Dr. Sung Won Sohn - Lost Decade and Deflation?

[ Silence ] I'm Bill Cordeiro, and I'm head of the Martin V. Smith School of Business and Economics Always thank the Smith Family, some of you I'm sure knew Bud Smith He made an initial gift to the University, and then his four daughters completed that. We named the School after Mr. Smith some time ago. And their generosity allows us to do certain things. Including partially funding something like this. But I also want to acknowledge directly the Business Advisory Council. These are community members, some of them are here. We just had our meeting. We meet 4 or 5 times a year. And they support the University, and their dues directly support this event. That's why we can give you a free lunch, even though our Economist friends say: "There's no such thing as a free lunch" [laughter] I'm proud to be one of the, and Joan Karp, my friend is here. Joan and I were one of the original 12 faculty that founded the University in 2001. I always tease my students: "We had a perfect University for a year... ...we had no students. We took students in 2002. And we're proud of what we've done, and we've built up the School and got the endowments from the Smiths. And it allowed us to grow the school and put on events like this. Under the Smith School, I want to give you a little framework for this particular talk. We have several institutes. We have an Institute of Small Business. Its called the Small Business Institute. And we take teams of students out and help the community. We have a newly-formed institute called the California Institute of Social Business. In collaboration with Muhammad Yunus. We've got quite a bit of publicity. Dr. Yunus, if you don't know is a Nobel Prize winner and a Medal of Freedom WInner. And we're developing that Institute. And the we have the Institute of Global Economic Research. and Dr. Sohn who I'll introduce in a moment is the director of that institute and it's through that institute that we ask him to put on programs like this and he does other things, of course, teaches for us. So that's the context of this. Dr. Sung Won Sohn is PhD in Economics of course. He worked-- he was a White House fellow, worked in the Office of Economics in White House. He has been a long time teacher. He was the chief economist for Wells Fargo Bank for many years. He was CEO of Hanmi Bank here in Los Angeles and now he's been with us a couple of years. We're happy that Dr. Rush was able to entice him to come over here. He teaches for us and does events like this. He's also a board member. I know he's on the board of Forever 21. And just a couple of facts that always stick in my mind, it makes the introduction very easy. Last year, the Wall Street Journal named him one of the top five economists in the United States in terms of accuracy and even better a couple of years before that, they said that he was the number one economist in the United States in terms of accuracy. He's quoted everyday literally in the newspaper. He does-- a lot of his work is media relations in terms of doing his analytical work. I know early in the morning and dealing with reporters all day so we get clippings and it's not unusual to have 10 or 15 quotations from Dr. Sohn everyday. Of course mentioning Channel Islands for sure and sometimes the Smith School, kind of a long name to mention the Smith School and Channel Islands but almost always we get the Channel Island's name in there. So, just one thing, at your seat you saw these three pieces of paper. One is showing you this speaker series. We're right in the middle of three. The last page shows the planned series for the spring. Dr. Sohn is gonna talk again in the spring. I believe it's April 8. And then the middle sheet is a description of the BAC or Business Advisory Council, each of the members, what they do, their charter, how they support the school, how they help me in my activities. So, and again there, it's their direct contribution that allows us to do things like this so we appreciate them very much. So I'm gonna quit talking and turn the stage over to Dr. Sung Won Sohn. [ Applause ] [ Silence ] >> Well, good afternoon. You know these days it's not fun to talk about economics. So, today as Bill mentioned, I'm on the board of Forever 21. So I'm going to talk about latest fashion if you don't mind. [ Laughter ] >> That's a lot more fun. Anyway, this morning, we saw government reporting that we are beginning to see a little bit of economic sunshine and hopefully, that will continue but we will have to wait and see. If you look at the economic growth from this chart, you see it is nothing so far very exciting. Economists talk about what is known as a potential economic growth rate. That should be about 3 percent over a long period. And as you can see, in the first year of the economic recovery we've been, well, staying below that. So if many people call this economic recovery lethargic, slow, weak and then any adjective that you wanna use and so the question is, well, how long will this continue? If you talk to other economists around the world that they are saying, America could be falling into a lost decade like Japan. I hope not but those are some of the concerns. If you look at the economic situation today, you know fewer people are moving. They can't sell their houses, there are no jobs so they aren't moving and also many young people are delaying their marriages and staying home and so that is doubling up. So some of the houses are getting full with the children coming and children coming back, see, rather than going out and rather than having two cars you have one car. If you have one car, you sell your car and then ride a bicycle or moped. And a lot of people got laid off and now they call themselves consultants. What do they do? Well, they have an office at home, right? So if you look at the number of offices at home, reported by the IRS, that has gone up dramatically, see. And well, one thing about education, more and more young people are saying, as long as I can't get the job I want, I might as well get my graduate degree, so they are going to get PhDs and MBAs and MAs and et cetera so well, that is a pretty typical phenomenon. So today I wanna talk about, you know, what's wrong with our economy? I mean, why couldn't we get out of this rut and then do better? First of all, if you look at the economic growth so far, you see two colors in each bar, the dark portion and the light portion. And if you look at the year 2010 to the right of the vertical dotted line. As you can see, the dark portion of the bar is very important. That is government economic stimulus program. As you know last year, President Obama got us 747 billion dollar economic stimulus program and that the light portion of the bar that is the inventories. Well, when we were coming out of the economic bottom, we found out that we did not have any merchandise on the shelves. So Detroit and everybody else decided to stock up on inventories and so that was good for the economy for awhile. We cranked up production of cars, appliances and furniture and but also, well, they cannot last forever. And also when you talk about government stimulus program, money is running out probably toward the end of this year. We will be coming to the end of that 747 billion dollars. You look at inventories. I just mentioned Detroit and appliances and furniture like, you know, these industries, they've been cranking up production to put more merchandise on the shelves and you can see inventories went up very sharply. The question is, how long can you do that? In fact, economic forecasting is actually pretty simple. I tell my students, if you look at the economic ups and downs during the post-war period and take out inventory ups and downs. The rest of the economic ups and downs are really not that much. You don't have severe economic downturns. You don't have economic booms. You have minor, moderate economic ups and downs without inventories. You can see why because inventories are so fluctuating. But, that probably is now behind this as well. We also know this is-- some people call it a jobless economic recovery. Well, again, you know, I hope this morning this data will continue into the future giving us more jobs but it may not. You see three lines. First of all, you see kind of the V-shape economic recovery that was in 1958. It went down sharply and then it bounced back sharply. And then you see kind of the middle one, U-shape or saucer-shape economic recovery. It goes down slowly and then it comes back up slowly and that was the case in the year 2001. Well, now, we see the one at the bottom, the solid one, it goes down sharply and then forgets to come back, see? It is essentially moving sideways and that's why people call this a jobless economic recovery, weak recovery, lackluster economic recovery and that's the situation that we are in. So, you can see, we've got a lot of grounds to cover. The jobless rate, even though this morning the jobless rate remained at 9.6 percent. As a matter of fact, the jobless rate has remained above 9 and half percent for 15 months in a row and, even worse, the outlook is not all that good. >> Many businesses are worried about economic future. They don't think we will have a strong economic upturn recovery. As a result they're not hiring people. You know, if you're a business person, the last thing you wanna do is hire somebody today and then lay them off you know a month later of six months later or a year later. You don't want to do that so they're being cautious. And also, they are instead relying on machines, software, computers and et cetera. When you rely on this technology, you know, they don't complain, they don't call in sick, they don't sue you, they don't eat and then you know, so that they are a lot more manageable and so that's what they are relying on today. Again, the point is that we cannot expect the jobless rate to fall as it had in the past. In fact, I wouldn't be surprised at all if it takes years, maybe four to five years before we come back to the previous low which was around 5 percent. So it's gonna take sometime. Also, we have something called long-term unemployed. If you are unemployed for more than six months, you are called long-term unemployed, chronically unemployed. As you know, many jobs have gone to China. They are never coming back and also today, many people from manufacturing and construction, they got laid off and they, you know, happen to be many males. Females tend to gravitate toward more services and then that service area has done quite well actually but manufacturing and construction have done very poorly. And, what about those people? Can we put those people in private education? Can we put those people in healthcare? Probably not and so that's why we have the percent of people who are long-term unemployed going up, so that is a problem. You and I as you all know went on a spending spree for the last 20 years or so, right, based on debt. And China was great for us, right? We give them paper money and they gave us shiny goods, see? And so, and then they took the shiny-- I mean they took the paper money and then bought US Treasuries which kept the interest rates low which allowed us to buy homes at low interest rates so we could have cake and eat it too. Remember that? You know, good old days. Well, now we have decided that we got too much debt. In fact, this is what Wall Street Journal called the moral issue in America. It is not only an economic issue, a moral issue because we are passing the debt onto our children and grandchildren. And some of us have decided to do something about it, tighten belts and that's why we are deleveraging. We are actually shedding our debt but that's gonna take a long time. The problem is that consumer spending accounts for about 70 percent of GDP in the United States. In China about 35 percent, in Japan about 65 percent, in the United States about 70 percent. And when the consumers don't spend we don't have an economic recovery, simple as that. And so, consumers have too much debt and they are trying to slim down. As a result, you can see the savings rate is going up and well, it's about time. But this creates a problem. In the short run, economy cannot grow rapidly, why? Because we are deleveraging, we are trying to save more. Well, in the short run President Obama wants you to go out and earn-- go out and spend more. Maybe in the longer term, in the medium term, perhaps you can cut back but in the short run this can actually be a problem because we are not spending. One of the areas that has been a concern is obviously housing. We all know about housing prices, right? It went up sky high and when it was going up, we thought it would go up and up and up and we thought it would go through the ceiling, right, okay? You know I bought my house in 2006 and my wife says, you're the economist, you should have known better. Well, I didn't see. [ Laughter ] >> And I've been trying to sell my house but no one wants to buy it yet. By the way if you do need a house in L.A. I've got a house for you, okay? [ Laughter ] >> Anyway, so you can see house prices are going down and then well, economists are saying that the end of it is not here yet. It could probably fall some more. And, but let's just begin with some good news on housing. Now, let me tell you why housing is important. One out of eight jobs in the United States depends on housing. One out of eight jobs, not only construction. Look in you house, you know, carpets, appliances, furniture, carpet-- you know the dry walls and the drapes and you know, the tiles and shrubs and all the things that go in and around houses. You know, they are very important, also lot of finance. Mortgage, banking, brokerage. And that's why one out of eight jobs in the United States depends on housing and well for a while housing was doing better from the bottom and then this is a-- what is known as a housing affordability index. National Association of Homebuilders they publish this on a monthly basis. When it goes up, it's good. When it goes down, it's bad. And then as you can see, in 19-- when I bought my house, that was absolutely the worst time to buy a house and then so-- and since then affordability has really got up pretty well. And there're a couple of reasons for that. Number one is, of course, home prices are going down and this is based on published reports but as again-- you know, I said there are a lot of potential homes for sale including mine and then, you know, so if you have a cash you could really get really, really good deal. If you come to my neighborhood and then I bet if you could, you know, buy it with cash you could discount 30, 40, 50 percent and that's essentially what's happening. So what I'm saying is that if you look at the, you know, actual declining home prices as opposed to published, the decline in home prices, you know, are much greater. Now, I realized that in Ventura County and in Camarillo and Thousand Oaks, things are much better but elsewhere it is not so good. And the other one is of course a mortgage rate. A mortgage rate as we all know has fallen pretty sharply. I refinanced my mortgage the other day and the other month and then-- so my mortgage payment went down by 25 percent and who knows a year from now it might be even lower that I am going to refinance again. And many people are doing that and so that's why affordability is going up. Lower house prices and then lower mortgage rates. But that's the good news and, but the concern is, are we going to have a double dip in housing? For a while the housing was doing better in part because the government has so-called the first home buyer tax credits and federal government gave you 7000 dollars and the state government gave you a few thousands dollars more, so for the first time home buyers that was a great deal. So a lot of, you know, young people they decided to buy homes and well, they did but that's over now. As I said, people are concerned about housing. Remember this is a very important part of the economy. As I said one out of eight jobs in the United States depend on housing. I talked about the jobless rate and the prospect that it is not going to go down much lower any time soon. And then also if you look at the seriously delinquent mortgages, they have skyrocketed. If you look at the kind of the right portion of the bar, you can see at one point, about 50 percent of all the homes sold were so-called distressed homes, foreclosed homes and the short sales. And today it is down to about, as you can see, about 35 percent or so but a very significant portion of the home sales is going on around the United States especially in California, they are distressed, see? And so they're artificially depressed the house price is even more and then so there's a lot more foreclosed homes who come out of the banks and this is one of the reasons why house prices are not going to be going up very much in the Unites States on the average. You look at the homeowner vacancy rate and here are the homes you know actually vacant. People have left, gone and they are saying, you know, you can have it. See? And many of these homes are owned by the banks foreclosed and you can see it is very, very high. And banks are not putting all these houses on the market all at once. It is coming in slow, you know, motion. And as a result, this will continue to depress house prices in the future. The other concern that we have in the economy is of course, we all know what's happening in the state of California, right, state and local governments. The city of Los Angeles, they are laying people off including teachers and so you can see what is happening. If you look at the government payrolls, it has been going down and down and down. Of course in California, we had a very good stretch of economic activities for about 20 years and our tax revenues went up. So our government officials in Sacramento rather than saving some of that money, decided to spend more than what they got, right? See. And then so government payrolls have ballooned and now, they are running huge deficits. Well, in many cases we are having to lay people off even in today's reports. You know, overall the private sector created the 159,000 jobs but the state and local government is laid off quite a few people. So this is going to-- for-- this is gonna continue for a while. This is the economic growth rates. There area a lot of bars but here's a line going sideways. That's a 0.25. What it says is that historically, remember I said, potentially economic growth rate is about 3 percent per year and about quarter of it, 0.25 of it, almost 10 percent of that came from state and local government payrolls. Well now, rather than being a positive, it is becoming a drag. So the swing from 0.25 percent to minus 0.25, that's a half of a percent, right, when economic growth rate is only what? Today, well, in the third quarter it was only 2 percent while you are losing half a percent because at the state and local government you can see there is a quite a bit of a swing and quite a bit of a drag and that's the situation that we are in. >> Then how about the federal government. We have no ammunition, see? We have an emperor without clothes because our budget deficits are so high, right, okay? And if you look at budget deficits, this is what it looks like as percent of GDP. If you look at the tall peak there, a spike, that was a great depression and then World War II, but the good news was right after the great depression and World War II, that deficit as a percent of GDP came down dramatically. So let's look at the current situation where the great recession, the financial crisis, so the debt to GDP ratio went up rapidly and spiked. So, it is probably reasonable to expect to see history repeating itself, right? Maybe debt to GDP ratio should come down like it did after the great depression and World War II, right? Well not so, that's not the problem, that's not what's gonna happen. Well, the reason why debt to GDP ratio came down after the great depression and World War II was because of economic growth. Debt didn't come down. Economic growth went up, see? A lot of GIs came back from war and you know, they got married and they need houses, they need everything from cars, right? See. So the economy boomed and with a strong healthy economic growth, as a result debt to GDP ratio fell dramatically. Now this time around, we have no GIs coming back to get married. They don't need a housing, they can't afford housing and as I pointed out, economic growth is lethargic, nothing to get excited about. And so the point is that that is not going to go down very rapidly if at all. In fact it could be going up. In fact, it will go up and economic growth will be anemic as a result, the debt to GDP ratio that you are seeing could go sideways or even up so that's the situation that we are in today. Well, one of the key issues that President Obama has to decide is the tax cut. What to do with the tax cut. As you know, President Bush gave us a tax cut and that tax cut expires at the end of this year. If we do not renew the tax cut, many economists' econometric models are saying that the economic problems will deepen, economic growth will be slower. So please President Obama, make sure that we continue the tax cut and President Obama says, "Yeah, I want to continue the tax cut but not for the rich people like yourself." See, he wants to raise taxes on you. And so let's see what happens if the tax cut is not renewed. Your income tax rate will go from 35 cents to 41 percent. The capital gains rate will go from 15 percent to 20 percent and top dividend rate will go from 15 to almost 40 percent and of course state taxes will go from 0 percent to 55 percent, see. And then so what I'm saying is that it is very important for the economy to have lower taxes right now because we need healthier, stronger, firmer economic growth. So President Obama, there isn't a whole lot that you can do about it, about the economy except that I'm gonna say more about it in a minute with the election but fortunately somebody is doing something in Washington. That's Chairman Bernanke. He has decided on quantitative easing, right? So what in the devil are we talking about? Well, quantitative easing simply means, you know, pouring liquidity into the economy. And so he's hoping that we will use some of that liquidity to buy cars and the businesses will use their money to build plant and hire people. We will have to wait and see whether that happens but as I pointed out. Well, Chairman Bernanke is saying that I've got to be doing something. See, I'm the only one who can do anything about the economy today. Why? Because first of all the job market we saw is very slow. And if you look at the so-called the output gap, the straight line going from bottom left to upper right that is called again the potential economic growth rate, I mentioned that, about 3 percent a year. The slope of the line is about 3 percent a year, right? And so in the long run that's how fast economy grows with obviously oscillations around it. Now if you look at the bulge down below, that is the economic recession because of the bulge, what, we're not at the long-term trend of growth rate and so that is known as a gap. We are talking about labor, we are talking about plant capacity, see? And so, it will take probably three to four years before we can use out that excess labor capacity, plant capacity. See. And this is one of the reasons why we don't have to worry about inflation. I doubt that we will have to worry about inflation for the next two to three years. Why? Because we got that bulge, we got that output gap, okay? And, so Chairman Bernanke decided to engage in quantitative easing. The short-term rates are zero so you can go negative, I suppose you could, right? And, it's been never been done but some people have said that, you know, why couldn't the banks actually pay you to borrow money? That'll be nice, wouldn't it? Okay. [ Laughter ] >> Yeah, but banks said I don't want you to do that, not right now anyway. And, but the bond yields are still positive. So Chairman Bernanke is saying that, you know, I should go to the bond yields and then stop buying bonds. From Economics 101, from Finance 101, what do we know? Well, when you buy anything, the price of that thing goes up. And in case of bonds, the price of bond goes up and when the price of bond goes up, what happens to interest rate? Interest rates go down, right? And so that's what he's doing. Buy bonds and he said about 600 billion dollars by the end of the first half and actually he's been buying about 35 billion dollars worth of bonds every month because some of the bonds have matured. So he is simply replenishing, maturing bonds is number one. On top of that, he's going to buy an addition of 65 billion dollars, total of 110 billion dollars a month. You know, that is quite a bit of change and then so he's hoping that that's going to lower bond yields. Again, when you lower bond yields, what does that do? Again, he's hoping that that will encourage you to buy more houses because the mortgage rates are gonna get lower and then he's hoping that businesses will use some of that cash and borrow money to buy plant equipment, build facilities and hire people and that could be wishful thinking but that's what he's hoping. Now actually, Chairman Bernanke in his statement last Wednesday did not mention the dollar at all because this is a kind of, you know, hot topic and he does not want to really touch it but what is happening right now is that as we create a lot more dollars, the value of the dollar is going down. You know when you create more of anything, widgets, the price of the widget goes down, doesn't it? In this case we are creating a lot more dollars. Of course the value of the dollar is going down, see? And so the Chinese and the Brazilians and the Koreans and the Thais, they are screaming. Why? Because the interest rates are so low in the United States, zero. So some of these speculators are borrowing money from the United States and Japan and then what do they do? They are going to Brazil, they are going to Australia, they are going to China, they are going to Korea, and so let's see, let's borrow the money. So money is leaving the United States and so when they leave the United States they have to sell dollars and then buy let's say Brazilian real. So the value of the dollar goes down because you are selling the dollar, right? And then you what? Buy Brazilian real so what happens to Brazilian real? The value of that goes up. Once you go into Brazil what do you do? You buy real estate. You invest that in the stock market, the stock market in Brazil goes up. And now Brazil which is heavily dependent upon export, they can't export, why? Because their currency is overvalued, as a matter of fact Goldman Sachs had the Brazilian real as the most overvalued currency on this side of the moon. It didn't say on this side of the moon but in the world, see. Okay. And so you can seen why the Brazilians are screaming and in fact that's why they are putting on capital control, same in Thailand, same in, you know, some other countries such as Indonesia. And then Korea is talking about putting on capital control so this could lead to, you know, some sort of a currency war and I'll talk about that more in a minute but this is exactly what I am saying. You see money to emerging market stocks and bond markets. If you look at the green bar, those are the money going to the stock markets in emerging markets and if you look at the blue bar, that's the money going into emerging market, the bond market. So if you are in Brazil, if you are in Korea, if you are in as I say Thailand, you can see why you are concerned about it because, you know, these are hot money, see. And so they aren't gonna stay very long and so that's why we are talking about the currency or the possibility of a currency war. And there is a G20 meeting in Seoul, Korea November 11th and 12th and it will be important to see, you know, what the conference decides to do about it. But anyway going back to economic forecast and here's a Blue Chip economic forecast and the consensus is about 2 and a half percent. Again compared to that-- compare this to what I talked about the long-term economic potential, economic growth rate of 3 percent. Again, this is not something that you can write home about. Generally, in the early stage of an economic recovery coming out of a trough, economic growth is fast simply because you are starting from a low base and also there is an inventory production and buildup. We've had economic growth rates as much as 7 percent per year in the first or the second year of the economic recovery. Here we are talking about 2 and half percent, maybe one half, one third of what it, you know, should be. Remember we talked about double dip and I must say that the probability of a double dip has gone down. I think earlier this summer it was as high as about 40 percent. I would say right now still there is a probability of maybe about 25 percent. And let me tell you why the double dip probably has gone down. First of all, I'm assuming that especially with the election, President Obama will continue the tax cut not let it expire. >> Chairman Bernanke is engaged in quantitative easing, someone in Washington is doing something so that's good. So that hopefully will help the economy. You know the stock market is doing better and when the stock market does better, you and I are going to feel richer. The econometric model studies have shown that if your net worth in the stock market goes up by a dollar, you tend to spend about 4 percent, 4 cents of it, see? So as a stock market, wealth goes up, net worth goes up. We are going to be spending more and this is the perfect season, right? The holiday shopping season so even-- you know I'm kind of pinching pennies and then what the heck? During the holiday shopping season, let's go out and spend money and so let's hope that you do. Well, I'm not going to but let's hope that you do. [ Laughter ] >> The other reason why we can't have a double dip is that, you know, we are at the bottom. And so how low can we go, see? And so that's one of the reasons why we are not going to have a, you know, double dip because we are already at the low base. The other question is of course inflation or deflation. One of the reasons why Chairman Bernanke is engaged in quantitative easing is because he's concerned about deflation. Now, we don't have to actually get to deflation but we don't want to get anywhere near the deflationary zone, see? Once you get to anywhere near the deflationary zone that is very debilitating. It's like a quicksand. Once you get into it you can't get out. Look at Japan, they've been struggling around the deflationary zone for the, you know, more than a decade, see? You know, look at houses, prices are going down that's why people do not wanna buy homes. If you think car prices are going to go down, will you want-- would you want to buy a house, a car today? Of course not, so you know deflationary situation, you expect prices to fall therefore people do not buy. When people do not buy, production goes down. Jobs becomes more scarce, income declines therefore economy does worse that's why it becomes a very vicious circle. And so deflation, that's a problem. Now historically, when we had a, you know, big inflation or big deflation, they were generally associated with some, you know, major economic events Crimean War, the World War I, World War II, the Oil Shocks and then et cetera. I guess the question is we just went through the great recession and we went through the great financial crisis. Does this qualify as one of the major economic events which could lead to even a-- either a deflation or lot of inflation. Again, we don't know that yet but we have to wait and see but what Chairman Bernanake is saying is that he does not wanna take any chances. Again, because the consequences, that's all bad, so painful and so long lasting therefore he's taking action in advance. If you look at inflation expectations, what people think about inflation, we still have inflation expectations. It's positive. But the important thing is that the inflation expectation is going down and down and down and down. So the question is well, will it continue to go down and then will it go down to zero and into negative, into a deflationary zone? That's something that we do not want and that's why we need quantitative easing. Again, I'm hoping that we do not have a deflation. Here are some of the reasons that I thought. First of all, is I just showed you that chart, right? Even though inflation expectation is declining and we still have some inflation. That's good. You know for so many years we thought the inflation was canceling our society, canceling our economy. We said, how can we slaughter inflation. Now we are saying, inflation where are you, please come back. See? And then so we want more inflation right now. The other reason why we are not going to have an inflation is-- a deflation is because of wage rigidities. About two thirds of the consumer price index is related to wages and well, wages are generally not falling and therefore this is one of the reasons why it is actually not that easy to fall into a deflationary trap. Import prices from the price of oil, from the corn, wheat and you know, copper and aluminum and the price of all commodities are going up. So the prices of imports are rising and then that sooner or later gets into the items that we buy. They take the price of oil. Today the newspaper said, the internet said, it will switch to the record high and so in this economic cycle and you know, there is nothing that does not use oil, you know plastic toys, even the medicine that we consume uses oil. So you can see, when price of imports go up, that is going to have an effect on inflation, again, monetary policy, quantitative easing. When you create more money, you are going to eventually have more money supply and the more inflation as, you know?, the late professor Milton Friedman said, "If you double money supply, eventually you are going to double the price level." See, and sooner or later that happens but we will have to again wait and see. No deflation and-- but eventually I'm hoping that that we will get more inflation and this is what Chairman Bernanke wants. Now, why do I say that we will actually have more inflation which is what we want? Number one is of course we have a cost push situation. Now demand put the cost push, I just mentioned the price of wages, the price of commodities so you know they are going up so that's a cost push. We have access capacity, what I call the output gap, right? The difference between long-term trend and where we are today, there is a bulge. But you know, as the economy grows that bulge will gradually disappear. It's gonna take a long time but we will eliminate that and then that will lead to some inflationary pressure. We know the tax, they're gonna go up. It's not gonna go down especially given the budget deficits, we are all-- we should be prepared for higher taxes and not lower taxes. How about fees? You know all the fees from university fees, the government fees, the fees for, you know, all kinds of things. They are going up so eventually I think we will get inflation but again, this is the optimistic scenario. Let's hope that I'm right then otherwise, we've got trouble in the economy. One thing, you know inflation actually is much better than deflation. One thing that you do not want to even think about, that's deflation, okay? Now what about the election? Well, President Obama said that he got shellacked, right? And then it's of course a-- it's a kind way of putting it and then so obviously the voters sent the strong message, we want more jobs, and not only more jobs. The voters are saying that I want you to get out of my pocket books. I want you to get out of my private lives. You are intruding too much. See, and that's what the voters are saying. And so something will have to be done about it and actually University of Michigan has an index called the assessment of a government economic policy. You can see well, this is really the report card for President Obama and I didn't put it-- you know, I didn't make it. And so you can see, well based on this economic indicator which is published every month, it is not all that surprising that the democrats and President Obama have-- has suffered a setback, right? Well, but there's something that both the democrats and republicans can enjoy, that is the stock market. Historically, after the midterm election, in fact 90 days after the midterm stock market goes up by 8 and a half percent. In a matter of 90 days it goes up by 8 and half percent, so you are going to become richer, right? So again, regardless of your political affiliations, you are going to be smiling. See? And so that's what history says. And here is a midterm election and then the stock market SMP500. You see the midterm and before the midterm stock market can go up or down and then you know it can be quite volatile, but after the midterm it's pretty clear that, you know, it's one way. Stock market goes up and we feel better about the economy, see? And so that's why the stock market goes up. As a matter of fact, we are already focused on not year 2011 but what? 2012 presidential election and it so happens that there is a very good correlation between the stock market and the presidential election. And again, if you look at the data between 1871 to 2005, in the first year of a presidential term the stock market goes up only 3 percent. Second year is the worse. It actually declines by 2.7 percent and the year is the best, by 10.1 percent, see? Okay. It's gone up as much as a 30, 35 percent in the third year, see? So you could see we can-- we have a lot to look forward to, right? And in the fourth year, it's 7 and a half percent. Of course the reason why it happens in the third year is because what? The incumbent party is trying to get reelected so what do they do? They try to spend their way through the election and then get reelected. Now I guess the important question is again, we shot the ammunition. We don't have a whole lot of bullets left and so what can President Obama do? That's the question this time around but historically as you can see the third year which is coming up, year 2011, that is very good for the stock market. Okay, so well, stay tuned. If you make some money in the stock market, I told you so, maybe you can share some with me, okay, all right. [ Laughter ] >> Now, there are obviously some key issues in this situation. The question is what are some of the economic issues? And let me quickly go through some of these, you know the most important is of course tax and budgets. I'm assuming that there will be an extension of the tax cut and the president was adamant about not extending it for everybody before the election. Now, I think he's more amenable to that. So he will extend it probably for year '02 and then worry about the so-called rich folks like yourselves later. What about the deficits? The Presidential Commission on Budget Deficits, they are supposed to issue a report on December 1st and this is supposed to be a bipartisan commission. >> And so I think it would make sense for President Obama, democrats and republicans to look at that and say, you know, here's bipartisan commission. This is what they are recommending. Maybe we have to coalesce around this so that, you know, that might be something that could happen so that could be a wishful thinking but that's one of the things that I'm hoping. President Obama has also talked about expensing capital expenditures like on equipment for business investments. This is designed to help out especially small to medium sized companies so if they can write off the expenses on equipment and buildings faster, they have greater cash flows. As a result, they might be willing to spend more on equipment and then facilities, that's the idea. And then of course energy, the problem with energy has been the energy policy has been so-called the cap and trade. Now, I don't have time to get into cap and trade. I assume you know what I'm talking about but they all have to decide on what they are going to do about cap and trade and the president is for it but republicans, they're not about the renewal energies source. What to do about the oil and gas exploration, transmission lines, and these are some of the issues in energy policy. Again, I hope that they will compromise on this. The third important issue of course is the trade. Now, so far, President Obama has been actually-- I don't wanna call it anti-trade but he has not been exactly very, you know, supportive about free markets. He has actually talked about export promotions instead of free trade. He put in Buy American policy in the economic stimulus program so a lot of countries call that protectionism. And South Korea, Columbia, Panama, you know, they are waiting for free trade policy and then so I'm assuming that with the republicans in congress having some lever, the president will be more amenable to some sort of a trade policy so that we might be seeing more free trade acts getting through congress. A China currency, in the house they passed a bill called HR-2378 and that simply says, well, you know, it didn't mention China directly but any currency which is grossly undervalued is subject to countervailing duties and of course they are thinking about the China. And this issue will have to be addressed that the G20 coming up in Seoul, Korea but many countries are now saying that you know America, you really don't have a lot to say because you know through so called quantitative easing, you are creating a lot of money. You are depreciating your currency and so you are really one of the offenders so that China, they might be pointing finger at us. So, it'll be interesting to see what comes out of the G20 out of Seoul, Korea. But currency war, trade war, the currency reform, this is one of the issues. The financial reform, as you know the financial reform is you know I would say hated by the financial services industry and because it simply means a lot more regulations. And with republicans in congress, I think it's quite possible that the regulatory implementation might be slowed or delayed in the so-called Dodd-Frank Act. And one of the ways of doing that is of course limiting funding, you know. Congress has created all these bureaucracy or supposed to create all these bureaucracy and then you can create bureaucracy but simply congress can say, "Well, I'm not gonna give you any money." That means you can't have the bureaucracy so that's one way of handling it, right? And so that's one thing that they might do and the other thing is that many of the appointments for these positions have to be approved by the senate, the congress and so, republicans may filibuster or delay their appointment so that really through the pursestrings and then also through the delay in appointment, they can influence the legislation, the implementation of the legislation. The housing finance. The most important issue is Fannie Mae and Freddie Mac. Now, what are you gonna do about it, see? And because they are continuing to lose money so that's one issue. The other issue is what is the role of the government in housing? One of the reasons why we are in the predicament that we are in today is because government has involved itself too much in housing. See. In Canada, they are much less involved but if you look at the home ownership right in Canada, it is high as it is in the United States. So many economists say the government involvement in housing is really not all that helpful, maybe they should get out. So those are some of the issues and we will see what happens. Obviously, republicans like to see them getting out and democrats like to keep them in. Healthcare, we all know that this has been a very emotional subject and again, what will the republicans do? Again the same thing, cut off finding so there are a lot of, you know, bureaucracies that the government is supposed to create and simply I'm sure the republicans in congress, they will try to cut off funding so that they can't really implement initiatives. The other one is the targeted changes. I mean, you know, they can't really repeal the healthcare reform act because President Obama, he will veto it and so congress, what they can do is they can, you know, make some so called technical corrections, you know legislation here, legislation there. Trying to kind of influence the changes here or there and so that's another way they can do it. But again, that's the way I think we will see some of the changes occurring. Immigration, that's another important issue. We all agree that America's immigration law is broken but no one really knows what to do about it. Anyway, it is hard to have a compromise especially with the, you know, importance of a tea party has-- the tea party has become more important, right? And then so, I'm sure everybody says we need to compromise. We need to do something about immigration but coming to some sort of a compromise that's going to be very, very difficult. So I guess the question is these are the issues and after the election, electorate, the voters, you and I clearly has said that we need more jobs and then we want you guys to compromise and then get some results. And then again, if you don't do that we are going to see you in year 2012 at the national election. So will they compromise or not? That's really the 64-dollar question and so I want you to look at this video. [ Pause ] >> Can you turn it up? I love you head to toe, heart to soul. Will you marry me? Yes...yes! [Wedding March] Honey, will you marry me? >> Well, she should have said yes, right? [ Laughter ] >> Now, okay, so how many of you think that the republican and democrats, they will compromise and then give us some concrete results before the 2012 election, raise your hand. Raise your hand, don't be shy. No, I'm-- oh my God, just one lady. Okay, just one. Okay. Now then, how many of you think that they will not compromise and then will be that business as usual and then we gotta be disappointed. Oh my God, we got problems. [ Laughter ] >> Okay, so that I hope you are wrong but again, you know, they are going to be judged and you know I kinda think that there might be more compromises than you think because again whether you are republican or democrat, the last thing you want to do is in year 2012, go to the polls and you know face the electorate and say, I've done nothing because I don't like the other guys because we are going to judge them based on the election. Now about the global economy, let me just, I'll go through this fairly quickly. You know when I first came to American which was so many years ago, Asia was poor and America was rich. Today, it's the other way around, right? America's economic power is declining and then well, the economic center of gravity has shifted to Asia and things are going, you know, very well in Asia. It's booming. They've got lots of money and et cetera. I remember when I first came to America many years ago, I was living in a dormitory and obviously as a freshman in college, one of the problems I had was the English language. As you know I'm a Korean and whether you're talking about a Korean, Chinese or a Japanese, we have one common problem in learning the English language. In those languages, there is no distinction between L and R so it is not unusual for a Chinese fellow to go into a restaurant and says, "Please, give a bowl of the lice" instead of a bowl of rice. And a Japanese friend of mine went to see an eye doctor and the eye doctor said, "Young men, you've got cataract," and he said, "No, I drive a Toyota." [ Laughter ] >> When I was living in a dormitory, a fellow countryman of mine, another Korean in the dormitory, he had a misfortunate of having a Greek roommate, and a fellow from Greece. And he knew but, you know, one day he called my friend and on Friday he said, "Hey, Mae Yung, what day of the week is it?" And of course my friend said, "Oh, it's a Fliday." And this Greece fellow thought that so funny. He can't even pronounce Friday correctly and he laughed a lot. The following Friday, he would do the same thing. "Hey Mae Yung, what day of the week is it?" And my friend would say, "It's a Fliday," and then he laughed and laughed. This went on for a while. >> My friend, Mae Yung, he got one of his American friends to figure out why he was being laughed at so got him to teach how to say Friday correctly, so he was ready. The following Friday, the Greek fellow came and again you know, playing this joke again. "Hey Mae Yung, what day of the week is it?" And as I said my friend, he was ready, and he said, "Oh, it's a Friday you dirty Gleek." [ Laughter ] >> And, anyway, but today when you go to Asia, things are really booming and if you look at the economic growth rate, as you can see the-- you know the-- not only has it been doing very well. The trend is clearly in an upward direction whereas if you look at the advanced economies, you can see, well, growth rate is not going to be all that exciting. Even inflation, in part because of stronger economic activities, inflation in emerging market nations in Asia they are going to be higher in China, Korea as a matter of fact. And whereas if you look at the advanced nations, the burgundy line, inflation is much lower. One thing that-- at G20 that they are going to talk about in earnest is so-called rebalancing. If you look at rebalancing of let's say the trade deficits, the current account deficits. Bottom, the red lines and red bars that's the United States. We've been incurring trade deficits or current account deficits for years and years and years and decades and decades and that has allowed of course China, Japan and then Germany and then et cetera, to rack up trade surpluses. But now we are saying that this cannot go on. America, we need to tighten belts, we need to reduce deficits and then China and Japan and Germany, they need to spend more and then, well, reduce their surpluses. So we are talking about so-called rebalancing. Two types of rebalancing that they are gonna talk about at G20 meeting in Seoul, Korea on November 11th and 12th is number is internal rebalancing. Internal rebalancing refers to domestic demand. In the United States we need to depress our domestic demands, spend less. In China they need to spend more and how about budgets? We need to decrease budget deficits. China, they need to increase, well, decrease budget surpluses and decrease-- increase spending. How about the financing credit? In any economy, it's very important to have the credit market working smoothly. Without that, you are not going to be growing very much so that is known as internal rebalancing. And also they will be talking about so-called the external rebalancing. What are we talking about? The deficit countries such as the United States, we need to increase exports and then reduce imports to reduce our budget deficits and trade deficits. China and Germany and Japan would be opposite. And there are also surplus countries like Germany and Japan and the China. They need to increase consumption as I pointed out. In the United States, consumption is 70 percent of the GDP, in China it's only 35 percent. They've got a lot of room to increase consumption. We are saying that, "China, you need to do that." And hopefully when they increase domestic consumption they will import more from us and so that is known as external rebalancing. The other issue that they are gonna talk about at G20 is the debt to GDP ratio. If you look at the government debt to GDP ratio for the advanced economies, this solid line, as you can see it's been-- it's going up whereas if we look at the dotted line which is for the emerging economy it's essentially moving sideways. So the-- many Asian nations including Japan, Korea, Thailand, Taiwan and then China, et cetera, they've got some debt but not whole lot of debt so they got a lot of plenty room to borrow and then spur domestic consumption. We want them to do that. Whereas if you look at the advanced nations, the United States, United Kingdom and of course Ireland, Portugal and Spain, we've got too much debt and therefore we need to tighten our belts and then do the opposite. In fact, there had been studies not by me but academic studies which show these results. You look at the debt to GDP ratio of any country, historically, it's over 90 percent. Japan will be an example. Economic growth rate is about 1.7 percent. If you lower the debt to GDP ratio by 30 percent, you can see the economic growth rate jumps to 3 and a half percent so the debt to GDP ratio, that's very important in promoting economic growth. In fact, if the economic growth, I mean, if the debt to GDP ratio goes to about 100 percent, it actually stunts economic growth. And again, the closest country that comes to this is Japan, okay? And so that's very important. Now China is a very important part of the global economy right now. It used to be-- America and China used to be the two locomotives pulling the world economy forward. Today, that is not the case. We're not a locomotive. China is. So what China does or does not do, that is very, very important. Well, as you can see during the financial crisis, during the great recession, China really pumped up the economy. So if you look at the production of you know light industry, heavy industry, they really went up very nicely and now they are concerned about their over expansion, overheating and property bubble so they've decided to tighten up and they are making credit more difficult to get. As a result production is declining somewhat. And if you look at the industrial production in China, a lot of it is manufacturing in China. As you can see, economic growth is somewhat slowing. And then, you know this is done at the forecast that I have in 2010 they will be growing pretty close 11 percent but in 2011 the question is, will they have a soft landing? To have a soft landing, China needs to have at least about 8 percent economic growth and the Chinese government, they'll probably make it happen but for some reason if they cannot, debt will be a problem not only for China but also all the other countries, United States, Korea, Japan and Europe as well. One concern that they are going to be talking about at G20 meeting is of course the Chinese currency. This is the value of various currencies, Japanese yen, Thai baht, Malaysian ringgit and Filipino pesos and Korean won and et cetera against the Chinese yuan. As you know the Chinese renminbi is pegged, tied to the US dollar. So when the dollar depreciates, the Chinese renminbi depreciates, right? See. And then how about the other currencies like Thai baht, they appreciate, see? And when you talk about that Chinese, I mean, the Thai baht and the Malaysian ringgit, their biggest competitor is not the United States but their biggest competitor right now is China, see? And so they are screaming, they are saying that because United States dollar is depreciating through quantitative easing, Chinese currency is depreciating as well because they are tied and that is really hurting our exports. And so that's one of the, you know, problems that they face right now. Well, let me just quickly go through what's happening in Ventura County and I guess that in a nutshell we are really kind of in neutral. We are not going up, we are going down very much in Ventura County and then here is employment. It goes up and down but essentially kind of moving sideways and if you look at the jobless rate, we are not too far away from 12 percent in the United States. As you saw, it was 9.6 percent so our jobless rate in Ventura County is higher than overall and, now let's look at the-- some of the positives and the negatives in Ventura County in terms of employment. Clearly education and health, that is one positive and it is not only true for Ventura County but all over the country. Education and health, this is where the jobs are and so that will continue to be the case. And other service jobs, I mean you know lots of these jobs are related to, as I pointed out, people putting up shingles. You get laid off then you decide to become a consultant, right? And then so you are a consultant, that shows up in so-called other service jobs and right here and so we are seeing lot of jobs and then there are a lot of negatives, retail jobs and I'm sure you're not surprising, you know we've cut back spending so retail jobs are declining. Information jobs, we do have quite a few of high-tech jobs but many jobs related to software, for example, has disappeared in Ventura County and that continues to be the case. Financial services jobs, we have a sort of retrenching and this is not only true for the United States but also for Ventura County as well. Leisure and hospitality, many things related to tourism. I'm hoping that they are gradually coming back but again in this area, we have lost a lot of jobs. What about demographics? Because the bodies are important because what? When you have bodies, they go to school, they eat and then you know they need houses and so bodies are very important. Fortunately, our bodies are going up, population is going up. In fact if you look at the migration, the net migration into Ventura County is basically flat. We're not getting a lot of people coming in on a net basis but the citizens of Ventura County is very productive because we are having quite a few babies, see? And then so that because you are productive, as a result our population is going up and sooner or later those babies are going to grow up and then they're gonna need houses and cars and shoes and then they will eat. As a result, hopefully, the demand will be going up, right? So that's what's gonna happen. I guess the last item that I wanna talk about is again, as I pointed out, it is pretty clear that this is going to be not a very healthy strong economic recovery that we are used to in the past. Hopefully, we will not have a double dip economic recession. In fact, you know double dip would not be all that bad. That simply means it goes down. You come back up and you know move on. Now, more and more people are concerned about a lost decade for America, just like Japan. And when you have a lost decade, this generally leads to deflation. And again, repeating myself, deflation is like a quicksand. Once you get in there, it's very hard to come out. Look at Japan. And then so people are saying that, you know, hopefully, we will not get into this so-called the lost decade but, you know, there are some tell tale signs. There are some worry signs out there. Again, we cannot really stimulate the economy much more. >> Federal government deficit is 1.4 trillion dollars this year. Interest rate is zero so there isn't a whole lot we can do about it, and how about consumer spending? You know, you and I, we got so much debt. We cannot really spend much more. We are trying to increase the savings rate. We are trying to decrease our debt, so called deleveraging. So, in this scenario the question really is, you know, who's going to be pumping up the economy? In fact I got a call from New York Times, the New York Times yesterday and says we are doing a story on you know what's going to be the economic driver for the next decade. And I said, I don't know, I said. You know, I wish I know, see? And-- but you know, I can think of a strong driver which will get the economy moving back up to 3 to 4 percent we had in the past. So, again, I'm not saying that we are going into a lost decade but again, when I talk to you again next spring I will elaborate on where we stand on the lost decade but this is one of the things that we are concerned about. Chairman Bernanke, obviously, he will never say that that we are going into a lost decade. He cannot say that but this is one of the reasons why he's engaged in so-called the quantitative easing. Again, I hope you know my website, Dr.sohn.com and then so there's no commercial and except the Smith School commercial and I update it everyday and like for example, you know this morning employment level came out and so if you saw my website, I have the result on my website and from-- plus my analysis by 7 p.m. or 7 a.m., your time so that you are able to get the information faster than almost anybody. So I hope you get a chance to come to my website and then keep up with us. Thank you very much. [ Applause ] [ Inaudible Remark ] >> Just a quick question on the price of gold, do you think that's a pretty good inflation indicator, something to watch the price of gold if you wanted to know for inflation for the future? >> So, are you saying that, is the price of gold an inflation indicator? >> Yes. >> Not today. I think it used to be. For example, in the 1970s and '80s, the price of oil went up, the price of gold went up and so people called it an inflation indicator. Right now it's almost a deflation indicator. People are flocking to gold in part because they do not, you know, trust the fiat currency like the dollar and like the Euro. So they are saying that, I want to be able to hang on to something that I can touch like a gold, and then so many reason-- the reason why people buy gold is not because it has intrinsic use and you know, silver is different. There's a lot more industrial use for silver than, you know, holding it for investment purposes. In gold, much of it is for investment purposes so in this situation now let's say, it is more of a deflation indicator rather than an inflation indicator and then so it's really the opposite, okay? Next question. Go ahead. >> Yes, several times you've mentioned that inflation or not inflation but the interest rates are sitting at zero percent. I'm curious about who gets a zero percent interest rate? Certainly not the guy with the mortgage and I would point out that mortgage rates sit at about, I don't know 5 percent and it seems to be sort of a bottom between 4 and 5 percent. If those mortgages were at 2 percent or 2 and a half percent, people would have twice as much money to go buy things and do things, so what's going on there? >> Well, we may get to that but when we talk about zero percent interest rate, we're not referring to the interest rate you and I pay and then that is called the federal funds rate. That is the interest rate that banks borrow and sell to each other. So Wells Fargo may sell excess cash to Bank of America and uh-- so that is so-called the federal funds rate. That rate is pretty close to zero and that rate is by the way controlled by the Federal Reserve and all the other rates in the United States including consumer loan rates, car loan rates and mortgage rates, they are built on top of that. The reason is when you talk about other rates, there are more risks involved. And then so to reflect that additional risk, you build in that risk premium so that's why starting zero mortgage rates you know 4 percent, you know, 4 and a half percent and et cetera. Car loan rates might be you know 7 percent or 6 percent, et cetera, so that-- but you know, I don't know about the mortgage rates going down to 2 and a half percent but you know, we are going to get pretty close to that because you know I refinance my mortgage and than I got it below 4 percent and then so, who knows, it may go down to something below 3 percent if we keep doing that. If you go to Japan, that is in fact the case and so in Japan, many of the consumer lending rates are like you know 2, 2 and a half percent , 3 percent in the range so we could be getting there. Yes? >> Dr. Sohn, thank you so much for presenting this morning, this afternoon. Under the key issues you did not mention demographics, the aging of the mature economies. The only time you mentioned demographics was the small growth in Ventura County giving the fact that we're having more babies. It seems to me that that is the systemic problem with all of the aging economies is they don't have a younger generation to carry the banner. Would you comment on that please? >> Yeah, that is obviously a very serious issue. It is called the graying of America, right? And so there aren't enough young people to support all the people like myself in the future and that means you know, fewer and fewer younger people will be supporting you know more and more older folks and then so that is a real problem. And so that leads to the question of really the solvency of the social security and then you know a lot of people are concerned about social security will be solvent and then I guess during my lifetime social security I'm sure will be around so I don't care but maybe for my children the social security might be bust and then so, yeah, it is you know really a very serious issue. So there is, you know, that financial issue number one and number two is economic growth. Economic growth, remember early I talked about the potential economic growth rates and in fact when I was a staff economist in the White House, one of my jobs was to really compute the potential economic growth rates and actually it's very simple, it takes two things. Number one is how rapidly the population is growing, okay? And then the other one is how much capital like the machines and software and computers they've got. So how many people do you have? And then you know how much capital do you have? You combine the two together and then you come up with a potential economic growth rate, the productivity. And clearly, you know, more and more people retiring with the graying of America. Our productivity is not going to go up all that rapidly, that means economic growth will slow. So that is another problem that we are facing in the long run. And you know, if you compare, for example, we don't-- you know I didn't get into that but if you look at India and China, that's a very good example. In China because of, you know, one child policy, pretty soon their population growth will plateau and then will start declining. Not only that. If you look at the population composition, well again, China will be graying. Now you compare that to India which is a large population, they did not have this one child policy so they have a strong population growth and then actually a growing portion of their population is becoming younger and younger and younger. So in the long run, if we look at the potential economic growth rate which takes, you know, people in the working age, workforce, plus capital, you can see India has a much stronger potential than China does in the future, see? And so I would say that, you know, America is going to be even worse. Now you go to Japan, for example, it's even worse and so it has, you know, many, many I think implications. Now in Ventura County as I pointed out, for some reason you know we are having quite a few babies and then you know population is growing very nicely and especially the young people so relative to the United States, I hope and assume that Ventura County is going to be a better off, okay? Yeah. Yes? Dr. Sohn, In light of Tuesday's results, do you expect any further discussion about the economy at the Fed? >> I mean, I think that will be the dominant discussion and then again the reason why the democrats took the shellacking, as the president said, is because of the economy. And so they will have to talk about what to do to create more jobs but unfortunately, you know, their options are very, very limited because we don't have the money. And then again, you know, what more could the Chairman Bernanke do and then so I think the options are very, very limited so that I don't think we should get our expectations up too high. Okay, go ahead. Yeah. Here, here. Yeah. Yeah. All right. The government recently announced that they're putting 600 billion dollars into treasuries. What effect is that going to have on the economy? >> Well, the-- essentially we are printing money and printing money simply means we are financing the government budget deficits. Let's say our budget deficit is-- this year is gonna be about 1.3 trillion dollars this year, okay? And so let's just call there are 100 billion dollars here and as I pointed out, the federal government is going to refinance 35 billion dollars of the maturing obligations of the existing securities that they own plus they are going to buy 65 additional billion dollars in treasury bonds so 35 plus 65 is 110. >> That's roughly equal to the government budget deficits so we are essentially seeing the federal government and the Federal Reserve, you know, financing, printing money to fund the federal budget deficit. And historically, that's been obviously a no, no. That's how you create a lot of inflation and fortunately or unfortunately, we have what economists call a liquidity trap. There's so much liquidity, you can't really get out of it and so I don't wanna get to be too technical but in Economics 101 we teach two things. Not only does the liquidity matter but also how rapidly that liquidity turns over what economists call velocity. That is just as important. For example, you know banks are not lending money that means money is not turning over. Velocity is actually declining so what's happening is that Chairman Bernanke sees the velocity actually going down. So he's trying to offset that by increasing liquidity by printing more money, see? That's what he's doing so what he's looking at is really the both, not only the liquidity but also the velocity. When you put the two together, he's trying to keep it about the same. But again, the bottom line is that, you know this is just a classical case of the Federal Reserve financing the federal budget deficits and in the long run that is a no, no. That's not very good. Thank you very much. [ Applause ] [ Inaudible Remark ]