Episode 101: Inflation and the Feds with Dr. Murray Sabrin

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Tom Wheelwright:

Welcome to the WealthAbility show. We're always discovering how to make way more money and pay way less taxes. Hi, this is Tom Wheelwright, your host, founder and CEO of WealthAbility.

So big topic right now is inflation. How do we navigate through it? How do we deal with it? What's going to happen in the future. And I am so excited to have Murray Sabrin on the call. He is an expert on inflation. He just wrote the book about it, Navigating the Boom/Bust Cycle, which is really all about these big booms and then the bust and the inflation that goes along with it. So Murray, it is just absolutely a delight to have you on the show.

Murray Sabrin:

Well, thank you, Tom. I'm really delighted to be with you because when I first had the idea for this book two years ago, who knew that two years later, the economy would be in a full blown boom and inflation would be roaring unlike we had in 30 years.

Tom Wheelwright:

Exactly. Exactly. Here we are at the top of inflation rate in almost 40 years, I think. And, you and I remember that far back, not all of our listeners do. But I remember those days of the late 70s and the early 80s when we had that inflation. So tell us if you will, just start out Murray, and give us a little of your background and why you're interested in this topic in particular?

Murray Sabrin:

Yeah, I was on the staff of the business school of the Ramapo College of New Jersey for 35 years from 1985 to 2020. And I wrote two books while I was on sabbatical during that time period. One on something I think your listeners would enjoy, how to create a tax-free America. So we finally, we get rid of the IRS, and all these other taxes that are really undermining prosperity, long-term prosperity.

But despite the taxes and the regulations, American entrepreneurs are incredibly innovative and creative and inventors still invent despite what the Federal Reserve, the federal government does. So, that's the good news about the economy. And so I've been writing about the Fed since the 1970s. In fact, I had a piece in the New York Times, a very long letter explaining what the Fed does and how it creates inflation and that why we need to stop the Fed from inflating the supply of money, which creates all these distortions, these booms, that unsustainable, we've seen the what, dotcom bubble burst. We've seen the housing bubble burst.

And now we have what economists have called, at least some economists, the everything bubble, housing prices in some parts of the country are up 30%, 40% from a year ago. That's clearly unsustainable and not an example of a good economic environment when prices are rising so much faster than people's incomes. And so I've been writing about these issues.

I wrote about a book about the Federal Reserve with the provocative title, Why the Federal Reserve Sucks. It causes inflation, recession, bubbles, that enriches the 1%. I also wrote a book that was published this year in the summer on how to create universal medical care, not the way Bernie Sanders wants with Medicare for All, but using free market approaches and techniques to make sure that everyone is covered. And that's outlined in my book on universal medical care.

And then this current book on Navigating the Boom/Bust Cycle, which is a guide for entrepreneurs, how they can see when the boom is underway, when it peaks, and then when the bottom occurs in the cycle. So they can make their plans to avoid getting trapped in a boom where they sometimes go out of business because they've over-expended themselves. And at the bottom, they can really buy up cheap assets and ride the next wave of the boom.

But as long as we have a Federal Reserve, which we've had since 1913, they opened up their doors in 1914, we've had these boom/bust cycles. And ironically, the fed was established back then to smooth out the business cycle because we had banking panics in the 19th century, because the banks were printing money. Now we have a central authority printing money and that money, diffuses through the economy, which my dissertation demonstrated 40 years ago. And here we are today with another inflation problem.

Tom Wheelwright:

So, Murray, let's step back just a second and talk about what causes inflation? There's been a lot of talk about, it's supply chain interruption. That's the cause of the inflation is that we have the backups in the manufacturing process and the supply process on the ships, on the container ships. Briefly, in your words, what do you think causes inflation?

Murray Sabrin:

Well, inflation, economists have known at least the good economists have known for centuries that when you have an authority being able to print money, literally out of thin air, like the banks did in the 17th, 18th or 19th century, like the Fed does in the 20, 21st century, that creates more purchasing power that is spread throughout the economy. And that tends to raise prices and wages and asset prices across the board. So, inflation, price inflation is the result of monetary inflation, which is done by a central monetary authority.

Now, the supply chain is an interesting issue because most people conflate prices hikes from supply chain disruption and monetary inflation, price inflation caused by the Fed. When you have supply chain disruptions, those price hikes are not the result of monetary policy, but the disruption to the smooth flow of goods and services from producers to eventual consumers.

So price inflation as is generally understood is a widespread phenomenon that affects virtual all prices in the economy. Supply chain will only affect those goods that are disrupted or the flow of goods that are disrupted by the supply chain. And there are goods, and that's why in the whole macro economy, you've got to sort this out as to what is causing the price hikes.

Tom Wheelwright:

We definitely have different levels of inflation for different things right now, right?

Murray Sabrin:

Absolutely.

Tom Wheelwright:

We were talking before, like Phoenix, Arizona, our asset prices have gone way up, right? The stock market asset prices have gone way up. And so you have this asset price inflation, and then you have food that's gone way up. But then you have other things that haven't. So, at what point can you figure out that this is widespread inflation instead of just supply chain inflation?

Murray Sabrin:

Well, I just downloaded the Bureau of Labor Statistics press release on the recent consumer price index. And you can see inflation is virtually across the board. There's virtually no price that has gone down in the last year. So, that indicates the money that the Fed has created. Remember, they created $4 trillion last year in reaction to the COVID situation, the COVID lockdowns in order to stimulate the economy. That money is now spreading through the economy. The Fed, the money supply increased 25% last year. That is an enormous increase.

M2, the broad measure of the money supply, which is cash and checking accounts and savings accounts and money market accounts, went up by $5 trillion last year. So that money is now going all over the economy, doing its thing, so to speak, raising prices, raising wages. And the average consumer sees prices going up. And of course, historically they blame the president, but it's not his fault. Unless of course he's spending crazy amounts of money, which Biden is. And the Fed is monetizing the debt in order to make sure the federal books are balanced.

And so what you have is trying to sort out what's going on and it's pretty simple to figure out. Has the money been created? Where is it going? Which would be the result of the Bureau of Labor Statistics' data. And interesting enough, I'm living here in Southwest Florida, the city that had the highest inflation rate for the past year is Tampa, Florida, 8%.

Tom Wheelwright:

Interesting.

Murray Sabrin:

And we know housing is a major component of the CPI. So I would imagine if we do a deep dive into the Tampa consumer price index, we'll probably see housing prices really going through the roof.

Tom Wheelwright:

So, this is something that's, I've been wondering, I have my own theories, but I'd like your thoughts. So after the 2008, 2009, 2010 crash, the Fed started pumping money. Why did it take until really this year before we start seeing inflation, when the Fed has been pumping money in for the last 15 years?

Murray Sabrin:

Yeah. Well, that's a good question. There are several things that are at work here. I call it the WAC factor, Walmart, Amazon, and China, because they're the ones that … China's producing goods at very low cost and therefore low prices. It's being distributed through Amazon and Walmart and other retailers. So there's been a lid on inflation, but the stock market, look at the stock market. It seems the bottom of March of 2009. It's up, I think, if I recall correctly, about seven times, eight times.

The economy hasn't grown that much. So the money that the Fed has created has flowed into the stock market, the bond market and the real estate market. Consumer price inflation has been dampened because of pretty good productivity and really relatively inexpensive goods coming from overseas. Now, the genie's out of the bottle because last year's enormous increase in the money supply. And we're seeing the effects in 2021, at the end of 2021.

Tom Wheelwright:

So do you think we're just catching up basically?

Murray Sabrin:

Well, I think the inflation would've been dampened if the Fed didn't create $4 trillion last year. So with that money, is going to flow through the economy for the next year or two until the Fed really throttles back. And here it is December what, 14th, today, 15th? And the Fed announced that it's going to raise rates next year. And the question is how much money will not be put into the economy? And if the Fed really slows down the growth of the money supply, like they did in 2008, that precipitated the stock market crash of 2008 and the deep recession that we felt.

So what the Fed does is, as I call it, one of the chapters of my book, wash rinse, and repeat. They do the same thing over and over again, and expect a different result. And of course, Einstein said, that's the definition of insanity. So they're going to give us these bubbles for as long as they keep on doing what they've been doing, which is pumping money in, lowering interest rates to “stimulate” the economy. But all that does is create bubbles and over expansion in sectors of the economy that are unsustainable.

Tom Wheelwright:

So, before we get to, okay, how do we predict this? Because that was your premise when you started out, is how do you predict the booms and the busts? Before we get there, we were talking before we started the podcast, that is it the Fed that there … Because the Fed really puts money in the bank that they can give the banks more freedom. But it's really the money that's come in has come from federal government.

Now, the Fed creates that, but the federal government distributes it. So, is it the money? Is it the Fed's actions? Or is it the government's actions? Or is it that combination of the two that's creating this surplus money supply?

Murray Sabrin:

This is a great question. This is the synergy of between the federal government and the Federal Reserve. The Federal Reserve is essentially the enabler of all the excessive spending in Washington. So in Washington, they don't care about balancing the budget by just taxes. We've been running deficits for as far as the eye could see practically, except for the late 90s, under Clinton when you had surpluses.

But that surpluses were the result of the federal government borrowing money from the trust funds, the social security and Medicare trust funds. So essentially the Federal Reserve, instead of being the keeper of monetary stability and sound money, essentially has enabled the federal government to just spend for the past several decades to support the great society programs, all these other welfare programs, the big military budgets over the past 50, 60 years.

So again, you have a very synergistic relationship between the federal government and the Federal Reserve. And every president wants low interest rates going back to the Johnson administration, that he wanted low interest rates to fund the great society program and the Vietnam war. So there's nothing new going on here.

Now we have a massive well pressed state. We have a very large military budget and that has to be funded. And of course they're not going to raise taxes to pay for that. Otherwise, you'd have a revolt in the country. In order to raise what, $1 to $2 trillion a year to balance the budget. So they just issued debt and the federal reserve is buying up a good portion of that debt, and also mortgage-backed securities to keep mortgage rates low, to keep the housing bubble going.

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All right, so how long does this inflation keep going? Assuming that the Fed just uses its normal tools, right? The things that it's doing, like you say, wash, rinse, and repeat. Assuming it does that, how long does this bubble go before it does what it did in 2008? Before what it does what it did in 1999, 2000? Before what it did in 1990? How long can they push out the bubble?

Murray Sabrin:

This is very important. If you look historically, the last inflation cycle we had, believe it or not was from 1965 to 1981 during the Johnson administration, the Nixon administration, the Carter administration. And Carter brought in Paul Volcker to really dampen inflation. And he raised interest rates to what, 21%? In order to dampen the double-digit inflation of late 70s. So we had a 15-year inflation cycle where inflation was accelerating from 1% during the Kennedy, Johnson, early years of Johnson. And then it ratcheted up until it peaked in the late '79, early 1980.

And so it could go on for a long time. It's not going to go in a straight line where inflation accelerates every year for 15 years. It'll accelerate, it'll decelerate, but it's like a step ladder. It's a one step up, one step down, and up. And we know what happened in 1970s, it was a terrible decade for investments and for productivity because of the inflation, the regulations that to his credit, Jimmy Carter started unwinding in the late 70s. And we had deregulation in so many industries and those industries have blossomed since then.

So as far as this cycle, remember inflation could be a very long cycle or it could be short-term cycles. It could be three, four years of accelerating inflation. So how long will this cycle last? It really depends on how the Fed reacts next year and the year after to what may be an accelerating of inflation from the 6.8% we've had for the last 12 months, maybe to 7.5% or 9.2% the following year. We don't know, we just have to let the data unfold. There's no way to predict what the rate of inflation will be over the next several years.

Tom Wheelwright:

But at what point, because what's always happened in the past, is there comes a point where that bubble comes crashing down because the Fed basically has to pull the rug out from under it, because it can't just slow it down. It actually has to put brakes on it. So how long do you … Because I think the Fed will push it out as long as they can.

Murray Sabrin:

Oh, there's no question.

Tom Wheelwright:

I think there's absolutely, clearly they could have done things in 2009 that could have solved this, frankly. I thought they could have done some things right then. They had the chance to do it and they decided not to. Instead they decided to pump the money back in. They started to keep this thing going. So I think they'll push it out as long as they can. How long do you think they can push it out before that bubble actually bursts?

Murray Sabrin:

Well, this is why I look at the interest rates term structure. If short-term rates go above long-term rates, that's the inverted yield curve. And historically the inverted yield curve has given a good signal that a recession is about to begin six months to a year later. And that's what the data show. It's clear right there on the [crosstalk 00:17:14].

Tom Wheelwright:

Is it [crosstalk 00:17:15] where we are now?

Murray Sabrin:

Well, it's the difference between the two-year and the 10-year. And that differential is starting to close. So if the Fed keeps on raising rates, the market's going to take the two-year rate higher than the 10-year rate. And that's when we get the inverted yield curve. That could happen next year. Will it happen? Nobody knows that. But if the Fed is very aggressive in raising rates next year, because inflation's accelerating more than they think, and market participants want a higher inflation premium on lending the government money, that's when the yield curve could invert, sometime in 2022.

It could be in the first half. I doubt it, it's going to be in the first half. It'll probably be, if it happens in 2022 in the second half, and maybe even in the fourth quarter of 2022. And then we could have a recession in 2023 or 2024. So again, that's the roadmap I think we're on right now to where this thing will unwind. And of course, when we have a recession, price inflation tends to decelerate quite a bit because it's very difficult to keep prices high when people are losing their jobs and demand declines for a whole host of goods and services, especially commodities and intermediate products.

So again, we're in the last stages of this current boom cycle. And no one knows how it's going to last. But the point is, another indicator I look at Tom, is the unemployment rate. If you look historically when the unemployment rate reaches 3% to 4%, which it has in previous cycles and then flat lines, goes sideways for several months and then starts increasing, that tends to show the beginning of a recession. Because that means that employers are starting to shed expenses, and the biggest expense they have is labor because the economy is beginning to contract.

Tom Wheelwright:

What I'm hearing you say is, is that, see if I get this right, is that the Fed has a choice. They're really choices between inflation or a bust in the cycle. So they basically, that's their choice. They can either go along and have inflation or they can bring this down, and in that case, you're into a recession. Are those their only two choices is my question?

Murray Sabrin:

No. This is why this is such an interesting topic. If you want to prevent the boom/bust cycle, the Fed should stop manipulating interest rates, trying to micromanage the economy by setting short-term rates. Let the market set this price of money. I mean, that's what markets do. They set the price of all sorts of goods and services. And they should do also in the financial sector. But the Fed has this obsession, if you will, that they know what should be the interest rate on short-term loans. And they don't know that information. That's very conceitful of them to say, we know what exact interest rate should be.

In fact, with inflation running over 6%, everyone who has a savings account, money market account, or a CD is getting creamed. In fact, the recent study pointed out that $4 trillion has been gone from savers to others in the biggest transfer of wealth in the history of the world because of the Fed's easy money policy since 2008, 2009.

So my conclusion is the Fed is not the great savior of the economy, it's the great destabilizer of the economy. In fact, I've said on the air, on other programs that the Fed is really the enemy of the people, especially savers. Because if we had a market rate of interest, CD should be yielding 6%, at least the inflation rate. And so if you have $100,000 in a CD or a money market account, you're getting virtually zero interest rate and inflation's running 6%-plus. You're losing 5% a year in purchasing power. That to me is unconscionable monetary policy.

Tom Wheelwright:

So basically, if I'm understanding this right, the Fed is artificially suppressing rates to encourage growth.

Murray Sabrin:

That's it.

Tom Wheelwright:

When, if it left it alone, the growth was slow on its own.

Murray Sabrin:

Well, here's the interesting factoid. Since the 2008 housing bust the rate of growth in the economy, a real GDP has been the slowest in decades. So when presidents say this is the greatest economy in the history, that's just false based upon the data. So the economy has not been perking up over the last few years because of this enormous monetary stimulus. And it's interesting, what are the reasons for it? I think it's because of the distortions that built up. Some sectors are doing quite well. Some sectors are not doing well.

Entrepreneurs are trying to figure out, is there demand going to be there for my products? Should I expand my factory? Should I expand my retail locations, and things like that? So the Fed does a lot of harm to the economy and from my perspective, and all the understanding of monetary economics in finance, the economy should be left alone and on its own. Entrepreneurs and consumers and investors will make for a great economy. So if you want to make America great again, to borrow a slogan, just leave the economy alone and reduce spending, reduce taxes, reduce regulation, and stop inflating.

Tom Wheelwright:

I'm totally in favor. I love Art Laffer. I love the idea that the lower taxes because they're a drag on the economy, et cetera. Given the old adage, “Don't bet against the Fed,” the Fed's going to do what the Fed's going to do. We don't get to control the Fed. We don't get to control the federal government either. Okay? Given what we know is happening, I mean, here's the federal government trying to put another $3 trillion into the economy in this Build Back Better. Which, I always say that if the government calls it something, it's the opposite.

They've got this big bill, spending bill, which they say is 1.75, but we know is more than that. So given that, what does an entrepreneur do now to prepare for what's coming?

Murray Sabrin:

Well, the thing is that bill doesn't seem to me at this point that will be passed because there's just too much uncertainty about all the spending. And it's basically a kitchen sink type of bill, but they're spending for everybody and no really consideration of the cost. And the CBO, the commercial budget office measured it, and they said that the cost will be much greater than the Biden administration says it will be.

Having said that, entrepreneurs really have to have their antenna up in terms of their local economic conditions. What's happening with suppliers? What's happening to prices? What's happening to wage rates? So in order to be an entrepreneur today, you really have to have a good handle on all the variables that could affect your bottom line. And that's why I wrote the book to give them a handle on how to figure out what's going on in their economy, the big picture, macro picture. And what they should be looking for as an entrepreneur in their own little business world.

So again, there's a lot of information packed into the book and I think I couldn't have written a more timely book and a more important book for the business community. And so right now businesses are scratching their heads and figuring out how long will this boom last? And should I expand? Or should I just sit on my hands? And that's a tough decision. I mean, there's no single answer to that. It's just what your expectations are of the future. If your expectations are that this boom could last for a long time, then you might as well go ahead and expand and roll the dice, and make sure you don't get caught when the bubble bursts.

Tom Wheelwright:

Yeah, I think there's one more challenge, Murray, and that is that wage prices have gone up so much. We're feeling it in my industry, CPA industry. I mean, the wage inflation has been enormous this year. Wage inflation isn't short term because you can't take it away. So if you give somebody a raise, if you give somebody a 10% raise you can't next year say, well, we're going to take away 10%. Once you give it, it's done. So with that wage inflation, how does an entrepreneur deal with that? Given that, okay, prices may come down, but your wages are not going to come down.

Murray Sabrin:

This is the delicate balancing act because you certainly don't want to lose employees to your competitors or to another firm in a different industry. And so this is where you have to have an honest conversation with your employees and say, listen, this is the reality of our economy today. And here's where we are in our situation. And I want to be as flexible as possible in order to pay you a wage that's commensurate with your productivity and value to this company. Because without employees, a company is nothing, but by the same token, Without capital investment, a company is nothing.

So you really have to have that conversation with the employees and say, listen, given the situation, we're going have this raise for this year. And we'll revisit it at the end of the year. I think if you do that, instead of trying to lock in a multi-year contract with people, that's where you can get in real deep trouble, because once it hits the fan in the economy and you have this high wage expense, it's very difficult, as you say, to pull it back and therefore, you start laying off employees.

Tom Wheelwright:

That's a good point. That is ultimately what happens is that you lay off employees because you really can't, your best performers, you can't … I mean, there's just no practical way. You just cannot reduce salary. Once you give an employee something, you can't take it away from them, otherwise, you will definitely lose them. So I think this is all sage advice.

What I love that I'm hearing from you Murray, that I think is great is that if you look at the macro, it'll help you navigate the micro. And I think what I hear from your book is, your book is navigating boom/bust cycle. This is macro type stuff, but we have to look at the macro, if we're going to deal with the micro day-to-day. Does that make sense to you?

Murray Sabrin:

Absolutely. Absolutely. I mean, there are people who say you should never look at the macro because you don't live in the macro world, you live in the micro world. But the point is the more knowledge you have the better decision-making you can do. And that's really, I think the key to entrepreneurs is to know where we are in the cycle. Because if you don't know where we are in the cycle, you may say, hey, things are great. I'm going to really put my foot to the pedal and borrow money to expand. And before you know it, you're borrowing at the peak of the cycle. And before you know it, you're sitting with debt and a loss of customers, a loss of sales.

Tom Wheelwright:

There you go. So the book is Navigating the Boom/Bust Cycle: An Entrepreneur's Survival Guide. Murray Sabrin, so good to have you on the show. If you would, where's the best way to get a hold of you or find more information about all that you do?

Murray Sabrin:

Well, my blog MurraySabrin.com. There's a flyer on the homepage where you can click on to the publisher's website and they have a 20% discount for both the ebook and the paperback. The publisher's very excited about the prospects for this book and they don't want the price to be a barrier to people buy it. This is a great book for undergraduate business students, MBA students, small business owners, and of course, corporate decision-makers, because they may not know where we are in the cycle. And I try to give the information that I think is the most relevant to business decision-makers.

Tom Wheelwright:

I appreciate that. So everybody just remember that the more we understand about not just the micro, which is our day-to-day, when we talk about that a lot on this show, but the more we talk about the macro and we understand the macro, the better we can predict the future. The better we can project out what we're going to do. And the more money we'll make and the less taxes we pay. We'll see you next time.

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