Hey, this is Tom good morning happy Thursday This is about 6 a.m over here and I thought I'd Use this kind of quiet time to chat about the very weird relationship between the Federal Reserve and the unemployment rate. Now usually the Federal Reserve and the government would like the unemployment rate to be as low as possible. More people employed is good for the economy, right? Yeah, common sense. So why Now in recent times, the FED is getting a rash on its Underpants every time we mention the fact that unemployment is at 3.4 percent, which is a historically low number.

In fact, it's pretty much as close to Full Employment as we can get. Why does the FED not like that? I mean isn't more people having jobs good? Well, let me explain. The first Theory would be is that the government would like to keep poor people as poor as possible because it's a control mechanism, right? and I totally get it. I mean governments never pass a good opportunity to control people, especially poor people.

But unfortunately that's not one of these cases. and I'll explain. You see, the FED is trying to prevent a far greater evil than the unemployment rate going from three and a half to seven percent and I'll talk in a second about why I said seven percent because I think that's the real number we're headed into. I'm just giving you a hint because what the FED is trying to prevent is a runaway inflation.

Because if runaway inflation actually happens as it happened in Turkey and other places and actually in Russia back in the day, then the effects of such runaway inflation would be far worse than more people losing jobs. It will be an all-out economic collapse for everybody. And the people who we see get hurt the most in this situation are mostly the poor people in the middle class because the ones that are very rich. Yes, they will suffer.

but I mean they won't collapse, They still have reserves. I mean the poor people? the middle class are the ones who suffered the most because of runaway inflation. So now we know why the FED is doing it. But the real question would be I guess for you as the thinking person.

Well Tom why would run away inflation uh, be worse than people losing their jobs Because I mean people not employed is the worst thing, right? and I get it. If you ever lost your job, you know that unemployment and not having an ability to survive is is as bad as it gets. But Runway inflation actually will be worse. and I know it sounds horrible for me to say it, but let me explain and just Pat on my pants.

But it's okay. Um, the thing is with runaway inflation is that it causes a few things. Number one, it causes loss of purchasing power completely. So imagine and this is a real situation that I've seen happen in.

Russia Imagine that over a few days the price of socks have gone up from you know, one hour's worth of salary to two weeks worth of salary. literally. I've seen that happen. Imagine the price of a loaf of bread now costing you a month worth of salary.

I've seen that happen. When that happens, people stop spending on everything else and they just buy the better Necessities That they can. What that causes is essentially a stop of all purchases of everything else. So retail collapses, all businesses that don't sell loaves of bread and socks collapse.

and the most painful thing is that people's savings become worthless now. I Actually seen that happen. A friend of my dad's sold his apartment in Soviet times just on the eve of the collapse, and the guy who actually bought the apartment showed up on his doorstep with a bag full of money. I'm not even kidding.

And you know, back in those days Russia was a mess. I Mean showing up with a bag full of money was completely normal. In fact, it was something that wasn't even seem strange and the money wasn't counterfeit or anything. There was no scam going on, but literally the next day after he showed up and they paid for the apartment, the money was worthless and the dude just lost his apartment because of massive runaway hyperinflation.

And that story is not unique. So let's just kind of understand here that runaway inflation would be worse than increasing unemployment rate from three and a half to seven to eight to nine percent. As bad as it sounds, but it is what it is. Now the next question should be.

Well, Tom We understand that runaway inflation is bad, but why is this the only solution we're talking about? Why hurting the middle class and the poor people is the only solution we're talking about? Are there other Solutions we can use here? How about price controls? How about wage controls? Because if we control the prices and the wages of things, then inflation, which is pretty much just things, are more expensive than they should be. What happened, right? Well, I'll explain. So I Agree that inflation is pretty much overpricing, right? So overpricing happens in one of two scenarios. Scenario number one where this can happen is when there's just too much demand when people have too much money.

Scenario number two is when there's not enough goods and services, there's not enough things and stuff to go around. and scenario number three, when two of these things happen at the same time. which is exactly what happened in the United. States Now I'm gonna talk in a second about price controls and wage controls.

I'm going to prove to you that it's not a good solution, but why don't we have any other Solutions except this stuff? Well look when The Perfect Storm Kind of brewed in the US Essentially, we had a horrific policy Mistake by the government over printing money and on top of that, we had the Murphy Law pretty much kick in and start massive supply chain shortages. And on top of that, we had massive geopolitical issues including a war including domestication and ensuring of businesses deglobalization. Whenever factories move from China back to the US, they make less stuff for more money. That's just what happens when you de-globalize So all of this happened at once and that caused the massive inflation.

but still still. Here's the crazy part. We could have stopped it in 2021. In 2021, we could have went in for teeth cleaning one hour.

It's painful, it's expensive one hour, but then the next day we would feel fine and everything would be okay. 2021, all we have to do is start raising interest slowly to stop inflation from ballooning all the way to 9.1 percent. But we chose to ignore the problem. I'm going to talk in a second about the reasons why we chose to ignore the problem, but we chose to ignore the problem and instead of doing that, what we chose is to pretend as if inflation is absolutely transitory and not real and will go away on its own.

and we kept interest pretty much at zero. So what happens? A year goes by and then our tooth decayed completely and now we have to go and actually have the tooth removed. not root canal. remove the tooth, pull the tooth more expensive, more painful, more damaging, and now you look like a Gargamel That's all I got to say about it.

So now we're in the Gargamel stage. in 2021, we missed the window of opportunity. but you know, let's not cry over spilled vodka here, right? It happened. now.

Why did it happen? Well, there's two reasons the reason number one would be I guess Political reason: Jerome Powell was trying to get renominated and reappointed, which he did. but because the guy who was supposed to reappoint him was Biden he had to play ball. He could not crash the economy because of recession when he was up for renomination. So he played the game and he pretended as if this was transitory.

although I never I never believed that he actually thought this was transitory. You'd have to be a dumbass to really believe in that reason. Number two: I think is Hopium I Mean you don't want to cause a recession before you? Absolutely sure there's a problem that you can't solve. So I guess John Paul was hanging around too long trying to see if there's if this thing will actually go away before he will go down in history as one of the people who caught the recession.

So the combination of these two things basically caused us to miss the window of opportunity to slowly increase interest rates and cruise out of inflation. So 2022 rolls around and now we don't have a choice Worth 9.1 percent. Now to go from 9.1 inflation. when you're at zero percent interest and your balance sheet is it nine trillion dollars, Don't forget the balance sheet.

There's no way to do it and not crash the economy. Now, you would have to achieve either of two things to do it. You would either have to reduce the amount of demand for goods and services, or you have to reduce or sort of increase the amount of supply of goods and services. Because inflation is higher prices, higher prices is a result of supply and demand.

So you either or has to solve demand or Supply or both. So increasing supply of goods and services is not something the world in general was good, and for the past 100 years I mean the world never excelled at increasing the amount of raw materials we have in the amount of goods we have. We barely make as much as we can as it is, so it's not like the world can just turn the knob and make more stuff appear. That's just not how things work.

So Supply is going to be limited. especially now when there's a lot of de-globalization and onshoring and geopolitical disruption. especially when there's a food shortage coming around very very soon. But everything is going on in Europe and specifically in Ukraine, which is the Bread Basket of the world.

Now Supply is not where the solution is, so it has to be in demand. So how do you reduce demand? Well, you can reduce demand by hurting people's pockets. Simple as that, if you cause people to lose their jobs and if you hurt them financially, they would have less money to spend. Which means that less money will be spent on goods and services.

Which means the demand reduction will cause the prices to go down. If I'm selling goods and services and the less people are willing to pay for it, then the price will have to come down and inflation will be solved. But it will be solved on the expense at the expense of the poor people and the middle class. In America they will pay the price for the policy mistakes and the horrific, horrific decisions that were taken by the Federal Reserve by the government.

And they will pay the price. Makes no mistakes about it. But the question is, why are we talking about 3.4 versus 4.5 Why is John Paul saying? Well, we need to go to four and a half percent. Why is this one percent increase gonna solve the the problem? Why is unemployment going from three and a half percent to four and a half percent will solve everything? Why is this one percent is the solution? Well, let me tell you the story here.

The real story is that this one percent is a bunch of horse baloney. It's transitory 2.0 and much like in transitory 1.0 which was the whole movie we saw in 2021. It's based on nothing. Jerome Powell Doesn't have a clue how much unemployment has to go up to solve this.

He doesn't have a clue how much unemployment will go up once the market starts reacting to elevated interest rates and it has no idea where this thing is going to stop. He has no freaking idea. In fact, the International Monetary Fund came out and said that they think that unemployment in the US will have to go to about seven and a half percent. Seven and a half percent to actually curb inflation, not 4.5 and not five.

So remember that. Now the real question here would be, well, Tom if if the solution is reducing demand and we we can't solve Supply why not imply or impose price controls and wage controls? Let's just say that people can't make more money than they make at a certain Pro Era kind of table. And let's say that you know businesses cannot charge more than a certain level so that we don't have price increases, Let's just take control of this. So I'm going to use an example here to to show you why this is absolutely stupid and I'm going to steal this example from my greatest mentor of all time which is Milton Friedman Now Milton Friedman has this example which I absolutely love.

Let's say you have a cattle on the fire and this cattle is full of soup and it's boiling and it has the top and the top starts. Kind of like bouncing around off of the Steam and everything. So how do you solve this? Well, you can turn down the light, the the flame and solve this. Or you can take a piece of brick and put it on top of the top of your kettle.

Now if you do that second solution, it will stop moving for a little bit. but then this mother lover is going to explode all over your kitchen. which is exactly what's going to happen. If you imply price controls, Price controls, Wage controls.

They handle the symptom, not the disease, the disease. Still Remains And every time we tried price controls ever including in the US in 1971 by Richard Nixon Go check me on this, including in the USSR USSR had the most price controls and wage controls ever. You know what happens? Well, people don't try hard. If you're not making more money by being better, you do the bare minimum.

If your business doesn't get more money by selling a better product, you do the bare minimum. Your GDP goes to the toilet. Your country's economy is going to the toilet. and then eventually what happens.

This whole thing blows up and inflation comes back. Not only stronger and bigger, it comes back into hyperinflation. And your whole economy isn't toilet. So no price controls.

Wage controls are not the solution. So the bottom line here is very simple. Is this late? Yes, the FED is late to the party for sure. Is this necessary? Yes.

Could it have been avoided? Yes. Is the Fed to blame for us now being in a shitty situation that we should have been? Yes, But there's no other way to solve this by Smashing Demand and smashing demand means more unemployment probably towards seven eight percent now. unfortunately. Unfortunately, there's going to be a lot of politicians free riding on this and trying to cause this kind of a shitstorm about it.

Showing how a recession is not necessary and the power just causing a recession. Not forget it. A recession is necessary. It's happening.

My only problem with Power was that the fact that he wouldn't admit that there's no way that a recession isn't coming and trying to pretend as if a soft Landing can actually happen. and I like how Elizabeth Warren exposed them for that and it's the only thing I ever liked by Elizabeth Warren I Despise that woman? not so much. but I mean she did expose them for that. But now that the cat's out of the bag and everybody knows a recession is coming now, we can actually deal with the actual problem, which is just brace for impact.

Prepare as much as you can and understand We're going through a recession a year two, but every recession has an end and after every session the US comes back stronger and better. Don't forget that.