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Moneybeat: Employment does not cause inflation


WORLD Radio - Moneybeat: Employment does not cause inflation

Plus: Asking questions about the Silicon Valley Bank failure by trekandshoot

MARY REICHARD, HOST: Next up on The World and Everything in It: the Monday Moneybeat.

NICK EICHER, HOST: All right, it’s time now to talk business markets and the economy with financial analyst and advisor David Bahnsen. David is head of the wealth management firm The Bahnsen group, and he joins us now. David, good morning to you.

DAVID BANHSEN, GUEST: Well, good morning, Nick, good to be with you.

EICHER: Well, David, the Chairman of the Federal Reserve, Jay Powell, appeared before committees in both houses of Congress last week. This was his first appearance before Congress in nine months time. His basic report was that inflationary pressures are running higher than they were the last time the Fed's Open Market Committee met, which would have been in February. Now you're going to hear Jay Powell refer to that panel by the initialism FOMC. We're going to play a bit of what Jay Powell said before the Senate. So let's have a listen.

JAY POWELL: From a broader perspective, inflation has moderated somewhat since the middle of last year, but remains well above the FOMC's longer run objective of 2%. Although inflation has been moderating in recent months, the process of getting inflation back down to 2% has a long way to go and is likely to be bumpy.

EICHER: So David, I'm going to ask you to demystify this for us. The Fed's target interest rate range is four and a half to four and three quarters percent if I have that right. And of course, market interest rates, the rates that you and I pay, are a lot higher than that. But because of these multi-day hearings, there were a lot of Fed stories on the Business Wire and into the headline news. So a lot of people were hearing about Jay Powell. What do we need to know, in order to understand what Powell is saying to the Senate and the House?

BAHNSEN: Well, I don't think that he's saying anything other than we have a plan to raise rates by a quarter point, and if we think inflation is getting worse, we'll raise by more than a quarter point. They're not going to raise by more than a quarter point at the next meeting. And I believe that his standard talking points of telling the market what they're going to do, and then adding qualifiers, like of course, if the data changes, then we'll change is very expected and very normal. I totally disagree with them, that there are upward inflationary pressures right now. But you notice he equivocated when he talks about growth, when you talk about jobs, when talking about wages, as these things are supposedly inflationary. I think it's a huge fallacy. And so we will see what the CPI number comes in here this coming week, and we will see what the Fed does next week. But I will go out on a limb and say that they will raise by a quarter point. And it's entirely possible they're going to raise by another quarter point at the meeting after that, that's certainly what the futures market is expecting. And I will be very surprised if they raise beyond that at all. I think that they're on the verge of breaking something, but have not yet broken something, and therefore they have a good chance to get out before doing real damage.

EICHER: David, I want to hone in on the idea that strong economic numbers are basically bad news. Job growth, for example, is overheating the economy, and the Fed needs to cool that off by raising rates. Recently, you quoted Elizabeth Warren favorably. And I think maybe it's time for a little more Elizabeth Warren here. As I said, Chairman Powell appeared before the Senate, which meant he appeared before Senator Elizabeth Warren. Warren took Powell to task repeatedly pressing him to address an estimated 2 million workers who might lose their jobs as the Fed tries to slow the economy. Powell responded by saying inflation is, quote, extremely high. It's hurting the working people of this country badly all of them. Warren then asked, does that mean unemployed workers will just have to bear it. Powell then responded with a question of his own, will working people be better off if we just walk away from our jobs, and inflation remains 5% 6%? David, why is that the choice? Why is that the trade off? Is employment really the cause of inflation?

BAHNSEN: No, it is not. It's a ridiculous theory. It's been so disproven over the last 50 years in economic life, that it's just absolutely depressing that we have to have the conversation and worse that we have to have a far left wing, economic progressive, like Elizabeth Warren being the one to actually make this case. Now let's not give her too much praise. She's rooting her argument in the notion that inflation is caused by profiteering and by entrepreneurs trying too hard to make money. which is an equally preposterous theory. But that in this moment, no one on the right is stepping up to say that economic growth is not inflationary, that employment is not inflationary, that wages are not inflationary is utterly depressing. And I hope that you and WORLD listeners know that I've been making this case for two years. And the trade-off is called the Phillips Curve. That's the economic term. And it was an academic theory that had gained a lot of weight in a kind of Keynesian environment, post-Depression, post-World War Two. And I had thought it was left for dead in the 1970s, when it was very clear that high unemployment was not putting downward pressure on inflation. The inverse of that, of course, is that low unemployment does not have to be putting upward pressure on inflation. And so we saw last week, the wage growth number was only 0.2% for the month, that's the lowest in over a year. And in fact, the annualized wage growth has now gone from near 7%, to only 4.6%. There's big downward pressure in the inflation of wages. And yet these Phillips Kurvers, and the academic ideology that Jay Powell is promoting on the Senate floor would suggest the opposite, that you should see what they call a wage price spiral, that the high level of inflation will be pushing wages higher, it's doing no such thing. I think that the wage inflation we saw in 2021 and '22 was a byproduct of very low immigration at the time, in the COVID moment. And, of course, big labor shortage domestically, as there were significant unemployment benefits and stimulus checks and incentives, and then culturally, a lot of people leaving the labor participation force. And that was a temporary and very unfortunate moment. But that right now there being strong demand for labor, is the furthest thing from inflationary. It is what is needed, Nick, to put downward pressure on inflation. Because with more workers, you get the production of more goods and services, you aid the supply side of the economy, and it helps normalize an equilibrium between supply and demand, which is anti-inflationary.

EICHER: Okay, David, on Friday, we received news of the biggest bank collapse since the financial crisis of 2008. According to The Wall Street Journal, Silicon Valley Bank collapsed on Friday, in the second biggest bank failure in US history after a run on deposits. So how big a deal is that? That seemed to have come out of the blue, but you've been talking about overvalued tech for a long time. And this was a big tech bank.

BAHNSEN: It was almost exclusively a tech bank. They put it in the name of the bank. So the whole reason that we-- Alexander Hamilton use to promote the idea of a national bank was the need for geographical diversification and sector and industry diversification. If all you bank is farmers, and farmers have a drought, then you have a real problem with your bank. And if you bank machinists, and educators, and healthcare and technology, and one of those sectors has a problem, then you likely don't have a problem with your bank. And in Silicon Valley Bank's case, they primarily bank venture capital firms and a lot of startups that were funded by venture capital. So you had a perfect storm, and I'll try to go quickly, but it's something I spent all weekend studying. I am firmly in the camp that this is a highly idiosyncratic event that will not prove to be systemic, or contagious. I expect that there could be a couple of other banks caught up in it. But in fact, you saw on Friday, JP Morgan, the largest bank in the country, it's stock was up as the market was tanking and as most banks were going down, the small and regional banks were getting hit as investors were concerned about smaller banks and the big banks that are more over-capitalized were doing well. 

So in a nutshell, what happened with Silicon Valley is that the interest rates go higher, and that has really deeply hurt the venture capital space. They can't get the easy funding they could get, a lot of their projects haven't taken off. We had a bubble in this tech stuff. I've been talking about it for over two years. So then a lot of the venture capital firms that, of course, their companies don't have any profits or any cash flows, they're startups, that's what venture capital is. They're used to raising money from equity and debt investors. That's dried up in a high rate environment. So they have deposits with this bank and they have to start depleting their deposit base. So that brings the deposit base of this bank down. But then to keep their capital cushion where it needs to be, they have their own portfolio of capital, which is largely in short term government bonds. And those have lost value for the same reason venture capital is hurting: higher interest rates. So they sold off a huge portion of their bond portfolio to raise cash and took a $1.8 billion loss in doing so. So their deposit cushion drops, their own capital cushion drops, then the worst thing that can ever happen to a bank happens, is the CEO is publicly having to defend the bank. And once you have to go tell the public that your bank is okay, you're not okay. And that's what happened. It was a classic run on the bank. 

I don't I'm not conspiratorial, but I just will try to help WORLD listeners get in front of this, we will end up finding out--it may not be soon, that there were some hedge funds and others who kind of helped, you know, facilitate, let's say, making money on both ends of this. And that's their prerogative within a leveraged financial system. I just simply believe that this was a really poor case of management at Silicon Valley Bank. And yet I do not believe that it reflects something systemic about the banking system.

EICHER: Well, a very big news week, this past week, so we will return to listener questions. And you may have a question for David. So if you do, please don't be shy about sending it over. The email address is And thank you to David Bahnsen. He's Founder, Managing Partner and Chief Investment Officer at the Bahnson group. You can check out his personal website David, thanks for bringing us up to date on all of this news from last week and we'll work, we'll catch you next week. Have a good one.

BAHNSEN: Thanks so much, Nick.

WORLD Radio transcripts are created on a rush deadline. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of WORLD Radio programming is the audio record.


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