1 00:00:16,480 --> 00:00:21,000 Okay, let's uh 2 00:00:18,760 --> 00:00:25,040 let's start. So, 3 00:00:21,000 --> 00:00:28,600 hello everyone. Um welcome to 1402, 4 00:00:25,039 --> 00:00:30,000 uh introduction to microeconomics. 5 00:00:28,600 --> 00:00:31,520 Um 6 00:00:30,000 --> 00:00:34,399 I won't teach today, so that's a good 7 00:00:31,519 --> 00:00:36,479 news. Uh I will start on Wednesday. 8 00:00:34,399 --> 00:00:38,280 So, what I want to today is essentially 9 00:00:36,479 --> 00:00:40,399 tell you what macro is about, 10 00:00:38,280 --> 00:00:44,719 macroeconomics is about, 11 00:00:40,399 --> 00:00:47,399 and uh also the rules of of the game. 12 00:00:44,719 --> 00:00:50,479 So, what a difference a single letter 13 00:00:47,399 --> 00:00:52,280 makes. Many of you must have taken 1401. 14 00:00:50,479 --> 00:00:54,079 In fact, some of you may be taking it 15 00:00:52,280 --> 00:00:55,840 concurrently. It's a lecture right 16 00:00:54,079 --> 00:00:57,320 before mine. 17 00:00:55,840 --> 00:01:00,000 And uh 18 00:00:57,320 --> 00:01:01,799 you know, that's microeconomics, 1401, 19 00:01:00,000 --> 00:01:04,359 and this is macroeconomics, and it 20 00:01:01,799 --> 00:01:06,200 doesn't take a lot of imagination to 21 00:01:04,359 --> 00:01:08,359 realize that this course is about big 22 00:01:06,200 --> 00:01:10,240 things, no? We don't look at small 23 00:01:08,359 --> 00:01:13,079 things. That's what micro is about. 24 00:01:10,239 --> 00:01:15,519 Micro looks at a household, at a firm, 25 00:01:13,079 --> 00:01:18,039 at an industry. Uh 26 00:01:15,519 --> 00:01:20,039 in macro, we don't do that. We look at 27 00:01:18,040 --> 00:01:22,520 the whole economy. We think about the 28 00:01:20,040 --> 00:01:24,080 US. We think about China. 29 00:01:22,519 --> 00:01:26,280 Uh we don't think about an individual 30 00:01:24,079 --> 00:01:28,759 price. We think about inflation, so the 31 00:01:26,280 --> 00:01:30,480 rate of change of all prices. We don't 32 00:01:28,760 --> 00:01:32,400 think about whether a particular worker 33 00:01:30,480 --> 00:01:34,280 is employed or unemployed. We think of 34 00:01:32,400 --> 00:01:37,080 whether the rate of unemployment is very 35 00:01:34,280 --> 00:01:38,519 high or low, things of that kind. Okay? 36 00:01:37,079 --> 00:01:39,719 When we look at two countries, we look 37 00:01:38,519 --> 00:01:41,759 at the exchange rate, which is the 38 00:01:39,719 --> 00:01:43,400 relative price of two currencies, not 39 00:01:41,760 --> 00:01:45,280 two individual goods in two different 40 00:01:43,400 --> 00:01:48,719 countries, but the whole currency, and 41 00:01:45,280 --> 00:01:50,400 so on. So, that's what macro is about. 42 00:01:48,719 --> 00:01:52,079 Now, you could think that macro is 43 00:01:50,400 --> 00:01:54,400 nothing else than the sum of lots of 44 00:01:52,079 --> 00:01:56,159 micros, no? After all, that's what an 45 00:01:54,400 --> 00:01:58,280 economy is made of. A population, a 46 00:01:56,159 --> 00:02:00,000 whole population is made of lots of 47 00:01:58,280 --> 00:02:02,840 individuals that can be analyzed with 48 00:02:00,000 --> 00:02:05,599 the tools of 1401 and and the sequence 49 00:02:02,840 --> 00:02:07,280 that follows uh 1401. 50 00:02:05,599 --> 00:02:09,359 But that doesn't work. And there are 51 00:02:07,280 --> 00:02:10,919 parallels in physics about this, and so 52 00:02:09,360 --> 00:02:12,760 on. The way you want to study sort of 53 00:02:10,919 --> 00:02:14,799 big bodies is different from the way you 54 00:02:12,759 --> 00:02:17,719 want to understand the movements of a 55 00:02:14,800 --> 00:02:21,400 small elements. And and that's the case 56 00:02:17,719 --> 00:02:23,719 in macro. In macro, there's a big 57 00:02:21,400 --> 00:02:27,039 line of research that has to do with uh 58 00:02:23,719 --> 00:02:28,840 the microfoundations of macroeconomics. 59 00:02:27,039 --> 00:02:31,159 But even in that case, which is very 60 00:02:28,840 --> 00:02:33,360 close to micro, uh 61 00:02:31,159 --> 00:02:35,919 most of the action ends up happening in 62 00:02:33,360 --> 00:02:38,560 the non-micro part, in the interactions, 63 00:02:35,919 --> 00:02:40,559 in in the in the equilibrium aspects 64 00:02:38,560 --> 00:02:42,199 of the system. So, so it's a much more 65 00:02:40,560 --> 00:02:43,960 complicated object, and if you were to 66 00:02:42,199 --> 00:02:46,639 build it from the micro, it would be an 67 00:02:43,960 --> 00:02:48,159 incredibly complicated object. So, one 68 00:02:46,639 --> 00:02:50,959 of the things we need to do in 69 00:02:48,159 --> 00:02:53,159 macroeconomics is take some shortcuts. 70 00:02:50,960 --> 00:02:55,800 And and and that's what makes macro a 71 00:02:53,159 --> 00:02:58,159 lot of an art. It's not a science per 72 00:02:55,800 --> 00:02:59,920 se. It's some sort of a science. It has 73 00:02:58,159 --> 00:03:01,680 the tools of a science, 74 00:02:59,919 --> 00:03:03,119 but it's a lot about shortcuts and 75 00:03:01,680 --> 00:03:04,520 tricks, and so on, to capture the 76 00:03:03,120 --> 00:03:06,920 essence of a problem that is very 77 00:03:04,520 --> 00:03:11,520 complex if you were to model it in in 78 00:03:06,919 --> 00:03:13,439 the all the gory details. Okay? And um 79 00:03:11,520 --> 00:03:15,560 and in this course, we're going to 80 00:03:13,439 --> 00:03:17,199 exaggerate on that sense. We're not 81 00:03:15,560 --> 00:03:18,759 going to do anything complicated. I 82 00:03:17,199 --> 00:03:19,719 promise you that. Some occasionally, 83 00:03:18,759 --> 00:03:21,479 conceptually, things will be 84 00:03:19,719 --> 00:03:24,000 complicated, but the math will not be 85 00:03:21,479 --> 00:03:25,519 complicated. Okay? 86 00:03:24,000 --> 00:03:27,479 Uh so, we're going to keep things very 87 00:03:25,520 --> 00:03:30,000 very simple. I want to communicate the 88 00:03:27,479 --> 00:03:31,599 essence of the big macroeconomic 89 00:03:30,000 --> 00:03:33,960 relationships. 90 00:03:31,599 --> 00:03:36,239 This is not a PhD course. If you were to 91 00:03:33,960 --> 00:03:38,240 take a a PhD course in macro, it would 92 00:03:36,240 --> 00:03:39,760 be a very mathy type course. 93 00:03:38,240 --> 00:03:42,640 In fact, most of the people that do 94 00:03:39,759 --> 00:03:44,439 apply in micro in our PhD program 95 00:03:42,639 --> 00:03:46,079 complain against macro because they find 96 00:03:44,439 --> 00:03:47,840 it too mathy, and so on. Okay? But 97 00:03:46,080 --> 00:03:50,960 that's not going to be the case here. 98 00:03:47,840 --> 00:03:52,840 That's not what this course is about. 99 00:03:50,960 --> 00:03:55,240 My goal, 100 00:03:52,840 --> 00:03:57,319 so if this is a successful course, is 101 00:03:55,240 --> 00:03:58,960 not that you come out being a researcher 102 00:03:57,319 --> 00:04:01,000 in macro out of this. Hopefully, you'll 103 00:03:58,960 --> 00:04:03,280 have a career eventually and do all the 104 00:04:01,000 --> 00:04:05,879 next steps that you need to do that. But 105 00:04:03,280 --> 00:04:07,520 I want you to be able to do is to read 106 00:04:05,879 --> 00:04:09,240 something like this. This is a World 107 00:04:07,520 --> 00:04:12,159 Economic Outlook. It's a publication 108 00:04:09,240 --> 00:04:14,200 that the IMF puts out every 6 months, in 109 00:04:12,159 --> 00:04:16,238 which it tells you what the how it sees 110 00:04:14,199 --> 00:04:18,358 the world and where where heading, and 111 00:04:16,238 --> 00:04:20,599 so on. No equations there. Lots of 112 00:04:18,358 --> 00:04:23,000 tables and stuff like that. I'd like you 113 00:04:20,600 --> 00:04:25,000 to be able to read that kind of document 114 00:04:23,000 --> 00:04:26,800 very clearly. I would like you to be 115 00:04:25,000 --> 00:04:28,879 able to read something, say, the Wall 116 00:04:26,800 --> 00:04:30,920 Street Journal, and read it even 117 00:04:28,879 --> 00:04:31,920 critically. Sometimes disagreeing with 118 00:04:30,920 --> 00:04:33,920 what's in there. 119 00:04:31,920 --> 00:04:35,520 Financial Times, The Economist. That's 120 00:04:33,920 --> 00:04:37,920 the goal of this course. It's not a lot 121 00:04:35,519 --> 00:04:39,839 more than that. It's just that. If you 122 00:04:37,920 --> 00:04:41,400 do a summer inter- in Wall Street, and 123 00:04:39,839 --> 00:04:42,639 you work in a macro hedge fund or 124 00:04:41,399 --> 00:04:43,799 whatever, 125 00:04:42,639 --> 00:04:45,639 this is going to be a good course for 126 00:04:43,800 --> 00:04:47,120 that. I mean, this is what traders 127 00:04:45,639 --> 00:04:48,439 really know. They don't know a lot more 128 00:04:47,120 --> 00:04:50,959 than that. Many traders should know 129 00:04:48,439 --> 00:04:53,000 that. They don't. But this that's the 130 00:04:50,959 --> 00:04:54,839 level of knowledge. I'm not 131 00:04:53,000 --> 00:04:57,040 if it gets to be very complicated, I'm 132 00:04:54,839 --> 00:04:59,079 failing. That's not what I want to do 133 00:04:57,040 --> 00:05:01,200 here. 134 00:04:59,079 --> 00:05:02,839 The typical lecture, again, this is not 135 00:05:01,199 --> 00:05:04,439 a lecture. The next The first lecture 136 00:05:02,839 --> 00:05:06,519 will be on Wednesday. 137 00:05:04,439 --> 00:05:07,920 The typical lecture, and not in the 138 00:05:06,519 --> 00:05:09,000 first part of the course, because you're 139 00:05:07,920 --> 00:05:11,280 not going to have the tools, the 140 00:05:09,000 --> 00:05:13,199 definitions, and so on, to do it. 141 00:05:11,279 --> 00:05:14,359 What I want to do is 142 00:05:13,199 --> 00:05:15,159 is 143 00:05:14,360 --> 00:05:17,960 uh 144 00:05:15,160 --> 00:05:19,240 spend 5 to 10 minutes early on. Again, 145 00:05:17,959 --> 00:05:20,519 the first part of the course, we can't 146 00:05:19,240 --> 00:05:22,400 do that because you don't have the still 147 00:05:20,519 --> 00:05:25,120 the knowledge to do that. 148 00:05:22,399 --> 00:05:27,199 But as as you start building tools, 149 00:05:25,120 --> 00:05:29,000 I want to be able to sort of 150 00:05:27,199 --> 00:05:30,959 talk about current events, something 151 00:05:29,000 --> 00:05:32,920 that is happening out there that I find 152 00:05:30,959 --> 00:05:36,000 I find interesting, or something I 153 00:05:32,920 --> 00:05:37,400 received that morning may even uh the 154 00:05:36,000 --> 00:05:39,399 the morning of the lecture, in which I 155 00:05:37,399 --> 00:05:40,799 which I find interesting. And if I think 156 00:05:39,399 --> 00:05:42,319 you already have the tools to begin to 157 00:05:40,800 --> 00:05:43,960 understand it, I'm going to be 158 00:05:42,319 --> 00:05:45,680 repetitive. I'm going to sort of come 159 00:05:43,959 --> 00:05:48,359 back to three, four times to the same 160 00:05:45,680 --> 00:05:49,800 topic. Hopefully, you'll be know you'll 161 00:05:48,360 --> 00:05:51,160 be more advanced in your knowledge in 162 00:05:49,800 --> 00:05:52,800 the later stages, so you'll be able to 163 00:05:51,160 --> 00:05:54,720 understand it more and more. 164 00:05:52,800 --> 00:05:56,240 Okay? So, the typical lecture will have 165 00:05:54,720 --> 00:05:58,600 5 to 10 minutes, in which we'll talk 166 00:05:56,240 --> 00:05:59,639 about some facts, something that is 167 00:05:58,600 --> 00:06:01,480 going on. 168 00:05:59,639 --> 00:06:03,039 For example, a picture like this. This 169 00:06:01,480 --> 00:06:05,480 is I received it this morning. I think 170 00:06:03,040 --> 00:06:07,000 this came from Goldman, I think. Goldman 171 00:06:05,480 --> 00:06:08,520 Sachs, yes. 172 00:06:07,000 --> 00:06:11,120 And what you have in that picture, 173 00:06:08,519 --> 00:06:14,000 again, don't worry about details today, 174 00:06:11,120 --> 00:06:16,759 is you have two lines. One of them is a 175 00:06:14,000 --> 00:06:18,639 measure of uh 176 00:06:16,759 --> 00:06:21,680 uh wages, 177 00:06:18,639 --> 00:06:22,959 wage growth, compensation to workers, 178 00:06:21,680 --> 00:06:25,199 and another one is a measure of 179 00:06:22,959 --> 00:06:27,199 inflation. Again, all those definitions 180 00:06:25,199 --> 00:06:29,159 will come in the next lecture. 181 00:06:27,199 --> 00:06:30,599 Uh and inflation, so it's the rate at 182 00:06:29,160 --> 00:06:32,280 which, you know, you must have heard 183 00:06:30,600 --> 00:06:34,000 about inflation. It's something prices 184 00:06:32,279 --> 00:06:35,759 are rising, no? 185 00:06:34,000 --> 00:06:37,040 And what that picture shows you is that 186 00:06:35,759 --> 00:06:38,879 these two series are very highly 187 00:06:37,040 --> 00:06:41,840 correlated. 188 00:06:38,879 --> 00:06:44,159 Okay? So, when wage growth is high, 189 00:06:41,839 --> 00:06:45,719 inflation tends to be high. Okay? And 190 00:06:44,160 --> 00:06:47,200 that's a big issue on these days. 191 00:06:45,720 --> 00:06:49,680 There's a lot of concern about this 192 00:06:47,199 --> 00:06:49,680 stuff. 193 00:06:50,120 --> 00:06:53,840 So, let me let me try to explain a 194 00:06:51,920 --> 00:06:55,800 little bit what is a concern on these 195 00:06:53,839 --> 00:06:57,039 days. Again, 196 00:06:55,800 --> 00:06:58,560 if you don't understand anything, it 197 00:06:57,040 --> 00:06:59,520 doesn't matter. 198 00:06:58,560 --> 00:07:01,920 If you don't understand anything I'm 199 00:06:59,519 --> 00:07:03,519 saying right now, in the last lecture, 200 00:07:01,920 --> 00:07:05,319 then it matters. But now it doesn't 201 00:07:03,519 --> 00:07:06,799 matter, you know? I'm just trying to 202 00:07:05,319 --> 00:07:08,800 give you a flavor of the kind of things 203 00:07:06,800 --> 00:07:10,439 we'll be talking about. 204 00:07:08,800 --> 00:07:11,960 That picture there, 205 00:07:10,439 --> 00:07:13,759 again, a variable that we'll define in 206 00:07:11,959 --> 00:07:15,599 the next lecture, not now, shows you the 207 00:07:13,759 --> 00:07:17,560 unemployment rate. You don't need any 208 00:07:15,600 --> 00:07:19,680 specific definition 209 00:07:17,560 --> 00:07:21,280 to know that to feel, at least get a 210 00:07:19,680 --> 00:07:23,800 sense that, well, if unemployment is 211 00:07:21,279 --> 00:07:24,959 high, workers aren't very happy. It's 212 00:07:23,800 --> 00:07:26,199 not a good thing to have lots of 213 00:07:24,959 --> 00:07:27,959 unemployment. 214 00:07:26,199 --> 00:07:30,879 And what that series shows you, the 215 00:07:27,959 --> 00:07:32,759 shaded areas are recessions in the US. 216 00:07:30,879 --> 00:07:34,399 What that series shows you is that 217 00:07:32,759 --> 00:07:36,120 typically in recessions, unemployment 218 00:07:34,399 --> 00:07:37,759 goes up. So, that's one of the features 219 00:07:36,120 --> 00:07:40,360 one of the main features of a recession 220 00:07:37,759 --> 00:07:42,560 is that unemployment is high. 221 00:07:40,360 --> 00:07:45,520 This episode here 222 00:07:42,560 --> 00:07:47,360 is is called the Great Recession, as a 223 00:07:45,519 --> 00:07:49,560 parallel for the Great Depression. The 224 00:07:47,360 --> 00:07:51,800 US had the Great Depression in the '30s. 225 00:07:49,560 --> 00:07:53,439 This is the Great Recession, the biggest 226 00:07:51,800 --> 00:07:55,960 sort of recession outside of the Great 227 00:07:53,439 --> 00:07:57,040 Depression in the US. And it's also 228 00:07:55,959 --> 00:07:59,199 known 229 00:07:57,040 --> 00:08:00,680 as the Global Financial Crisis, because 230 00:07:59,199 --> 00:08:02,479 this was a recession all around the 231 00:08:00,680 --> 00:08:04,959 world. And what you can see is that 232 00:08:02,480 --> 00:08:07,240 unemployment went very high. 233 00:08:04,959 --> 00:08:09,560 That's a very feature a telltale sign of 234 00:08:07,240 --> 00:08:11,800 a of of a big recession. And then it 235 00:08:09,560 --> 00:08:13,199 took a long time. This was in in in sort 236 00:08:11,800 --> 00:08:15,639 of recovery. 237 00:08:13,199 --> 00:08:16,920 COVID was a massive shock to the labor 238 00:08:15,639 --> 00:08:18,319 market. So, not surprisingly, 239 00:08:16,920 --> 00:08:19,920 unemployment the unemployment rate did 240 00:08:18,319 --> 00:08:21,959 spike there. 241 00:08:19,920 --> 00:08:23,800 But then it also recovered a lot faster 242 00:08:21,959 --> 00:08:25,959 than it recovered from that. 243 00:08:23,800 --> 00:08:28,360 And today, we have unemployment rates 244 00:08:25,959 --> 00:08:30,120 that are at historically low levels. And 245 00:08:28,360 --> 00:08:33,120 that's a big issue. 246 00:08:30,120 --> 00:08:36,320 The rate of unemployment in the US is at 247 00:08:33,120 --> 00:08:37,918 historically low levels. Okay? Way below 248 00:08:36,320 --> 00:08:38,479 what is normal 249 00:08:37,918 --> 00:08:40,439 uh 250 00:08:38,479 --> 00:08:42,800 forget recessions, obviously way below 251 00:08:40,440 --> 00:08:44,720 what is in if it happens in recession. 252 00:08:42,799 --> 00:08:46,759 But even way below what is normal, what 253 00:08:44,720 --> 00:08:49,160 happens during normal times. 254 00:08:46,759 --> 00:08:49,159 Okay? 255 00:08:49,360 --> 00:08:56,039 Closely related to that is wage growth. 256 00:08:53,399 --> 00:08:58,000 I have just one measure of wages there. 257 00:08:56,039 --> 00:08:59,240 It's a wage It's a It's a series of 258 00:08:58,000 --> 00:09:01,320 wages that is 259 00:08:59,240 --> 00:09:03,919 that is particularly that that what I'm 260 00:09:01,320 --> 00:09:05,640 about to say is particularly sharp, 261 00:09:03,919 --> 00:09:08,000 which is the wages of in the 262 00:09:05,639 --> 00:09:09,919 accommodation and food service sectors. 263 00:09:08,000 --> 00:09:13,039 So, wages have been rising very steadily 264 00:09:09,919 --> 00:09:15,000 and and very fast recently everywhere, 265 00:09:13,039 --> 00:09:16,559 particularly in sectors like these, you 266 00:09:15,000 --> 00:09:18,320 know, where we have some problems with 267 00:09:16,559 --> 00:09:20,279 what we call labor supply. But we'll 268 00:09:18,320 --> 00:09:21,800 I'll get back to that. Okay? So, those 269 00:09:20,279 --> 00:09:23,679 are two facts. We have unemployment at 270 00:09:21,799 --> 00:09:26,479 extremely low levels, 271 00:09:23,679 --> 00:09:27,919 and we have wage growth at a very high 272 00:09:26,480 --> 00:09:29,480 fast pace. 273 00:09:27,919 --> 00:09:30,959 Now, that sounds wonderful, no? I mean, 274 00:09:29,480 --> 00:09:33,320 what else do you want? An economy in 275 00:09:30,960 --> 00:09:34,759 which few people are unemployed, 276 00:09:33,320 --> 00:09:37,640 and and 277 00:09:34,759 --> 00:09:39,799 and wages are growing a lot. I mean, if 278 00:09:37,639 --> 00:09:41,960 this was micro, this would be fantastic. 279 00:09:39,799 --> 00:09:43,599 Say, "Okay, look. The guy is employed, 280 00:09:41,960 --> 00:09:45,360 and he's getting a high wage. This is 281 00:09:43,600 --> 00:09:48,680 great." 282 00:09:45,360 --> 00:09:51,639 Well, not so fast for macro. 283 00:09:48,679 --> 00:09:52,879 Not so fast because I already showed you 284 00:09:51,639 --> 00:09:54,000 in the first picture that I showed you 285 00:09:52,879 --> 00:09:56,759 to motivate, there's a connection 286 00:09:54,000 --> 00:09:58,440 between wage growth and inflation. 287 00:09:56,759 --> 00:10:00,480 And that's what we're experiencing. The 288 00:09:58,440 --> 00:10:03,120 normal level of inflation for an economy 289 00:10:00,480 --> 00:10:05,279 like the US is around 2%. That's normal. 290 00:10:03,120 --> 00:10:08,279 That's what central banks target in an 291 00:10:05,279 --> 00:10:10,519 economy like the US, in the Euro area. 292 00:10:08,279 --> 00:10:12,519 Japan has been dreaming with 2% but he 293 00:10:10,519 --> 00:10:14,240 hasn't been able for decades to get it 294 00:10:12,519 --> 00:10:16,199 but although 295 00:10:14,240 --> 00:10:18,159 now they are but but they weren't for a 296 00:10:16,200 --> 00:10:20,120 couple of decades to get to 2% but 297 00:10:18,159 --> 00:10:22,600 that's about and we will discuss later 298 00:10:20,120 --> 00:10:24,600 in the course why 2% is about right for 299 00:10:22,600 --> 00:10:26,360 economies of the size of the US and so 300 00:10:24,600 --> 00:10:28,159 on. 301 00:10:26,360 --> 00:10:30,279 Obviously in in recessions these things 302 00:10:28,159 --> 00:10:32,480 can go low and that's what 303 00:10:30,279 --> 00:10:35,159 you know that in the COVID recessions 304 00:10:32,480 --> 00:10:37,279 inflation went to zero essentially. 305 00:10:35,159 --> 00:10:40,159 But then it began to pick up and it's 306 00:10:37,279 --> 00:10:42,159 now at levels which are unheard of in 307 00:10:40,159 --> 00:10:44,799 the US since the '80s. 308 00:10:42,159 --> 00:10:47,279 Okay? So depending on the particular 309 00:10:44,799 --> 00:10:49,279 measure you use of inflation is around 6 310 00:10:47,279 --> 00:10:52,600 and 1/2% to 8%. That's the level of 311 00:10:49,279 --> 00:10:55,439 inflation we have which is way way above 312 00:10:52,600 --> 00:10:57,399 what is considered a normal reasonable 313 00:10:55,440 --> 00:10:59,760 target for the central banks for the 314 00:10:57,399 --> 00:11:02,159 inflation. Okay? So that's a problem. We 315 00:10:59,759 --> 00:11:04,960 have had some good news recently in that 316 00:11:02,159 --> 00:11:06,679 inflation clearly picked already. 317 00:11:04,960 --> 00:11:08,280 Again definition of inflation formal 318 00:11:06,679 --> 00:11:10,079 definition inflation happens in the next 319 00:11:08,279 --> 00:11:12,039 lecture but 320 00:11:10,080 --> 00:11:14,639 it already picked and it's declining but 321 00:11:12,039 --> 00:11:15,719 it's still a very very high level and 322 00:11:14,639 --> 00:11:17,639 that's a problem. That's a big 323 00:11:15,720 --> 00:11:18,920 macroeconomic problem and one of the 324 00:11:17,639 --> 00:11:21,039 things we want to understand in this 325 00:11:18,919 --> 00:11:22,879 course is well what to do about it. How 326 00:11:21,039 --> 00:11:25,000 do you do how do you deal with that? 327 00:11:22,879 --> 00:11:27,759 What do central banks need to do 328 00:11:25,000 --> 00:11:29,639 in order to deal with that? Now 329 00:11:27,759 --> 00:11:32,639 I've been talking about the US but this 330 00:11:29,639 --> 00:11:33,319 is not specific to the US. 331 00:11:32,639 --> 00:11:36,838 Uh 332 00:11:33,320 --> 00:11:40,240 this is episode this recovery from COVID 333 00:11:36,839 --> 00:11:41,640 is is incredibly common across different 334 00:11:40,240 --> 00:11:43,320 regions of the world. I mean you see it 335 00:11:41,639 --> 00:11:45,439 everywhere with a few exceptions and I'm 336 00:11:43,320 --> 00:11:46,520 going to talk about one major exception 337 00:11:45,440 --> 00:11:49,440 in a minute. 338 00:11:46,519 --> 00:11:51,039 But but it's it's it's it's widespread. 339 00:11:49,440 --> 00:11:52,880 It's a widespread phenomenon that you 340 00:11:51,039 --> 00:11:56,120 know we had high unemployment then we 341 00:11:52,879 --> 00:11:58,600 had sort of very high uh 342 00:11:56,120 --> 00:12:00,560 uh well I haven't told you that part yet 343 00:11:58,600 --> 00:12:02,480 but then we had sort of low inflation 344 00:12:00,559 --> 00:12:04,039 then inflation pick up enormously and 345 00:12:02,480 --> 00:12:06,920 now we're all worried about this very 346 00:12:04,039 --> 00:12:08,120 high levels of inflation. In fact 347 00:12:06,919 --> 00:12:09,799 uh 348 00:12:08,120 --> 00:12:11,279 if you look at sort of what happened 349 00:12:09,799 --> 00:12:13,719 between the great recession and the 350 00:12:11,279 --> 00:12:16,360 COVID recession it was pretty normal to 351 00:12:13,720 --> 00:12:18,839 have 70 to 80% of the economies in the 352 00:12:16,360 --> 00:12:22,000 world having inflation levels at or 353 00:12:18,839 --> 00:12:23,600 below 2%. So that's a norm. You so if if 354 00:12:22,000 --> 00:12:25,919 I throw you into a country say drop you 355 00:12:23,600 --> 00:12:27,480 into a country the normal thing would be 356 00:12:25,919 --> 00:12:29,199 well it's about 2% that's the level of 357 00:12:27,480 --> 00:12:30,519 inflation. Obviously if I drop you in 358 00:12:29,200 --> 00:12:32,480 Argentina you're going to find a much 359 00:12:30,519 --> 00:12:35,399 bigger number no? 360 00:12:32,480 --> 00:12:39,519 10,000% but but but but the the bulk of 361 00:12:35,399 --> 00:12:41,838 the countries were around uh 2% or so. 362 00:12:39,519 --> 00:12:44,199 Today you don't find any country with 363 00:12:41,839 --> 00:12:46,880 inflation below 2%. 364 00:12:44,200 --> 00:12:49,800 Okay? Not even Japan that for years were 365 00:12:46,879 --> 00:12:51,519 in deflation and trying to get sort of 366 00:12:49,799 --> 00:12:52,559 uh above zero. That's what they all they 367 00:12:51,519 --> 00:12:54,199 wanted. 368 00:12:52,559 --> 00:12:57,879 Not even in Japan you have inflation 369 00:12:54,200 --> 00:13:00,600 below 2% So this thing I show you and 370 00:12:57,879 --> 00:13:02,439 for more or less the same reasons uh is 371 00:13:00,600 --> 00:13:05,040 happening everywhere. 372 00:13:02,440 --> 00:13:08,000 Not exactly the same factors is the same 373 00:13:05,039 --> 00:13:09,959 episode in for example in 374 00:13:08,000 --> 00:13:11,159 and then with differences 375 00:13:09,960 --> 00:13:13,720 depending on the structure of the 376 00:13:11,159 --> 00:13:15,279 economy or in additional shocks. In 377 00:13:13,720 --> 00:13:16,680 Europe for example they have very high 378 00:13:15,279 --> 00:13:17,439 inflation. 379 00:13:16,679 --> 00:13:19,199 Uh 380 00:13:17,440 --> 00:13:20,880 but the problem is not 381 00:13:19,200 --> 00:13:23,040 the origin of the problem the 382 00:13:20,879 --> 00:13:24,720 the bulk of the of the problem is the 383 00:13:23,039 --> 00:13:26,599 same as in the US. 384 00:13:24,720 --> 00:13:28,879 But the but at the margin they're 385 00:13:26,600 --> 00:13:31,279 different. In in Europe the big driver 386 00:13:28,879 --> 00:13:32,519 of inflation the big recent driver of 387 00:13:31,279 --> 00:13:35,079 inflation 388 00:13:32,519 --> 00:13:37,079 is unlike the US which is I is aggregate 389 00:13:35,080 --> 00:13:39,120 demand I will discuss later is 390 00:13:37,080 --> 00:13:40,440 essentially the war in Ukraine. That has 391 00:13:39,120 --> 00:13:42,480 increased the price of energy and the 392 00:13:40,440 --> 00:13:43,680 price of energy has led to lots of 393 00:13:42,480 --> 00:13:46,240 inflation. So there are different 394 00:13:43,679 --> 00:13:48,120 reasons but all of them are sort of 395 00:13:46,240 --> 00:13:51,039 different reasons that you add on top of 396 00:13:48,120 --> 00:13:54,600 what is a common story which is that we 397 00:13:51,039 --> 00:13:57,838 overheated coming out of the COVID COVID 398 00:13:54,600 --> 00:14:00,200 episode and and and now 399 00:13:57,839 --> 00:14:01,600 we're struggling struggling with that. 400 00:14:00,200 --> 00:14:03,120 Now the main tool and we're going to 401 00:14:01,600 --> 00:14:05,920 talk a lot about this in this course. 402 00:14:03,120 --> 00:14:07,320 The main tool that central banks have to 403 00:14:05,919 --> 00:14:08,199 deal with inflation is the interest 404 00:14:07,320 --> 00:14:10,440 rate. 405 00:14:08,200 --> 00:14:12,759 Okay? So for reasons you'll understand 406 00:14:10,440 --> 00:14:15,280 later uh although you may have an 407 00:14:12,759 --> 00:14:17,439 intuition about some of those now 408 00:14:15,279 --> 00:14:19,600 obviously when the central bank lowers 409 00:14:17,440 --> 00:14:21,520 the interest rates then that helps the 410 00:14:19,600 --> 00:14:23,839 economy to expand. 411 00:14:21,519 --> 00:14:25,399 Uh and when it increases interest rate 412 00:14:23,839 --> 00:14:26,959 then it does the opposite. Raising 413 00:14:25,399 --> 00:14:28,078 interest rate makes mortgages more 414 00:14:26,958 --> 00:14:30,359 expensive makes everything more 415 00:14:28,078 --> 00:14:32,239 expensive so people tend to consume less 416 00:14:30,360 --> 00:14:34,879 firms tend to invest less and so on 417 00:14:32,240 --> 00:14:38,639 because it's more expensive to invest to 418 00:14:34,879 --> 00:14:39,799 borrow to to do something. Okay? And and 419 00:14:38,639 --> 00:14:41,519 there 420 00:14:39,799 --> 00:14:43,958 there you see it. I mean this was the 421 00:14:41,519 --> 00:14:46,078 level of the interest rate in the US 422 00:14:43,958 --> 00:14:48,399 before COVID. When COVID came boom they 423 00:14:46,078 --> 00:14:49,879 brought it all the way down. It happens 424 00:14:48,399 --> 00:14:52,000 that you cannot bring interest rate a 425 00:14:49,879 --> 00:14:53,559 lot lower than zero. That's the reason 426 00:14:52,000 --> 00:14:55,799 it stayed close to zero there. We're 427 00:14:53,559 --> 00:14:57,279 going to talk about that later on. 428 00:14:55,799 --> 00:14:58,958 But then eventually they realized that 429 00:14:57,279 --> 00:15:00,519 were behind the curve. Inflation had 430 00:14:58,958 --> 00:15:01,239 picked up a lot and the central banks 431 00:15:00,519 --> 00:15:02,600 were 432 00:15:01,240 --> 00:15:04,360 behind it behind the curve. So they 433 00:15:02,600 --> 00:15:06,120 began to hike rates 434 00:15:04,360 --> 00:15:08,639 in a hurry. Okay? And that's what we 435 00:15:06,120 --> 00:15:09,480 have been experiencing for for the last 436 00:15:08,639 --> 00:15:10,958 uh 437 00:15:09,480 --> 00:15:13,360 year or so. 438 00:15:10,958 --> 00:15:14,159 Okay? Very fast increase in the interest 439 00:15:13,360 --> 00:15:15,519 rate. 440 00:15:14,159 --> 00:15:17,279 Now this is a course about 441 00:15:15,519 --> 00:15:19,559 macroeconomics but I happen to do a lot 442 00:15:17,279 --> 00:15:21,319 of research between macro and finance so 443 00:15:19,559 --> 00:15:24,359 I'm going to put a little bit more of a 444 00:15:21,320 --> 00:15:26,600 component of finance into in the in the 445 00:15:24,360 --> 00:15:28,680 I think I'm going to do most of that 446 00:15:26,600 --> 00:15:30,839 in the last third of the course. 447 00:15:28,679 --> 00:15:34,559 But monetary policy has lots of 448 00:15:30,839 --> 00:15:36,920 implications for for for for finance for 449 00:15:34,559 --> 00:15:38,239 equity values for the stock market and 450 00:15:36,919 --> 00:15:40,319 stuff like that. 451 00:15:38,240 --> 00:15:41,440 So what you see here 452 00:15:40,320 --> 00:15:44,120 is the 453 00:15:41,440 --> 00:15:48,800 the this line here is the is the S S S 454 00:15:44,120 --> 00:15:51,279 S&P X 500. It's the index the main 455 00:15:48,799 --> 00:15:52,799 index of equity in the US of shares. 456 00:15:51,279 --> 00:15:56,159 Okay? And there are several indices 457 00:15:52,799 --> 00:15:58,078 Nasdaq S&P Dow and so on. This is the 458 00:15:56,159 --> 00:16:00,039 main index the most comprehensive the 459 00:15:58,078 --> 00:16:01,919 one that takes the largest 460 00:16:00,039 --> 00:16:03,759 the largest companies 461 00:16:01,919 --> 00:16:05,240 and so on and so forth. 462 00:16:03,759 --> 00:16:07,720 And when you can see what happens here 463 00:16:05,240 --> 00:16:09,959 is that when COVID happened the 464 00:16:07,720 --> 00:16:11,200 the surprise that we had really a 465 00:16:09,958 --> 00:16:13,399 pandemia 466 00:16:11,200 --> 00:16:15,360 then the stock market crashed. It 467 00:16:13,399 --> 00:16:16,480 declined like 30% or something like that 468 00:16:15,360 --> 00:16:17,959 at the time. 469 00:16:16,480 --> 00:16:19,039 That's interesting of assets. I mean 470 00:16:17,958 --> 00:16:21,559 that's one of 471 00:16:19,039 --> 00:16:23,759 one characteristic of of 472 00:16:21,559 --> 00:16:26,439 equity that I like a lot. Other risky 473 00:16:23,759 --> 00:16:28,120 assets as well but but but but they like 474 00:16:26,440 --> 00:16:30,000 a lot they they anticipate what happens. 475 00:16:28,120 --> 00:16:31,759 What happened there is 476 00:16:30,000 --> 00:16:34,200 the stock market the shareholders 477 00:16:31,759 --> 00:16:36,600 realized that something big was negative 478 00:16:34,200 --> 00:16:38,360 and big was happening in front of us so 479 00:16:36,600 --> 00:16:40,560 it was time to sell you know and so the 480 00:16:38,360 --> 00:16:41,879 equity market collapsed. 481 00:16:40,559 --> 00:16:43,838 What happens next is even more 482 00:16:41,879 --> 00:16:45,240 interesting for a macroeconomist 483 00:16:43,839 --> 00:16:47,360 which is this 484 00:16:45,240 --> 00:16:48,959 this big boom here. 485 00:16:47,360 --> 00:16:51,159 It's an enormous boom. The the economy 486 00:16:48,958 --> 00:16:53,559 here is still was at levels of activity 487 00:16:51,159 --> 00:16:54,958 below what it had before COVID but the 488 00:16:53,559 --> 00:16:56,919 stock market the value of the stock 489 00:16:54,958 --> 00:16:59,039 market had way exceeded 490 00:16:56,919 --> 00:17:00,240 the level we had before 491 00:16:59,039 --> 00:17:01,399 the pandemia. 492 00:17:00,240 --> 00:17:03,560 Okay? 493 00:17:01,399 --> 00:17:05,679 And the main driver of that I've shown 494 00:17:03,559 --> 00:17:07,639 that in some papers. The main driver of 495 00:17:05,679 --> 00:17:10,240 that is not I mean people tell lots of 496 00:17:07,640 --> 00:17:12,439 stories you know you know Amazon and so 497 00:17:10,240 --> 00:17:14,519 on and so on but Tesla blah blah. If you 498 00:17:12,439 --> 00:17:17,519 look at the aggregate the main reason 499 00:17:14,519 --> 00:17:18,959 for that rise was monetary policy. Was 500 00:17:17,519 --> 00:17:20,759 you can explain 501 00:17:18,959 --> 00:17:21,839 all that increase in the equity value in 502 00:17:20,759 --> 00:17:23,519 the US 503 00:17:21,838 --> 00:17:25,799 of the index not individual shares of 504 00:17:23,519 --> 00:17:28,319 the index by the effect of interest 505 00:17:25,799 --> 00:17:30,678 rates. Okay? So monetary policy plays a 506 00:17:28,319 --> 00:17:32,639 big role. If you care about finance well 507 00:17:30,679 --> 00:17:34,560 it plays a huge role in the value of 508 00:17:32,640 --> 00:17:36,759 assets. When monetary policy is very 509 00:17:34,559 --> 00:17:38,599 loose that tends to increase the the 510 00:17:36,759 --> 00:17:40,240 value of assets and that's 511 00:17:38,599 --> 00:17:42,599 one of the mechanism the central banks 512 00:17:40,240 --> 00:17:43,759 use to expand aggregate demand when they 513 00:17:42,599 --> 00:17:45,000 want to expand aggregate demand. They 514 00:17:43,759 --> 00:17:47,039 want people to feel if you are in a 515 00:17:45,000 --> 00:17:48,519 recession you want people to feel richer 516 00:17:47,039 --> 00:17:50,480 so they spend more and so on and so 517 00:17:48,519 --> 00:17:51,920 forth. 518 00:17:50,480 --> 00:17:53,960 What happened here? 519 00:17:51,920 --> 00:17:55,920 This decline you can also explain it 520 00:17:53,960 --> 00:17:57,240 fully with the hiking interest. Remember 521 00:17:55,920 --> 00:17:59,840 I showed you that the interest rate 522 00:17:57,240 --> 00:18:02,440 began to rise very rapidly here. 523 00:17:59,839 --> 00:18:04,439 Well last year the equity market in the 524 00:18:02,440 --> 00:18:07,400 US and most major equity markets around 525 00:18:04,440 --> 00:18:09,480 the world declined by 20% or more. 526 00:18:07,400 --> 00:18:11,160 You can explain all that decline simply 527 00:18:09,480 --> 00:18:11,920 by the increase in the interest rate. So 528 00:18:11,160 --> 00:18:14,640 that's another thing we need to 529 00:18:11,920 --> 00:18:16,320 understand is why is it the interest why 530 00:18:14,640 --> 00:18:18,000 is it the interest rate matters so much 531 00:18:16,319 --> 00:18:19,919 for something like equity? So we want to 532 00:18:18,000 --> 00:18:22,200 value assets and we want to see what is 533 00:18:19,920 --> 00:18:23,440 the effect of the interest rate and then 534 00:18:22,200 --> 00:18:25,600 we're going to think about well why 535 00:18:23,440 --> 00:18:27,159 would the central bank worry or not 536 00:18:25,599 --> 00:18:28,799 worry about these things and so on and 537 00:18:27,159 --> 00:18:30,400 so forth. But the truth is that 538 00:18:28,799 --> 00:18:32,639 financial markets 539 00:18:30,400 --> 00:18:34,720 and the central banks 540 00:18:32,640 --> 00:18:35,560 interact all the time. I mean 541 00:18:34,720 --> 00:18:37,960 it's the 542 00:18:35,559 --> 00:18:40,039 If you are in again in into Wall Street 543 00:18:37,960 --> 00:18:42,319 type thing you're going to be watching 544 00:18:40,039 --> 00:18:44,000 every day every time that the monetary 545 00:18:42,319 --> 00:18:45,678 minutes the minutes of the central banks 546 00:18:44,000 --> 00:18:48,000 are released you're going to be watching 547 00:18:45,679 --> 00:18:51,360 because it has a big implication 548 00:18:48,000 --> 00:18:52,599 uh for the value of your equity. 549 00:18:51,359 --> 00:18:54,599 Actually something very interesting of 550 00:18:52,599 --> 00:18:56,079 this nature happened last week. On 551 00:18:54,599 --> 00:18:57,359 Friday 552 00:18:56,079 --> 00:18:58,720 uh 553 00:18:57,359 --> 00:19:01,639 last Friday 554 00:18:58,720 --> 00:19:04,120 um the there was a release of payroll 555 00:19:01,640 --> 00:19:06,240 numbers. So it's an employment index. 556 00:19:04,119 --> 00:19:08,319 Okay? Employment numbers. 557 00:19:06,240 --> 00:19:10,720 And 558 00:19:08,319 --> 00:19:13,359 people expected uh 559 00:19:10,720 --> 00:19:16,039 and and the the payroll to increase to 560 00:19:13,359 --> 00:19:17,879 so to add non-farm payroll we'll talk 561 00:19:16,039 --> 00:19:19,519 about these things later by about 562 00:19:17,880 --> 00:19:21,320 190,000 563 00:19:19,519 --> 00:19:23,720 workers. 564 00:19:21,319 --> 00:19:25,678 At 8:30 well and this 565 00:19:23,720 --> 00:19:27,440 you're seeing here is the behavior of 566 00:19:25,679 --> 00:19:29,040 the same index I showed you before but 567 00:19:27,440 --> 00:19:31,320 the futures. So these things you can 568 00:19:29,039 --> 00:19:33,799 trade before the market actually opens. 569 00:19:31,319 --> 00:19:36,480 The market in the US opens at 9:30 a.m. 570 00:19:33,799 --> 00:19:38,240 but you can trade futures since Asia 571 00:19:36,480 --> 00:19:39,640 times. Okay? 572 00:19:38,240 --> 00:19:41,720 Anyway so this is the path. It's all 573 00:19:39,640 --> 00:19:44,679 very quiet tranquil. Everyone is waiting 574 00:19:41,720 --> 00:19:46,679 the release of this news at 8:30 a.m. 575 00:19:44,679 --> 00:19:49,240 At 8:30 a.m. 576 00:19:46,679 --> 00:19:50,840 great news for the labor market. 577 00:19:49,240 --> 00:19:51,839 Not only 578 00:19:50,839 --> 00:19:54,000 not 579 00:19:51,839 --> 00:19:58,639 the the the actual change in the payroll 580 00:19:54,000 --> 00:20:01,079 was not 190k. It was over a 500,000k. 581 00:19:58,640 --> 00:20:02,640 So, enormous addition of jobs 582 00:20:01,079 --> 00:20:03,720 to the economy. 583 00:20:02,640 --> 00:20:05,400 And look what happens to the equity 584 00:20:03,720 --> 00:20:07,240 market. Boom. 585 00:20:05,400 --> 00:20:08,840 It imploded immediately. 586 00:20:07,240 --> 00:20:11,480 So, this is wonderful news now for the 587 00:20:08,839 --> 00:20:14,759 economy. Lots of jobs. The equity market 588 00:20:11,480 --> 00:20:18,000 imploded as a result of that. 589 00:20:14,759 --> 00:20:18,000 Why do you think that happened? 590 00:20:18,359 --> 00:20:21,679 I've already given you a little bit of 591 00:20:19,640 --> 00:20:22,960 the ingredients for why 592 00:20:21,680 --> 00:20:26,560 for an answer 593 00:20:22,960 --> 00:20:27,840 in in in in the previous slides. 594 00:20:26,559 --> 00:20:31,359 The reason I'm showing you this is 595 00:20:27,839 --> 00:20:32,879 because it's a in in one in 15 minutes, 596 00:20:31,359 --> 00:20:36,279 it summarizes all that I was talking 597 00:20:32,880 --> 00:20:36,280 about in the previous 30 minutes. 598 00:20:36,839 --> 00:20:40,639 Why do you think that happened? 599 00:20:38,759 --> 00:20:42,640 This is wonderful news. 600 00:20:40,640 --> 00:20:45,200 Why why the stock market should 601 00:20:42,640 --> 00:20:47,480 crash like 2% from top to bottom as a 602 00:20:45,200 --> 00:20:48,559 result of that. 603 00:20:47,480 --> 00:20:50,279 Um 604 00:20:48,559 --> 00:20:51,679 because there's a lot more 605 00:20:50,279 --> 00:20:52,559 labor because 606 00:20:51,680 --> 00:20:56,400 um that 607 00:20:52,559 --> 00:20:59,679 gives a lot more um supply of 608 00:20:56,400 --> 00:21:02,480 um that thing and thus it increases the 609 00:20:59,680 --> 00:21:06,560 price because high supply. 610 00:21:02,480 --> 00:21:08,240 No, but uh okay, that's an interesting 611 00:21:06,559 --> 00:21:10,240 Okay, that that's an interesting 612 00:21:08,240 --> 00:21:11,120 explanation. It's not the one I have in 613 00:21:10,240 --> 00:21:13,200 mind. 614 00:21:11,119 --> 00:21:15,759 It's a this this explanation says, 615 00:21:13,200 --> 00:21:17,960 "Look, that means firms hire lots of 616 00:21:15,759 --> 00:21:19,119 people, so the price 617 00:21:17,960 --> 00:21:20,840 that means there's going to be lots of 618 00:21:19,119 --> 00:21:22,279 supply of whatever goods they're 619 00:21:20,839 --> 00:21:23,319 producing. The price of those goods is 620 00:21:22,279 --> 00:21:24,720 going to decline and that's going to be 621 00:21:23,319 --> 00:21:25,960 bad for profits." That's the story you 622 00:21:24,720 --> 00:21:28,039 had in mind? 623 00:21:25,960 --> 00:21:30,240 Yeah. 624 00:21:28,039 --> 00:21:31,639 Maybe there's some of that, but I I'm 625 00:21:30,240 --> 00:21:33,799 willing to bet that it's not the main 626 00:21:31,640 --> 00:21:33,800 thing. 627 00:21:34,359 --> 00:21:37,919 Is 628 00:21:35,480 --> 00:21:39,759 So, the only clue I'll give you is that 629 00:21:37,920 --> 00:21:42,240 I already talked about these things 5 630 00:21:39,759 --> 00:21:42,240 minutes ago. 631 00:21:44,160 --> 00:21:51,440 Um employment is very closely um related 632 00:21:48,240 --> 00:21:53,079 to inflation rates. Yes. to uh 0.81, so 633 00:21:51,440 --> 00:21:54,759 this could be result of expectations of 634 00:21:53,079 --> 00:21:57,720 higher uh continued high inflation. 635 00:21:54,759 --> 00:21:59,000 Okay, you're very close. One step more. 636 00:21:57,720 --> 00:22:02,000 Yes. 637 00:21:59,000 --> 00:22:04,559 That that means that that means that so 638 00:22:02,000 --> 00:22:07,640 expect higher interest rates. Okay, that 639 00:22:04,559 --> 00:22:08,720 there you are. So, what happens? Uh the 640 00:22:07,640 --> 00:22:10,400 bank the 641 00:22:08,720 --> 00:22:12,839 the shareholders wouldn't have done 642 00:22:10,400 --> 00:22:15,080 anything if they thought that the Fed 643 00:22:12,839 --> 00:22:16,559 would not be able to see this data. 644 00:22:15,079 --> 00:22:18,439 But they know that the Fed also sees 645 00:22:16,559 --> 00:22:19,519 this data. They say, "Whoa, these guys 646 00:22:18,440 --> 00:22:21,000 are going to be worried because the 647 00:22:19,519 --> 00:22:22,039 economy's going to keep overheating. 648 00:22:21,000 --> 00:22:24,559 They're going to have to hike interest 649 00:22:22,039 --> 00:22:27,159 rates even more in order to cool down 650 00:22:24,559 --> 00:22:28,559 this economy." Okay? I already showed 651 00:22:27,160 --> 00:22:30,080 you that what happens in the labor 652 00:22:28,559 --> 00:22:32,559 market is very connected to what happens 653 00:22:30,079 --> 00:22:34,599 in with inflation. The the central bank 654 00:22:32,559 --> 00:22:36,519 knows that. And now they get this big 655 00:22:34,599 --> 00:22:38,799 surprise that means they're not really 656 00:22:36,519 --> 00:22:40,359 been able to they're not been successful 657 00:22:38,799 --> 00:22:42,200 at really slowing down one of the main 658 00:22:40,359 --> 00:22:43,559 drivers of inflation. 659 00:22:42,200 --> 00:22:44,559 And so 660 00:22:43,559 --> 00:22:46,039 financial markets are very 661 00:22:44,559 --> 00:22:47,879 forward-looking. They say, "Whoa, this 662 00:22:46,039 --> 00:22:48,960 is coming. This is only means that 663 00:22:47,880 --> 00:22:51,600 they're going to 664 00:22:48,960 --> 00:22:53,079 financial markets were betting that that 665 00:22:51,599 --> 00:22:54,879 the Fed was going to begin to cut 666 00:22:53,079 --> 00:22:57,519 interest rate 667 00:22:54,880 --> 00:22:59,040 uh in six four months more or so." 668 00:22:57,519 --> 00:23:01,240 And if you look at what the forwards 669 00:22:59,039 --> 00:23:02,678 deal there is, so what the market you 670 00:23:01,240 --> 00:23:05,480 can you can extract what the market 671 00:23:02,679 --> 00:23:07,519 thinks. Right after this, it only got 672 00:23:05,480 --> 00:23:09,559 immediately pushed out to the end of of 673 00:23:07,519 --> 00:23:11,279 the year. Okay, so so it's precisely 674 00:23:09,559 --> 00:23:13,559 this anticipation that the central bank 675 00:23:11,279 --> 00:23:14,960 will have to do something. And and so I 676 00:23:13,559 --> 00:23:16,359 thought it was 677 00:23:14,960 --> 00:23:18,600 very interesting from that point of 678 00:23:16,359 --> 00:23:18,599 view. 679 00:23:19,119 --> 00:23:23,719 Recessions, well 680 00:23:20,759 --> 00:23:24,839 Look, and these are all very good news, 681 00:23:23,720 --> 00:23:26,600 but 682 00:23:24,839 --> 00:23:28,480 everyone knows that the Fed needs to 683 00:23:26,599 --> 00:23:30,319 cool off the economy. 684 00:23:28,480 --> 00:23:32,079 So, despite the fact that we're getting 685 00:23:30,319 --> 00:23:35,039 good news now, 686 00:23:32,079 --> 00:23:37,359 uh people expect the majority of people 687 00:23:35,039 --> 00:23:38,240 expect a recession in the US for this 688 00:23:37,359 --> 00:23:39,559 year. 689 00:23:38,240 --> 00:23:41,640 I'm not going to explain this bar 690 00:23:39,559 --> 00:23:44,480 graphic here, but these are forecasters. 691 00:23:41,640 --> 00:23:47,120 These are professional forecasters and 692 00:23:44,480 --> 00:23:49,079 more than half of them uh 693 00:23:47,119 --> 00:23:51,479 so the median of them thinks that there 694 00:23:49,079 --> 00:23:55,399 is a 65% probability that there is a 695 00:23:51,480 --> 00:23:55,400 recession in the US this year. 696 00:23:55,480 --> 00:23:58,480 I'm a little Well, we're going to talk a 697 00:23:56,640 --> 00:24:00,080 lot about this. And probably you're 698 00:23:58,480 --> 00:24:01,720 going to be getting news about this 699 00:24:00,079 --> 00:24:03,079 while we're taking the course. So, this 700 00:24:01,720 --> 00:24:04,440 is going to be a sort of picture that 701 00:24:03,079 --> 00:24:06,799 we're going to discuss 702 00:24:04,440 --> 00:24:08,759 extensively. Uh 703 00:24:06,799 --> 00:24:11,919 and the reason for the recession is 704 00:24:08,759 --> 00:24:13,359 nothing else than the reason you ask at 705 00:24:11,920 --> 00:24:16,080 this forecast, "Why do you think we may 706 00:24:13,359 --> 00:24:18,039 have a recession?" Well, because the Fed 707 00:24:16,079 --> 00:24:19,879 is trying to fight inflation. It's going 708 00:24:18,039 --> 00:24:22,119 to keep hiking interest rate and at some 709 00:24:19,880 --> 00:24:23,200 point it may break something. 710 00:24:22,119 --> 00:24:25,000 Okay? 711 00:24:23,200 --> 00:24:26,559 And and and that's that's the reason. 712 00:24:25,000 --> 00:24:28,480 But we're going to all these things you 713 00:24:26,559 --> 00:24:31,039 are going to be able to understand very 714 00:24:28,480 --> 00:24:33,480 clearly hopefully through models. 715 00:24:31,039 --> 00:24:34,599 The last thing I want to say before 716 00:24:33,480 --> 00:24:35,759 uh 717 00:24:34,599 --> 00:24:37,359 telling you a little bit the rules of 718 00:24:35,759 --> 00:24:39,720 the game 719 00:24:37,359 --> 00:24:41,359 is that I said before that the story I 720 00:24:39,720 --> 00:24:43,240 told you about the US is more or less 721 00:24:41,359 --> 00:24:46,119 what has happened all around, you know? 722 00:24:43,240 --> 00:24:48,440 I was in Chile uh 723 00:24:46,119 --> 00:24:50,079 a month ago. I'm Chilean and they have 724 00:24:48,440 --> 00:24:51,799 the same story. They started hiking 725 00:24:50,079 --> 00:24:53,919 interest rate a little earlier because 726 00:24:51,799 --> 00:24:58,000 they had more inflation than the US, but 727 00:24:53,920 --> 00:24:59,920 they're going through the same cycle. Um 728 00:24:58,000 --> 00:25:01,480 There's one big economy, the second 729 00:24:59,920 --> 00:25:03,279 largest economy in the world that has 730 00:25:01,480 --> 00:25:05,279 not been part of this, 731 00:25:03,279 --> 00:25:07,920 which is China. 732 00:25:05,279 --> 00:25:10,119 China was very aggressive in the COVID 733 00:25:07,920 --> 00:25:12,360 uh policy, you know? So, zero COVID 734 00:25:10,119 --> 00:25:13,678 policy. So, they really slowed down 735 00:25:12,359 --> 00:25:14,839 their economy. That's a consequence. 736 00:25:13,679 --> 00:25:17,320 They didn't want to do that, but as a 737 00:25:14,839 --> 00:25:19,599 result of a very strict COVID policy, 738 00:25:17,319 --> 00:25:21,799 they essentially shut down big parts of 739 00:25:19,599 --> 00:25:24,119 the economy for a long time. That, by 740 00:25:21,799 --> 00:25:25,678 the way, had big impact in the rest of 741 00:25:24,119 --> 00:25:27,199 the world through the 742 00:25:25,679 --> 00:25:29,000 network of production, the chains of 743 00:25:27,200 --> 00:25:31,160 production and stuff like that. That was 744 00:25:29,000 --> 00:25:32,519 inflationary in itself. That part is 745 00:25:31,160 --> 00:25:35,320 dissipating. 746 00:25:32,519 --> 00:25:36,879 But but for the the their own economy, 747 00:25:35,319 --> 00:25:39,480 for the domestic economy, that really 748 00:25:36,880 --> 00:25:42,760 slowed down China. An economy that, you 749 00:25:39,480 --> 00:25:45,039 know, grew typically at 5 and 1/2 to 6%. 750 00:25:42,759 --> 00:25:47,359 A lot higher 15 years ago. I'm going to 751 00:25:45,039 --> 00:25:49,599 try to understand why later on. 752 00:25:47,359 --> 00:25:51,359 But last year, I don't know, it was 3% 753 00:25:49,599 --> 00:25:53,480 or or or less. 754 00:25:51,359 --> 00:25:55,879 Numbers in China are 755 00:25:53,480 --> 00:25:58,039 difficult to 756 00:25:55,880 --> 00:26:00,360 to figure out. They're not equally 757 00:25:58,039 --> 00:26:01,639 transparent to other numbers. 758 00:26:00,359 --> 00:26:04,599 But but in any event, but it's very 759 00:26:01,640 --> 00:26:06,840 clear that China slowed down a lot. 760 00:26:04,599 --> 00:26:10,119 And that policy recently changed. 761 00:26:06,839 --> 00:26:11,839 Okay, the zero COVID policy has changed. 762 00:26:10,119 --> 00:26:13,279 And so there's great expectation that 763 00:26:11,839 --> 00:26:15,639 now there's going to be a big boom in 764 00:26:13,279 --> 00:26:18,359 China because they're lagging behind. I 765 00:26:15,640 --> 00:26:20,520 mean, in in in the US when COVID began 766 00:26:18,359 --> 00:26:21,879 to dissipate, we got a huge boost to 767 00:26:20,519 --> 00:26:23,759 growth. And that's part of the reason we 768 00:26:21,880 --> 00:26:25,040 got all this inflation is because we had 769 00:26:23,759 --> 00:26:26,679 lots of growth 770 00:26:25,039 --> 00:26:28,759 coming out of the recession that 771 00:26:26,679 --> 00:26:31,040 happened in COVID. And the more or less 772 00:26:28,759 --> 00:26:33,440 the same is expected in China. And one 773 00:26:31,039 --> 00:26:34,960 of the big reasons behind those big 774 00:26:33,440 --> 00:26:36,320 bounce backs is well, people are 775 00:26:34,960 --> 00:26:37,279 desperate. They want to spend on 776 00:26:36,319 --> 00:26:38,919 something. They want to go to 777 00:26:37,279 --> 00:26:39,879 restaurants and cinemas and stuff like 778 00:26:38,920 --> 00:26:41,120 that. 779 00:26:39,880 --> 00:26:43,000 And the other one is they have the means 780 00:26:41,119 --> 00:26:44,959 to do it because they couldn't spend on 781 00:26:43,000 --> 00:26:46,960 anything for a while, you know? And so 782 00:26:44,960 --> 00:26:48,720 they can travel and 783 00:26:46,960 --> 00:26:50,799 and stuff like that. So, so people 784 00:26:48,720 --> 00:26:53,519 expect and this is a 785 00:26:50,799 --> 00:26:55,159 very large economy that suddenly sort of 786 00:26:53,519 --> 00:26:57,519 wakes up. 787 00:26:55,160 --> 00:27:00,200 You know, that's a big thing for China, 788 00:26:57,519 --> 00:27:01,720 but it's also a big thing for the world. 789 00:27:00,200 --> 00:27:04,000 You know, what what happens in China 790 00:27:01,720 --> 00:27:06,240 doesn't stay in China. It's a big giant, 791 00:27:04,000 --> 00:27:08,039 so it moves. And for some countries it's 792 00:27:06,240 --> 00:27:10,240 very very important. In this picture 793 00:27:08,039 --> 00:27:12,000 here it shows what is the impact on 794 00:27:10,240 --> 00:27:13,679 different regions of the world on the 795 00:27:12,000 --> 00:27:17,160 growth rate in different regions of the 796 00:27:13,679 --> 00:27:19,440 world of an increase in by 1% in the 797 00:27:17,160 --> 00:27:21,360 rate of growth of China. 798 00:27:19,440 --> 00:27:22,120 One of the the most 799 00:27:21,359 --> 00:27:24,399 uh 800 00:27:22,119 --> 00:27:26,759 obviously all the neighbors are benefit 801 00:27:24,400 --> 00:27:29,800 a lot. But Latin America benefits even 802 00:27:26,759 --> 00:27:32,119 more. Why is that? Well, because Latin 803 00:27:29,799 --> 00:27:34,000 America produces lots of commodities and 804 00:27:32,119 --> 00:27:36,279 China consumes lots of commodity when 805 00:27:34,000 --> 00:27:37,839 it's building and and stuff like that. 806 00:27:36,279 --> 00:27:39,559 And so that's the reason big impact on 807 00:27:37,839 --> 00:27:41,919 Latin America. So, this is 808 00:27:39,559 --> 00:27:44,759 a piece of good news for the world in 809 00:27:41,920 --> 00:27:46,519 the sense that activity will go up. 810 00:27:44,759 --> 00:27:49,119 But 811 00:27:46,519 --> 00:27:50,960 it's good news on average, 812 00:27:49,119 --> 00:27:53,639 but it may be too much of a good thing 813 00:27:50,960 --> 00:27:55,559 as well. Why? Because many economies are 814 00:27:53,640 --> 00:27:56,960 going through what we described before. 815 00:27:55,559 --> 00:27:58,200 They're trying to bring down inflation. 816 00:27:56,960 --> 00:28:00,679 They don't want more demand. They want 817 00:27:58,200 --> 00:28:02,160 less for now because we're going to 818 00:28:00,679 --> 00:28:05,160 understand the connection later on how 819 00:28:02,160 --> 00:28:06,440 demand connects to inflation, but but 820 00:28:05,160 --> 00:28:09,400 you want less. And now you're going to 821 00:28:06,440 --> 00:28:11,400 get this the this impulse from China, 822 00:28:09,400 --> 00:28:12,679 which is going to fuel more inflation. 823 00:28:11,400 --> 00:28:14,600 It's okay for China because they don't 824 00:28:12,679 --> 00:28:16,080 have an inflation problem. But it may be 825 00:28:14,599 --> 00:28:19,919 a problem for many of the countries that 826 00:28:16,079 --> 00:28:21,399 are trying to uh undo uh the 827 00:28:19,920 --> 00:28:23,279 inflationary 828 00:28:21,400 --> 00:28:26,080 consequences of the previous expansion, 829 00:28:23,279 --> 00:28:27,480 the expansion that followed COVID. 830 00:28:26,079 --> 00:28:29,799 Okay, anyways, but this is the kind of 831 00:28:27,480 --> 00:28:31,880 things we're going to be talking about. 832 00:28:29,799 --> 00:28:33,759 The I said the course is not going to be 833 00:28:31,880 --> 00:28:35,720 mathy, but it's going to be all about 834 00:28:33,759 --> 00:28:37,319 models. The next lecture is the most 835 00:28:35,720 --> 00:28:38,400 boring lecture of the course. I 836 00:28:37,319 --> 00:28:39,799 tell you in advance because it's 837 00:28:38,400 --> 00:28:41,840 definitions. I need to go through 838 00:28:39,799 --> 00:28:44,319 definitions. At least I get bored. 839 00:28:41,839 --> 00:28:46,639 But but the rest those always which are 840 00:28:44,319 --> 00:28:48,359 little models, but simple models, okay? 841 00:28:46,640 --> 00:28:49,720 But the models 842 00:28:48,359 --> 00:28:51,959 are going to try to explain the kind of 843 00:28:49,720 --> 00:28:53,720 things I I I discussed today. So, that's 844 00:28:51,960 --> 00:28:54,720 what this course is about. It's It's 845 00:28:53,720 --> 00:28:57,400 It's 846 00:28:54,720 --> 00:28:58,799 is ideally, if we're successful, you're 847 00:28:57,400 --> 00:29:00,800 going to be able to read something like 848 00:28:58,799 --> 00:29:03,079 the World Economic Outlook, which will 849 00:29:00,799 --> 00:29:04,279 have lots of pictures like these, 850 00:29:03,079 --> 00:29:06,039 and you're going to be able to write a 851 00:29:04,279 --> 00:29:07,559 little equation, very simple, on the 852 00:29:06,039 --> 00:29:09,240 side to try to understand what is going 853 00:29:07,559 --> 00:29:10,158 on there. And to catch the mistakes as 854 00:29:09,240 --> 00:29:12,559 well. 855 00:29:10,159 --> 00:29:13,960 Okay? I we all have less mistakes than 856 00:29:12,559 --> 00:29:16,319 the Wall Street Journal, but but you 857 00:29:13,960 --> 00:29:18,799 will catch mistakes. You'll see. You'll 858 00:29:16,319 --> 00:29:18,799 be proud of it.