.
Maybe we'll talk some Fed stuff.
We're gonna be speaking, of course, to Adam Posen.
He has the president of the Peterson Institute and recently co-authored a piece with uh Peter Orsag.
Uh 4% inflation.
What?
Uh Adam, thanks for uh coming back and joining us here in studio.
Four percent inflation, really.
Thanks, Tracy.
Thanks, Joe, for having me back.
Yeah, I I mean, I've got friends who say I should have just said 3.5 and that would have been enough out of consensus.
Exactly.
But I think it's realistic to think about four percent by the end of the year on headline CPI.
And just going to the spirit of what both of you were saying, I I think the direction of travel is up, not down, and and pretty clearly that way.
There's obviously, like you just said, today's job report, but I think that there's a broader pattern.
The the issue isn't, you know, like you say, one month.
It's more about why the jobs report looks the way it does.
And if you look at prime age, like you Tracy was saying about drilling down in the numbers.
If you look at prime age labor force participation, which to me is one of the most important statistics you can look at, it's still pretty high.
And there's this risk of women dropping out of the labor force to look after kids and elderly and sick people if they don't restore some of the Obamacare insurance subsidies.
And there is a conundrum that if you're either they haven't deported yet or managed to drive out yet as many migrants as they think, or you're losing labor there too.
So it's hard for me to see this as a very weak job market.
The kinds of things people point to, like the slowing of wage growth or the vacancies over as compared to unemployment, I think are not indicative of a demand side slowdown.
They're indicative of what economists call mismatch, meaning less good functioning in the labor market.
So just to give you two quick examples.
So Department of Education gone, a lot of environmental gone, a lot of health and human services gone.
And these are things where you had a lot of government contractors that were African American owned or run or heavily populated.
And so I think part of the reason African American unemployment is up, and that doesn't mean it's okay.
It just means it's not a sign of demand shock or decline or soft market is because of this hit to this specific part of the workforce.
Similarly, and I know you have had episodes talking about this issue, we see the phenomenon of young people having less hiring, particularly college educated people, young people not getting hired as much.
And I think there's two things going on there.
One is, I mean, it's real.
Again, like with African American unemployment, I'm not saying it's not real.
I'm just saying it's not telling you about the demand situation.
So idiosyncratic rather than cyclical.
Right.
Well said.
Very tech speak.
So, you know, I think part of it is that we've the rise in you younger people unemployment, college-aged younger people unemployment has been a very steady rise for a few years.
It's actually a very, it's not like suddenly, oh, it got soft.
It's been coming up slowly since roughly 2023.
And to me, that has to do with the hiring and rematching coming out of COVID, that people moved a lot, companies moved a lot of people into new jobs, and they hired extra people in some sense.
And so there's this overhang.
And that's particularly affecting young people.
I mean, AI's in there.
I'm just that's nothing.
So anyway, I'm not trying to cherry pick data, but I'm just trying to say that if you match that with the more well-known data, the layoffs are relatively low, the wage growth is slowing, but it's not going to zero, that participation rate is high, that the monthly job numbers are fluctuating, but on the new baseline that we all rightly should be looking at solid.
I don't see it as a weak week labor market.com slash work.
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So you just talked about the labor side, but your forecast for 4% inflation by the end of this year is comprised of many different things.
So walk us through what exactly you're looking at to get that call.
Thanks, Tracy, for the opportunity which OddLots gives to give more than two points.
But I I think the message is there are I want to start with, though, is there are so many points.
If you kind of step back, right, and you say, all right, if I'm making a forecast for inflation over the next year or two, there's how soft or tight the labor market is, there's how hot the economy's running, and those two obviously overlap.
There's are we getting supply shocks like tariffs or anti-migration policy?
There's what's fiscal policies doing.
And then there's what's monetary policy doing, and very importantly, how credible is it?
How is it being transmitted?
So you go down that list, and there's to me, there's just an awful lot of inflationary stories.
So tariffs, anti-migration policy.
There was a debate, or at least a bunch of people asserting, oh, it didn't really matter.
Look, inflation's not up that much.
Well, my view, and I argued this in a Bloomberg Business Week piece a few weeks ago, is that we never should have expected the impact of these policies to be so fast.
And in fact, if you go back, not that we forecast it perfectly by any means, but if you go back to the stuff my colleagues McKinnon and Noland and others at the Peterson Institute published a year and a half ago on what would be the likely effect of the tariffs or the migration policies, they were building in a one-year lag from when the policies took effect.
And so, you know, roughly next quarter is when we should start to really see the policy hit.
And we're seeing anecdotally in the beige books from the Fed, in statements by the Amazon CEO and my co-author on part of this, Peter Orzag, who runs Lazard, has many contacts in the business community who are talking about this.
It takes time to make up your mind what you're going to do, even if you're a big company, let alone if you're a small company.
It's very hard.
So, like, do I get a new supplier?
Do I move production to China, out of China?
Do I move it into Mexico?
Do I move it into the U.S.?
Can I find a substitute?
Do I raise prices now?
Do I wait till my competitors raise prices?
Can I get an exemption from the tariffs if I go meet with Howard Lutnick?
You know, all this stuff takes time to work through.
And the same thing is true for, and that's even before you factor in like inventories of imported goods, and they're waiting to see whether Trump actually sticks with the tariffs or not before they make a decision.
And I would argue that the same's true for migrant families or migrant workers, undocumented migrant workers.
That they have hard to leave aside the human aspect, which is amazingly horrible.
But it just on the economics, they have to make up their minds.
Is ICE really coming for me?
Are they coming to my town?
Is my employer going to protect me?
How long do I have before they get here to accumulate dollar pay before I have to leave?
Can I hide and keep working?
If I go, do I go legally?
Do I take my kids with me?
Do I not take my kids?
Do I try to come back?
Again, these are irreversible decisions.
It takes time and you want to see uncertainty change, or at least get settled before you make the decision.
So to me, I think these inflationary pressures from the anti-migration policy and tariffs are already here, but that they're going to accelerate and be more visible.
Then to be much quicker with the other points, fiscal policy.
I think the Republican majorities in the Congress and the president are going to want to pass a big blowout checks to people ahead of the midterm election.
I think they are going to pass some restoration of the lower middle class subsidies for Obamacare insurance because it's really hurting people and it's really making people angry.
You put those two together, that's well towards 2% of GDP in additional deficit.
So say you risk weight it, say you put a 50% chance on the checks being handed out, and you put, I'd say, an 80 to 90% chance on some amount of Obamacare subsidies coming back.
You put in that weighted average, that still gets you an additional percent plus of GDP on the deficit that people weren't figuring.
Then you got a weaker dollar.
Then you've got the Fed, and this is something we've talked about a few times when you've been kind enough to have me on.
The interest rate for all Trump talking constantly about it and pressuring the Fed doesn't summarize sufficiently the state of monetary conditions in the economy.
So you've got all this private credit, you've got all the AI investment being funded either out of retained earnings or out of issued bonds, not based on credit, um, not based on normal bank borrowing or big stuff.
And as Joe says, you have a soft housing market, but mortgage rates in real terms have been coming down.
And it's not like mortgage money is unavailable.
So it's not a tight credit environment.
And so then finally, regrettably, we have to take into account all the attacks on the Fed and the changes at the Fed.
And I'm not too into personalities, I don't think it matters that much which individual, but the structural forces on the Fed for change.
And you have to believe that makes the credibility, the likelihood that they're going to react in the right direction to this inflation soon enough, lower.
So boom, boom, boom, boom, boom, boom.
So there's a great summary or overview of your view, and there's uh plenty of follow-ups to ask about that.
But let's just talk about the tariff.
So I certainly take your point that it would take any company a while before they decide their pricing strategy.
Incidentally, not you know, some companies, you know, about almost a year after the tariffs are going the other direction, uh, Pepsi, for example.
So they cut prices.
So now clearly, like some companies are deciding they cut.
But just on tariffs, you know, even theoretically, like, yes, I can understand the argument.
This is a good reason to raise prices.
On the other hand, tariffs are a tax, and generally we think of taxes as disinflationary.
They take money out of the economy.
Here's my, I guess the question is every company would love to be able to pass on higher costs.
Does there need to be something on the demand side for them to be able to?
Because another possibility is they just have to eat it in margins because the consumer is not willing, or you know, as the Pepsi consumer, evidently they're they don't want to continue to pay high prices for end goods.
Like, are tariffs per se inflationary, or are they only inflationary if there's sort of a demand boost, something from like the checks or the Obamacare subsidies coming back, et cetera?
That's a really good added layer of sophistication to this, Joe.
And you're absolutely right.
It varies from company to company, from industry to industry, the decisions.
Part of the decision-making process is what is the competitive landscape?
And we do see, I'm proud to say PepsiCo is one of the many corporate supporters of the Peterson Institute.
I'm a big fan.
And disclosure there.
No, no, I have to be honest.
And I'm I'm proud to be honest, all our donors are listed on our website.
But anyway, PepsiCo is arguably facing a lot of fundamental trends in the food industry and having to do with GLPs, having to do with health perceptions and things that of course are going to overwhelm for them.
And they actually are not that exposed to tariffs compared to some other companies, because they're not importing sugar, and they're not importing inputs the way, say uh auto company is.
But anyway, but just to that that just illustrates your point that it is going to vary from company to company.
And my argument was just that as a general thing for any given company, it's not a trivial decision.
You don't just go.
But your point, your further point, Joe, that it's sort of conditional on demand is absolutely right.
So there's two aspects to that.
One is just literally what you said that if it turns out there's slack demand, you may not see the rise in pricing as much because the you you just the company, any given company additionally has to decide, you know, how much am I going to lose market share if I raise prices?
But additionally, there is an interactive effect that when you are when this is why I made so much about the labor market initially with Tracy.
It's it's a question of not so much the demand side as your input side, right?
Are we in a tight labor market?
Are we in a tight supplies market for commodities?
Do these things matter?
And and are expectations about inflation in the economy more broadly moving towards the high side.
And and so again, just to come back, your bottom line point is right.
It's interactive.
And that's why when you talk about inflation, you want to have all these components.
I have to say, I spent $35 on three bags of chips and two dips on the weekend for the Super Bowl.
Holy geez.
To be fair, I got them from a gas station, so there was a markup, but it was so worth it.
They're so good.
Yeah, yeah.
I don't eat chips that often, but when I do, I know.
Yeah, yeah, yeah.
Yeah, no, we had we had we had Frito scoops and uh there's so good, yeah, very thick Super Bowl.
Now we're just talking about stack foods.
Which is fine.
Um, okay, what about tariffs, tariff inflation?
Pepsi Ridola, Pepsi.
That's a good thing.
Oh, that's a Pepsi product.
Yeah, it's true.
Just from a math perspective, what you often hear is that, well, you know, you might have a price impact from a terrorist, but it doesn't matter that much because it's a one-off, and then, you know, the next year the base effect kind of goes away.
But does it matter if we get four percent at the end of the year?
Or would you expect this to be a sort of the start of a durable price increase cycle?
Well, I think yes, it it is a start of a durable, as you put it, price increase cycle.
And again, it's partly to do with the general conditions, and it's partly to do with the nature of the tariffs and the shock.
So I think in a world where the labor the labor market is not high unemployment, lots of slack, whatever anybody says.
In a world where they are going to be putting fiscal fuel on the fire, in a world where whatever you think about the transition from JPAL to nominated Kevin Warsh and the attacks on the Fed, you cannot believe that the Fed's credibility of commitment to low inflation is as strong as it was a few years ago.
All of those things suggest that any given shock, any given price shock will to me translate into higher and more persistent inflation than it would say a few years ago in a different circumstance.
The second point is, and and there's this, I forget what it's now called, but there used to be the Million prices project at Harvard Business School that's been looking at the price pass-through, and there have been others looking at it, and people at Peterson as well.
The the second thing is the migration shock, if it turns out they do drive out a million people, million workers, is gonna have much bigger first-round effects than the tariff shock.
The tariff shock, I think reasonable estimates are they've already had one point year's worth of CPI effects roughly over the past year.
I think if if they really are pushing out the migrants, and we can go to why I keep putting it conditionally and saying I'm not sure they have yet.
But if they really are, we're talking about something potentially four to six times as large.
But then the final thing I want to emphasize, Tracy, is on the when you say about the durable size of inflation, it is a question of what people expect the monetary policy response to be.
I mean, clearly they did raise rates more, but most of us would argue part of the reason for that was because it was the second round of inflation, and they hadn't fully stomped it out the first time.
And I think you can make the case, again, this is speculative, but I think there's a historical parallel here.
If we get this kind of inflation shock now, coming it's five years or four years instead of three years, but four years after the last inflation, having again the inflation not come all the way down to two percent target in this case, I think the upside risk is higher.
So this is interesting, you know, when uh when we were at Jackson Hall, the last time we saw you, yeah.
Or that we did an episode with uh I mean Nakamura and talking about this idea of like the value of central bank credibility, and there's like kind of a fixed stock of it, or the stock of credibility can deplete over time, and it might take a while to refill the reservoir, so to speak.
So what you're saying is sort of dovetails with that, which is that if you don't sort of in fairly short order smash it back to two percent, that there is this sort of like persistent cost that you might pay the next time there's a shock.
If you never got that's generally what we see in the data, and Professor Nakamar may have a different take on this, but uh the but what to my understanding of the research, including by a colleague of mine at Peterson, Joseph Gagnon, on some of these issues, is if you fail to stomp it down, the anchoring, as the phrase is, of inflation expectations is lower.
And so a lot of people focus on the UMichigan survey of inflation expectations or the New York Fed survey.
Uh, we had, oh God, I can't remember her name, I apologize from UMichigan, who who runs that survey speak at the Peterson Institute last Friday.
There's a video if you want it here.
And and she can point to the fact that the long-term inflation expectations haven't moved that much.
My view is that only tells you so much, because it it's it's people have rational inattention.
They don't spend their lives thinking about inflation unless they have to spend their lives thinking about inflation.
And so the question is more when inflation comes, how do they react?
And so, besides the work of my colleague Joseph Gagnon, there's a professor at Berkeley, Yuri Gorodnikchenko, and his co-authors who did a really interesting paper last summer, I think ahead of Jackson Hall at a different Fed conference, showing that there was this persistently higher upside risk on inflation expectations.
Since we're on monetary policy, you touched on this earlier, but one of the very interesting things in your argument is, you know, you contend that the transmission mechanism isn't quite what it used to be.
Possibly because of the expansion of private debt.
It's less linked to bank rates, bank lending rates.
Talk more about that.
Because if I see an inflationary environment and you say the durability of that inflation depends on what the central bank does in response, even if they raise rates, is that going to be enough to stamp it out?
Because as we've seen, and we've asked a number of central bankers this question at this point, but financial conditions are still really, really sad.
Exactly.
No, I think you're absolutely right.
And I know you recently did an episode with former Fed vice chair Rich Clarida.
And when he was vice chair, he tried to promote this idea of I think I don't know if they actually called it this, but essentially a monetary conditions index.
I think it had 14 pieces to it.
But basically trying to get at what you just said conceptually, that if you in the textbook, the central bank has three channels through which it tightens policy.
One is it directly affects the amount of bank deposits and bank lending.
The second is there are repercussions through the yield curve that if you move the short end of the yield curve, it decreases the further out the yield curve and duration you go, but there is some repercussions along the curve.
And then the third is this expectations channel.
Does the do people believe ultimately that the Fed will get things under control?
But at the same time, that's the textbook.
The working central bankers, and this overlaps somewhat with the people who wrote the textbooks, although I'm not one of them but the working central bankers going back all again Paul Volker are very concerned about monetary transmission in the plumbing meaning which parts of the financial system get affected how much by moves in interest rates or quantitative tightening or regulatory rules.
And so Volcker famously was very upset when money market mutual funds came into play because the idea was those wouldn't be as affected by Fed interest rate moves.
I think a much more serious issue right now is the existence of private credit where not only it exists but is growing but that we have very little supervisory or regulatory transparency into it.
So the central bank or anybody doesn't really know how much is out there, where it's going, what terms, how how shaky some of it might be but anyway so the point is think about it again with respect to the housing market.
So we had a very strong Fed tightening a couple of years ago.
And normally, up until a couple of years ago, one of the first places you would see that would be that there would be layoffs in single family and general residential construction, because these tend to be small firms that are very credit dependent, very both demand their their customers are dependent on mortgages and supply, they need credit to do what they do.
And usually the first one of the very first effects on the real economy of a Fed tightening would be contraction in that sector.
We didn't see it.
We saw very large Fed tightening and essentially no unemployment rise in in housing and not very much change in housing starts.
And that's been replicated across a number of sectors, what used to be called interest rate sensitive sectors in the economy.
And so if you go back to where I started, and you say there are these multiple channels, right?
So two of the three channels arguably are weaker than they used to be.
You can get it back, but you probably have to do something to get it back.
So you're left with this middle channel, which is the yield curve.
And even in normal times or or less chaotic times, there never was a lockstep between what happened at the short end of the curve and what happens at the long end of the curve.
And Fed uh Dallas president Laurie Logan gave a speech a few weeks ago, I think, on some of the aspects of this where she's an expert.
But the bottom line, I keep using that phrase, sorry.
But the bottom line is you I you again, directionally, if the Fed tightens, all three of these channels will have some tightening effect.
But there's good reason to think that none of these effects will be as powerful bang for your rate hike as it used to be.
Let's talk about AI spend.
The numbers were already going to be eye watering for 2026.
And now they're going to be more eye-watering than that.
And we got numbers from Alphabet and Amazon that were just much higher than we're talking like, you know, this moves GDP.
It's a GDP altering numbers.
Like talk to us about how you see the ripple out effects from that spending.
So it's fascinating.
And I actually listened to you all for some of your insights when you talk to people more in that space than I am.
As a macroeconomist thinking about it.
So the first point, go starting again with the monetary transmission aspect is so much of this is self-finance or easily financed.
So Google's now issuing, I guess, this hundred-year bond.
Yeah.
I hope so, in the sense of I hope everybody's still around in a hundred years and gets paid back, and that would be nice.
I won't be.
I'm pretty sure.
Yeah, well.
You know, it's a power, it's a British bond.
It's a sterling-based bond because of those.
Yeah.
The LDIs of their long duration.
Yeah, yeah, yeah.
They're forced to hold it.
The point is like most of it has been cash financed.
Of course.
Yeah, yeah.
So my point was even the parts that are not cash financed are being very easily financed.
So that's the first point.
There is no credit crowding out in the rest of the economy because of this.
There is no credit constraint on them doing this.
That has an interesting implication, which I've mentioned at various times in recent months.
That makes it all the more striking how little investment we're getting from the rest of the economy.
I mean, so if you think about sort of the litany of reasons that a Trump administration official, ex ante could give for why there should be investment boom beyond AI, right?
We've made permanent the tax cuts that are favorable to corporate investment.
We are deregulating.
We are doing things to make the labor market more friendly to employers.
We've got cheaper energy prices until AI pushes up some of that.
But broadly speaking, we've got cheaper domestic energy supply.
And we got a Fed that until recently looked like it was cutting rates.
So beyond AI, there should have been an investment boom.
And my view is that a lot of the Trump administration's creation of massive uncertainty, including through the tariffs and the anti-migration policy, but in other fields as well, is why you don't have an investment boom outside of AI.
And it's not because of tight credit.
And people should be taking that more seriously.
Again, that doesn't change what you just said, Joe.
It's eye watering what AI does.
So that doesn't mean the total GDP has to contract.
But I think people should notice the fact that we haven't had an investment boom.
My colleague Karen Dynana Peterson presented on some of this in her forecast in October.
We haven't had the investment boom outside of AI.
Then the big ticket, there are a number of things we can think about, but the big ticket issue which some Fed officials and Trump officials have been talking about is productivity growth.
How much does this generate productivity growth?
How soon?
How job displacing is it?
What's the effect on inflation?
So let me give you my take.
My view is we're in the process of the baton sort of being handed in the in the imagine a summer Olympics, a relay race, and the one runner hands the baton.
I think a lot of the labor market changes that took place during and after COVID, nobody knew they would be ex ante, but ex post, they turned out to be pro-productivity growth.
There was a lot of good reallocation of workers.
And I think that's running out because that was a one-off thing.
And so now the AI is the main is increasingly the main source of the productivity growth.
But I also think, going back to something you were saying earlier about the tariffs, when you have a supply shock, positive or negative, it it's it's indeterminate how much of that shows up in prices versus real things.
So, like we've had this discussion about tariffs.
Could it be a one-off, could it be recessionary from the tariffs, and therefore not price inflationary.
We can go into why I don't think that's right.
But you have to do the same process thinking about productivity growth.
It's a positive supply shock.
But how much of it shows up as real income gains and how much of it shows up as disinflation has to be determined.
And my reading of the history is when you get a leap forward in a general purpose technology, you get the real income grains up front and you get the disinflationary part later.
Because, I mean, not all the real income gains, but it's primarily real income gains initially.
Because what happens, again, going back to stuff we were talking about, it takes businesses a while to figure out how do I use this technology?
How do I change my production process?
How do I change my hiring and training process?
What are the new products I can offer?
But there's cool products that people want and use right away.
So if you think about the internet in the 90s when Solo famously said the computers are everywhere, but in the statistics.
Well, you know, a bunch of us were starting to use computers, getting productivity gains, but it took several years before Walmart and UPS and science firms figured out how to make use of this and to change their processes.
So sorry to be so long-winded, but I think this is overlaps with a lot of stuff that you hear it odd lots talk about with some of your some of your other guests.
These are non-trivial business decisions, non-trivial investment decisions.
And so if I'm sitting at the Fed, yes, in theory, I don't know whether tariffs are going to be mostly recessionary or mostly inflationary.
For the reasons I've we've discussed, I think they're going to be mostly inflationary starting now and less recessionary.
If you're talking about AI, I think if I'm a if I were a central banker again and I had to make a call, or I am making a forecast call now, I think you're going to see the real income effects in the next couple of years predominantly, and not so much the disinflationary effects.
Then they'll coming.
They're coming, but they're not there yet.
Can we go back to the transmission mechanism and the yield curve for a second?
Because one of the reasons we wanted to talk to you, it's not just because of the report, but also because you're a former central banker, used to be with the Bank of England, the Monetary Policy Committee over there.
There is talk at the moment of a new treasury accord.
And Warsh has kind of signaled some interest in this.
So that would basically be tying the Fed's balance sheet to Treasury financing in some way, coordinating, presumably to, you know, lower short-term rates and allow the Treasury to issue more bills and thereby lower the deficit.
Is that a good idea?
No.
Okay.
Explain.
Yeah.
So during the Euro crisis, when I was at Bank of England, I gave a speech that central bank independence is about the power to say no, but you didn't have to always say no, right?
So you don't want to be, I made the analogy a teenager or a toddler, but I think I use teenager.
You know, you you don't assert your independence by no matter what your parents say to you disagreeing.
So the idea that there should be some coordination between Treasury and Fed or between the central bank and the finance ministry is not unreasonable.
But the idea that there should be an ongoing accord, as opposed to say an emergency response during the financial crisis or during COVID, is what's scared.
And it's scary because if you go back to the work on central bank independence, there's a huge amount of data analysis on this and historical records, and I was one of the many contributors to that literature.
Turns out there are two things that predict whether a central bank is inflationary or not.
And one is does the governor or the chair get fired and replaced a lot out of turn out of the normal sequence.
And the other is does the central bank buy bonds pretty directly from the Treasury?
And there's whole lists of all these other aspects of central bank independence about voting rules and transparency, and those don't have any predictive power.
But those two things do you do you directly buy government bonds and do you have a lot of turnover at the top leadership do predict higher inflation?
And we saw this on the leadership side in with Erdogan in Turkey and Modi in India in recent years where they forced rapid turnover.
It was four or five, I think.
And India's case it was like three.
And again, that's not what we're talking about.
But I think it is important to contextualize the things that Treasury Secretary Bissent and the administration are talking about, vis-a-vis the Fed, are things that historically, over time in other countries, have produced high inflation.
So I mean I can make it more complicated than that, but just full stop.
But so then there comes the question of how much can you fix a fiscal problem through short-term debt management and financial engineering.
Right.
And the answer is you can't.
So generally you, and this goes to stuff that both Walsh and Bissent complained about in public going into the elections in 2024, which was they complained that the Yellen Treasury was financing.
They did the same thing.
Yeah.
And I beyond pointing out the hypocrisy, which I guess is par for the course, I think they had more validity with what they were saying before than what they're saying now.
And again, it's not a good sign about the fiscal sustainability of the U.S.
if what you're trying to do is, you know, get the loan with the free toaster to bridge over your monthly credit card bill.
There is risk to doing more short-term issuance.
So I mean, it's worth thinking back a few years ago, right, when rates were incredibly low, and the Treasury started considering issuing hundred-year bonds or very long-term bonds, or at least increasing the issuance of 30 years versus short bills to fund infrastructure, to fund long-term investment.
And there was pushback from something called the Treasury Borrower Advisory Committee, uh T BAC, exactly.
And the Treasury Secretary at the time, I think it was Jack Lou, said, okay, we're not going to do it.
And the pushback was twofold.
First, the general principle that the US government should be issuing across the range of maturities on a very deliberate basis to continue to maintain the U.S.
Treasury's international and national role as the most liquid, most deep, most stable asset in the world.
And that if you start gaming it for short-term advantage, you lose that.
And that will show up in higher borrowing costs because then the number of people who park in treasuries because it's this domestic and foreign, because it's the safe, stable asset goes down because it's less safe and less stable.
But then there is also the rationale that you don't know what's going to happen.
I mean, look at the fluctuations we had from surplus at the end of the 90s to rising interest rates in the early 2000s to incredibly low interest rates for a decade after the financial crisis to now rising rate.
You know, this is not smart if you can borrow long to borrow short.
We are recording this on jobs day, of course, the new jobs day, which is Wednesday.
It jobs Wednesday.
Yeah, February.
My mind is blown.
No, no, I don't like it.
I don't like it.
Yeah, it feels weird, but we just got some truth social posts out of Trump saying these are great job numbers, much better than expected.
America should therefore be paying the lowest interest rates.
Yeah, I know.
Reward for good work.
We could go on.
I have so many questions, we go on a long time.
But I wanted to sort of get your take on, especially like around Davos, some of the tensions around Greenland and Europe and all that.
And it occurs to me like one of the themes of this conversation, particularly as it relates to tariffs and also immigration, is that people don't make up their minds at once, right?
Corporate leaders don't just say, okay, tariffs are up, because these are big decisions.
And they're uncertain.
You don't know if Trump's gonna give it away or not.
Yeah, that's right.
There's a huge lag.
And then once you make the decision, that's like big mistakes.
And I've been thinking about this like in the context of Europe, because obviously Europe still has this very tight economic and security relationship with the United States.
And the European leaders kind of have to make a bet, which is is Trump the new normal here in the United States, or will the next president uh have a adopt a posture, an economic and security posture that's sort of like the old president.
So no one, no one really knows for sure.
But this is like a high consequence choice to make.
Because if the next president is going to be sort of a more, you know, more normie on this stuff, then maybe you know what?
You just sort of grin and bear it for the next few years and then, or at some point, if the relationship is going to be dramatically changed, Europe really needs to rethink like how much it spends on military, and maybe rethink about oh, do we want a closer orientation with China?
Whatever it is.
And uh big decision to make.
So I'm curious like your take, like European leaders right now, they haven't pulled the ripcord yet on the United States.
There's a lot of frustration, but they haven't.
We had we still have this tight relationship.
Is it are we getting closer to where European leaders might think, look, this is never gonna go back.
Maybe sort of the Carney speech.
It's like we're never gonna go back to the old relationship with the United States.
We're in a new world.
It is the great big picture question, Joe.
And I have been writing on this and talking with European leaders on this.
I published a piece in foreign affairs in September called The New Economic Geography, in which I talked about if I argued that this is a fundamental lasting change because the US is ceasing to be the insurance provider in both security and economic terms that it was.
And that I think it's very fair to say on realistic, whatever happens in terms of successor to the current administration, even if the successor administration, whether it's another Republican, a Democrat, some kind of new party centrist, whatever it is, is not going to immediately credibly reverse everything that's been said and done.
And so it's analogous, the parallel you you were giving, I think is right.
And there's a fundamental economic theory by Dixon and Pindick called um about investment, that investment under uncertainty you delay because, in a sense, it's irreversible.
Once you once once something happens and you commit down a certain path, it's not literally irreversible, but it it it locks you in.
It's not just some cost fallacy, it's rational.
So going from the abstract to the real, where we're coming up on the new Munich Security Conference, annual Munich Security Conference.
And in March 2024, Vice President of J.D.
Vance gave a speech there in the preceding week in Paris, in which he basically March 2025.
2025, sorry, right.
We're in 2026.
You're absolutely right, March 2025.
In which he basically said, you know, NATO, Ukraine, but NATO cannot count on us the way they used to.
And he gave arguments for why that was good for NATO and good for the US and all that, and we can debate that.
But the the it was a very shocking big shift.
And then as you mentioned, Prime Minister Kearney, now the most famous ex-central banker in the world, um, gave a speech in Davos a few weeks ago, which was very much about the trying to say for Canada, it was a general loss of this framework that we've all functioned in.
And interestingly, almost exactly a year ago, I was in Ottawa brought in by the Canadian government to brief them on the likely implications of the Trump.
It was right before the election where Kearney moved from appointed to ongoing prime minister.
But anyway, at that time, I I you know, I was dealing with absolutely shocked Canadians.
And like you said, right, so the first time during Trump's one, people said discounting, the adults are in the room, maybe it'll change.
Under Biden, things did change, but on tariffs and a lot of things, it had been a one-way ratchet.
They didn't go back to the U.S.
You were upset about a lot of the IRA stuff.
Absolutely.
And it was unilateral and I think short-sighted.
But anyway, and the Biden team did a lot of bad things, continued a lot of bad things and did a lot of bad things.
They weren't as hostile on the security front, they were transatlanticists there, but on the economic front, they didn't really roll back, and in some ways they made worse some of what Trump won did.
And so by the time you get to a year ago, which is even before Vance's Munich speech, the Canadians are saying to themselves, oh my God, we this is a perfect example.
We we we just realized we have no internet pipes that don't run through the U.S.
We either have U.S.
satellites or we have U.S.
cables.
We literally have no access to the internet without the U.S.
permission.
And that encapsulates what's going on, right?
That you took for granted that if you were not Russia or Iran, the U.S.
would not weaponize things against you.
And that's no longer a feasible thing.
So going specifically to Europe, this is the biggest challenge to Europe since the war.
This is a situation where a lot of European officials, very much in line with your characterization, Joe.
A year ago we're still in denial, or we're still having a lot of conversations with people like me about is this going to last?
Can we wait it out?
Is this going to turn around?
At this point, nobody believes it's going to turn around.
Or at least nobody believes it's going to turn around sufficiently and last in a way that the Europeans can count on whoever's next the same way they took for granted.
Now, the Trump people would say that's good, they're not taking us for granted.
But from an economic point of view, that it was a good thing that large parts of the world could take the U.S.
enforcing the rules of the game, providing some basic security of navigating the seas and property rights and trade relations and access in and out of treasuries, access in and out of U.S.
markets, that we took all that for granted was a huge boon to business.
It was a huge boon to investment.
It was a huge boon to two-way trade.
So it's a very big deal.
And so a number of people in Europe are involved in various projects trying to come up with what's next.
And two colleagues of mine at Peterson are very active.
Olivier Blanchard, the famous French economist, who's now back in France, is leading an effort on what future for Europe.
My colleague Jacob Kierkegaard, who's based in Brussels, does a lot of work on how much common European funding is going into the military and how sustainable is that.
So the amount of spending that these countries are doing on military is a declining function of how close they are to Russia.
I mean, you can literally do the scatter plot.
Poland and the Baltics and Swedes and the Norwegians, Norway's not part of Europe, but it's part of NAO, anyway, are spending a lot more.
Germany's in the middle, Spain and Portugal are not spending.
But you're back in a world of that kind of geo in geopolitics really mattering.
And the final thing I would say in this, because we're coming up on the Munich Security Conference, is ahead of this, there was an announcement of a new idea backed by Meritz in Germany and Macron in France, of sort of a leadership committee in Europe moving ahead.
So it would be Germany, France, Poland, Spain, Italy, basically, the big countries plus Netherlands.
And that was a no-go for decades in Europe.
That things had to be done by involving everybody, things had to be done by qualified majority or unanimity.
And this is a statement.
We have to stand up.
And so my view, which is ultimately more optimistic than a lot of Europeans, is that what Europe chooses to do, they have a lot of agency.
They will have a lot to determine the outcome of how bad things go for them and for the rest of the world, as Trump and she end up pursuing similar bad economic policies.
I mean, it is very telling about our current moment in time that we're talking about the Munich Security Conference as like a macroeconomic communicator at all, right?
Absolutely right.
Used to be just for foreign policy wonks.
Exactly.
Now it's for econ wonks as well.
That's right.
Also, why are they holding it on Valentine's Day weekend?
Oh no, they do all these things.
It's like it's like the UECB Centra conference is always on July 4th weekend.
It's just they ostentatiously don't watch the Hallmark channel.
It's just no good.
Thank you.
That was fantastic.
That was a great conversation.
We could ask you so much more, but really appreciate you uh coming on odd lots again.
Really glad to be with you both in odd lots.
Keep up the good work and thank you for having me.
All right.
Take care.
Thanks so much, Adam.
Tracy, I thought that was a great conversation.
Your point there at the end, don't tell with something else you said about the sort of the link now between security and macro.
Yeah.
I was thinking about that observation.
We should definitely do more on this, you know, Canada not having access to the internet unless it's through the US.
So how do you solve that?
Well, like you spend and you build new pipes, you build new undersea cables, you build more satellites, but that's spending.
That's right.
Right?
That's inflationary.
Yeah, it's inflation.
And so, you know, again, it's the same thing with we talked about it with Jeff Curry, Europe spending trillions on defense.
These concerns about whether the degree to which countries can rely on the US anymore, the way you address these concerns is a lot more spending.
Absolutely.
To me, I we are seeing some inflationary signs, right?
Like we talked about them at the beginning, and you can't really ignore them.
I guess the the big question is how much of this is like a temporary like blip in terms of building back inventories.
You know, maybe people ran them down all last year because they didn't know exactly what was going to happen with tariffs, but now they really have to stock back up.
And so you're getting this like one time inflationary hike, or is this the start of something that's kind of I know we keep using the word durable?
Um, but it is the right question.
It is the totally.
And like if you look at something like trucking rates, and again, like we're interested in trucking rates.
We did a lot of episodes on it, but also they're just a good macroeconomic indicator.
We've seen some glimmers of a recovery there.
So freight rates are starting to go up, but everyone's kind of saying, well, we need to see like six weeks of sustained improvement.
So I think that's kind of like the question right now, February 11th.
Do we get more sustained inflationary indicators over the next month or two?
Absolutely.
And um, you know, again, I you know it's interesting, even if we'd had this conversation, say a month ago, something like that, when you know it looked like maybe there was more, you know, the the story of job market softening was less unambiguous or something like that.
When you think about the new Fed share, it's like, okay, do we need rate cuts right away?
It's like, uh, 25 basis points, 50 base points.
Maybe it could they could be a little lower.
It's not the end of the world.
If there is a reacceleration, if we actually are seeing gathering steam again, and the incoming Fed share still has this impulse that like you have to like cut rates, you have to establish.
I mean, Trump joked, but not really a joke.
He's like, Oh, I would sue if uh Kevin Warsh doesn't cut rates.
If you have this sort of rate cuts into a period of we're actually seeing reaccelation, that's like a very different story.
No, I can't.
And uh very yeah, you put more fuel on the fire.
So a lot of sort of interesting risks out there.
Yeah, people were kind of ambivalent about a rate cut even when the labor market was softening.
Yeah, exactly.
And then if you say you're gonna cut rates when it's reaccelerating, well, we could go on.
Go on.
Shall we leave it there?
Let's leave it there.
This has been another episode of the Oddlots Podcast.
I'm Tracy Alloway.
You can follow me at Tracy Alloway.
And I'm Joe Weisenthal.
You can follow me at the Stalwart.
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