[00:16] Okay, let's uh
[00:18] let's start. So,
[00:21] hello everyone. Um welcome to 1402,
[00:25] uh introduction to microeconomics.
[00:28] Um
[00:30] I won't teach today, so that's a good
[00:31] news. Uh I will start on Wednesday.
[00:34] So, what I want to today is essentially
[00:36] tell you what macro is about,
[00:38] macroeconomics is about,
[00:40] and uh also the rules of of the game.
[00:44] So, what a difference a single letter
[00:47] makes. Many of you must have taken 1401.
[00:50] In fact, some of you may be taking it
[00:52] concurrently. It's a lecture right
[00:54] before mine.
[00:55] And uh
[00:57] you know, that's microeconomics, 1401,
[01:00] and this is macroeconomics, and it
[01:01] doesn't take a lot of imagination to
[01:04] realize that this course is about big
[01:06] things, no? We don't look at small
[01:08] things. That's what micro is about.
[01:10] Micro looks at a household, at a firm,
[01:13] at an industry. Uh
[01:15] in macro, we don't do that. We look at
[01:18] the whole economy. We think about the
[01:20] US. We think about China.
[01:22] Uh we don't think about an individual
[01:24] price. We think about inflation, so the
[01:26] rate of change of all prices. We don't
[01:28] think about whether a particular worker
[01:30] is employed or unemployed. We think of
[01:32] whether the rate of unemployment is very
[01:34] high or low, things of that kind. Okay?
[01:37] When we look at two countries, we look
[01:38] at the exchange rate, which is the
[01:39] relative price of two currencies, not
[01:41] two individual goods in two different
[01:43] countries, but the whole currency, and
[01:45] so on. So, that's what macro is about.
[01:48] Now, you could think that macro is
[01:50] nothing else than the sum of lots of
[01:52] micros, no? After all, that's what an
[01:54] economy is made of. A population, a
[01:56] whole population is made of lots of
[01:58] individuals that can be analyzed with
[02:00] the tools of 1401 and and the sequence
[02:02] that follows uh 1401.
[02:05] But that doesn't work. And there are
[02:07] parallels in physics about this, and so
[02:09] on. The way you want to study sort of
[02:10] big bodies is different from the way you
[02:12] want to understand the movements of a
[02:14] small elements. And and that's the case
[02:17] in macro. In macro, there's a big
[02:21] line of research that has to do with uh
[02:23] the microfoundations of macroeconomics.
[02:27] But even in that case, which is very
[02:28] close to micro, uh
[02:31] most of the action ends up happening in
[02:33] the non-micro part, in the interactions,
[02:35] in in the in the equilibrium aspects
[02:38] of the system. So, so it's a much more
[02:40] complicated object, and if you were to
[02:42] build it from the micro, it would be an
[02:43] incredibly complicated object. So, one
[02:46] of the things we need to do in
[02:48] macroeconomics is take some shortcuts.
[02:50] And and and that's what makes macro a
[02:53] lot of an art. It's not a science per
[02:55] se. It's some sort of a science. It has
[02:58] the tools of a science,
[02:59] but it's a lot about shortcuts and
[03:01] tricks, and so on, to capture the
[03:03] essence of a problem that is very
[03:04] complex if you were to model it in in
[03:06] the all the gory details. Okay? And um
[03:11] and in this course, we're going to
[03:13] exaggerate on that sense. We're not
[03:15] going to do anything complicated. I
[03:17] promise you that. Some occasionally,
[03:18] conceptually, things will be
[03:19] complicated, but the math will not be
[03:21] complicated. Okay?
[03:24] Uh so, we're going to keep things very
[03:25] very simple. I want to communicate the
[03:27] essence of the big macroeconomic
[03:30] relationships.
[03:31] This is not a PhD course. If you were to
[03:33] take a a PhD course in macro, it would
[03:36] be a very mathy type course.
[03:38] In fact, most of the people that do
[03:39] apply in micro in our PhD program
[03:42] complain against macro because they find
[03:44] it too mathy, and so on. Okay? But
[03:46] that's not going to be the case here.
[03:47] That's not what this course is about.
[03:50] My goal,
[03:52] so if this is a successful course, is
[03:55] not that you come out being a researcher
[03:57] in macro out of this. Hopefully, you'll
[03:58] have a career eventually and do all the
[04:01] next steps that you need to do that. But
[04:03] I want you to be able to do is to read
[04:05] something like this. This is a World
[04:07] Economic Outlook. It's a publication
[04:09] that the IMF puts out every 6 months, in
[04:12] which it tells you what the how it sees
[04:14] the world and where where heading, and
[04:16] so on. No equations there. Lots of
[04:18] tables and stuff like that. I'd like you
[04:20] to be able to read that kind of document
[04:23] very clearly. I would like you to be
[04:25] able to read something, say, the Wall
[04:26] Street Journal, and read it even
[04:28] critically. Sometimes disagreeing with
[04:30] what's in there.
[04:31] Financial Times, The Economist. That's
[04:33] the goal of this course. It's not a lot
[04:35] more than that. It's just that. If you
[04:37] do a summer inter- in Wall Street, and
[04:39] you work in a macro hedge fund or
[04:41] whatever,
[04:42] this is going to be a good course for
[04:43] that. I mean, this is what traders
[04:45] really know. They don't know a lot more
[04:47] than that. Many traders should know
[04:48] that. They don't. But this that's the
[04:50] level of knowledge. I'm not
[04:53] if it gets to be very complicated, I'm
[04:54] failing. That's not what I want to do
[04:57] here.
[04:59] The typical lecture, again, this is not
[05:01] a lecture. The next The first lecture
[05:02] will be on Wednesday.
[05:04] The typical lecture, and not in the
[05:06] first part of the course, because you're
[05:07] not going to have the tools, the
[05:09] definitions, and so on, to do it.
[05:11] What I want to do is
[05:13] is
[05:14] uh
[05:15] spend 5 to 10 minutes early on. Again,
[05:17] the first part of the course, we can't
[05:19] do that because you don't have the still
[05:20] the knowledge to do that.
[05:22] But as as you start building tools,
[05:25] I want to be able to sort of
[05:27] talk about current events, something
[05:29] that is happening out there that I find
[05:30] I find interesting, or something I
[05:32] received that morning may even uh the
[05:36] the morning of the lecture, in which I
[05:37] which I find interesting. And if I think
[05:39] you already have the tools to begin to
[05:40] understand it, I'm going to be
[05:42] repetitive. I'm going to sort of come
[05:43] back to three, four times to the same
[05:45] topic. Hopefully, you'll be know you'll
[05:48] be more advanced in your knowledge in
[05:49] the later stages, so you'll be able to
[05:51] understand it more and more.
[05:52] Okay? So, the typical lecture will have
[05:54] 5 to 10 minutes, in which we'll talk
[05:56] about some facts, something that is
[05:58] going on.
[05:59] For example, a picture like this. This
[06:01] is I received it this morning. I think
[06:03] this came from Goldman, I think. Goldman
[06:05] Sachs, yes.
[06:07] And what you have in that picture,
[06:08] again, don't worry about details today,
[06:11] is you have two lines. One of them is a
[06:14] measure of uh
[06:16] uh wages,
[06:18] wage growth, compensation to workers,
[06:21] and another one is a measure of
[06:22] inflation. Again, all those definitions
[06:25] will come in the next lecture.
[06:27] Uh and inflation, so it's the rate at
[06:29] which, you know, you must have heard
[06:30] about inflation. It's something prices
[06:32] are rising, no?
[06:34] And what that picture shows you is that
[06:35] these two series are very highly
[06:37] correlated.
[06:38] Okay? So, when wage growth is high,
[06:41] inflation tends to be high. Okay? And
[06:44] that's a big issue on these days.
[06:45] There's a lot of concern about this
[06:47] stuff.
[06:50] So, let me let me try to explain a
[06:51] little bit what is a concern on these
[06:53] days. Again,
[06:55] if you don't understand anything, it
[06:57] doesn't matter.
[06:58] If you don't understand anything I'm
[06:59] saying right now, in the last lecture,
[07:01] then it matters. But now it doesn't
[07:03] matter, you know? I'm just trying to
[07:05] give you a flavor of the kind of things
[07:06] we'll be talking about.
[07:08] That picture there,
[07:10] again, a variable that we'll define in
[07:11] the next lecture, not now, shows you the
[07:13] unemployment rate. You don't need any
[07:15] specific definition
[07:17] to know that to feel, at least get a
[07:19] sense that, well, if unemployment is
[07:21] high, workers aren't very happy. It's
[07:23] not a good thing to have lots of
[07:24] unemployment.
[07:26] And what that series shows you, the
[07:27] shaded areas are recessions in the US.
[07:30] What that series shows you is that
[07:32] typically in recessions, unemployment
[07:34] goes up. So, that's one of the features
[07:36] one of the main features of a recession
[07:37] is that unemployment is high.
[07:40] This episode here
[07:42] is is called the Great Recession, as a
[07:45] parallel for the Great Depression. The
[07:47] US had the Great Depression in the '30s.
[07:49] This is the Great Recession, the biggest
[07:51] sort of recession outside of the Great
[07:53] Depression in the US. And it's also
[07:55] known
[07:57] as the Global Financial Crisis, because
[07:59] this was a recession all around the
[08:00] world. And what you can see is that
[08:02] unemployment went very high.
[08:04] That's a very feature a telltale sign of
[08:07] a of of a big recession. And then it
[08:09] took a long time. This was in in in sort
[08:11] of recovery.
[08:13] COVID was a massive shock to the labor
[08:15] market. So, not surprisingly,
[08:16] unemployment the unemployment rate did
[08:18] spike there.
[08:19] But then it also recovered a lot faster
[08:21] than it recovered from that.
[08:23] And today, we have unemployment rates
[08:25] that are at historically low levels. And
[08:28] that's a big issue.
[08:30] The rate of unemployment in the US is at
[08:33] historically low levels. Okay? Way below
[08:36] what is normal
[08:37] uh
[08:38] forget recessions, obviously way below
[08:40] what is in if it happens in recession.
[08:42] But even way below what is normal, what
[08:44] happens during normal times.
[08:46] Okay?
[08:49] Closely related to that is wage growth.
[08:53] I have just one measure of wages there.
[08:56] It's a wage It's a It's a series of
[08:58] wages that is
[08:59] that is particularly that that what I'm
[09:01] about to say is particularly sharp,
[09:03] which is the wages of in the
[09:05] accommodation and food service sectors.
[09:08] So, wages have been rising very steadily
[09:09] and and very fast recently everywhere,
[09:13] particularly in sectors like these, you
[09:15] know, where we have some problems with
[09:16] what we call labor supply. But we'll
[09:18] I'll get back to that. Okay? So, those
[09:20] are two facts. We have unemployment at
[09:21] extremely low levels,
[09:23] and we have wage growth at a very high
[09:26] fast pace.
[09:27] Now, that sounds wonderful, no? I mean,
[09:29] what else do you want? An economy in
[09:30] which few people are unemployed,
[09:33] and and
[09:34] and wages are growing a lot. I mean, if
[09:37] this was micro, this would be fantastic.
[09:39] Say, "Okay, look. The guy is employed,
[09:41] and he's getting a high wage. This is
[09:43] great."
[09:45] Well, not so fast for macro.
[09:48] Not so fast because I already showed you
[09:51] in the first picture that I showed you
[09:52] to motivate, there's a connection
[09:54] between wage growth and inflation.
[09:56] And that's what we're experiencing. The
[09:58] normal level of inflation for an economy
[10:00] like the US is around 2%. That's normal.
[10:03] That's what central banks target in an
[10:05] economy like the US, in the Euro area.
[10:08] Japan has been dreaming with 2% but he
[10:10] hasn't been able for decades to get it
[10:12] but although
[10:14] now they are but but they weren't for a
[10:16] couple of decades to get to 2% but
[10:18] that's about and we will discuss later
[10:20] in the course why 2% is about right for
[10:22] economies of the size of the US and so
[10:24] on.
[10:26] Obviously in in recessions these things
[10:28] can go low and that's what
[10:30] you know that in the COVID recessions
[10:32] inflation went to zero essentially.
[10:35] But then it began to pick up and it's
[10:37] now at levels which are unheard of in
[10:40] the US since the '80s.
[10:42] Okay? So depending on the particular
[10:44] measure you use of inflation is around 6
[10:47] and 1/2% to 8%. That's the level of
[10:49] inflation we have which is way way above
[10:52] what is considered a normal reasonable
[10:55] target for the central banks for the
[10:57] inflation. Okay? So that's a problem. We
[10:59] have had some good news recently in that
[11:02] inflation clearly picked already.
[11:04] Again definition of inflation formal
[11:06] definition inflation happens in the next
[11:08] lecture but
[11:10] it already picked and it's declining but
[11:12] it's still a very very high level and
[11:14] that's a problem. That's a big
[11:15] macroeconomic problem and one of the
[11:17] things we want to understand in this
[11:18] course is well what to do about it. How
[11:21] do you do how do you deal with that?
[11:22] What do central banks need to do
[11:25] in order to deal with that? Now
[11:27] I've been talking about the US but this
[11:29] is not specific to the US.
[11:32] Uh
[11:33] this is episode this recovery from COVID
[11:36] is is incredibly common across different
[11:40] regions of the world. I mean you see it
[11:41] everywhere with a few exceptions and I'm
[11:43] going to talk about one major exception
[11:45] in a minute.
[11:46] But but it's it's it's it's widespread.
[11:49] It's a widespread phenomenon that you
[11:51] know we had high unemployment then we
[11:52] had sort of very high uh
[11:56] uh well I haven't told you that part yet
[11:58] but then we had sort of low inflation
[12:00] then inflation pick up enormously and
[12:02] now we're all worried about this very
[12:04] high levels of inflation. In fact
[12:06] uh
[12:08] if you look at sort of what happened
[12:09] between the great recession and the
[12:11] COVID recession it was pretty normal to
[12:13] have 70 to 80% of the economies in the
[12:16] world having inflation levels at or
[12:18] below 2%. So that's a norm. You so if if
[12:22] I throw you into a country say drop you
[12:23] into a country the normal thing would be
[12:25] well it's about 2% that's the level of
[12:27] inflation. Obviously if I drop you in
[12:29] Argentina you're going to find a much
[12:30] bigger number no?
[12:32] 10,000% but but but but the the bulk of
[12:35] the countries were around uh 2% or so.
[12:39] Today you don't find any country with
[12:41] inflation below 2%.
[12:44] Okay? Not even Japan that for years were
[12:46] in deflation and trying to get sort of
[12:49] uh above zero. That's what they all they
[12:51] wanted.
[12:52] Not even in Japan you have inflation
[12:54] below 2% So this thing I show you and
[12:57] for more or less the same reasons uh is
[13:00] happening everywhere.
[13:02] Not exactly the same factors is the same
[13:05] episode in for example in
[13:08] and then with differences
[13:09] depending on the structure of the
[13:11] economy or in additional shocks. In
[13:13] Europe for example they have very high
[13:15] inflation.
[13:16] Uh
[13:17] but the problem is not
[13:19] the origin of the problem the
[13:20] the bulk of the of the problem is the
[13:23] same as in the US.
[13:24] But the but at the margin they're
[13:26] different. In in Europe the big driver
[13:28] of inflation the big recent driver of
[13:31] inflation
[13:32] is unlike the US which is I is aggregate
[13:35] demand I will discuss later is
[13:37] essentially the war in Ukraine. That has
[13:39] increased the price of energy and the
[13:40] price of energy has led to lots of
[13:42] inflation. So there are different
[13:43] reasons but all of them are sort of
[13:46] different reasons that you add on top of
[13:48] what is a common story which is that we
[13:51] overheated coming out of the COVID COVID
[13:54] episode and and and now
[13:57] we're struggling struggling with that.
[14:00] Now the main tool and we're going to
[14:01] talk a lot about this in this course.
[14:03] The main tool that central banks have to
[14:05] deal with inflation is the interest
[14:07] rate.
[14:08] Okay? So for reasons you'll understand
[14:10] later uh although you may have an
[14:12] intuition about some of those now
[14:15] obviously when the central bank lowers
[14:17] the interest rates then that helps the
[14:19] economy to expand.
[14:21] Uh and when it increases interest rate
[14:23] then it does the opposite. Raising
[14:25] interest rate makes mortgages more
[14:26] expensive makes everything more
[14:28] expensive so people tend to consume less
[14:30] firms tend to invest less and so on
[14:32] because it's more expensive to invest to
[14:34] borrow to to do something. Okay? And and
[14:38] there
[14:39] there you see it. I mean this was the
[14:41] level of the interest rate in the US
[14:43] before COVID. When COVID came boom they
[14:46] brought it all the way down. It happens
[14:48] that you cannot bring interest rate a
[14:49] lot lower than zero. That's the reason
[14:52] it stayed close to zero there. We're
[14:53] going to talk about that later on.
[14:55] But then eventually they realized that
[14:57] were behind the curve. Inflation had
[14:58] picked up a lot and the central banks
[15:00] were
[15:01] behind it behind the curve. So they
[15:02] began to hike rates
[15:04] in a hurry. Okay? And that's what we
[15:06] have been experiencing for for the last
[15:08] uh
[15:09] year or so.
[15:10] Okay? Very fast increase in the interest
[15:13] rate.
[15:14] Now this is a course about
[15:15] macroeconomics but I happen to do a lot
[15:17] of research between macro and finance so
[15:19] I'm going to put a little bit more of a
[15:21] component of finance into in the in the
[15:24] I think I'm going to do most of that
[15:26] in the last third of the course.
[15:28] But monetary policy has lots of
[15:30] implications for for for for finance for
[15:34] equity values for the stock market and
[15:36] stuff like that.
[15:38] So what you see here
[15:40] is the
[15:41] the this line here is the is the S S S
[15:44] S&P X 500. It's the index the main
[15:48] index of equity in the US of shares.
[15:51] Okay? And there are several indices
[15:52] Nasdaq S&P Dow and so on. This is the
[15:56] main index the most comprehensive the
[15:58] one that takes the largest
[16:00] the largest companies
[16:01] and so on and so forth.
[16:03] And when you can see what happens here
[16:05] is that when COVID happened the
[16:07] the surprise that we had really a
[16:09] pandemia
[16:11] then the stock market crashed. It
[16:13] declined like 30% or something like that
[16:15] at the time.
[16:16] That's interesting of assets. I mean
[16:17] that's one of
[16:19] one characteristic of of
[16:21] equity that I like a lot. Other risky
[16:23] assets as well but but but but they like
[16:26] a lot they they anticipate what happens.
[16:28] What happened there is
[16:30] the stock market the shareholders
[16:31] realized that something big was negative
[16:34] and big was happening in front of us so
[16:36] it was time to sell you know and so the
[16:38] equity market collapsed.
[16:40] What happens next is even more
[16:41] interesting for a macroeconomist
[16:43] which is this
[16:45] this big boom here.
[16:47] It's an enormous boom. The the economy
[16:48] here is still was at levels of activity
[16:51] below what it had before COVID but the
[16:53] stock market the value of the stock
[16:54] market had way exceeded
[16:56] the level we had before
[16:59] the pandemia.
[17:00] Okay?
[17:01] And the main driver of that I've shown
[17:03] that in some papers. The main driver of
[17:05] that is not I mean people tell lots of
[17:07] stories you know you know Amazon and so
[17:10] on and so on but Tesla blah blah. If you
[17:12] look at the aggregate the main reason
[17:14] for that rise was monetary policy. Was
[17:17] you can explain
[17:18] all that increase in the equity value in
[17:20] the US
[17:21] of the index not individual shares of
[17:23] the index by the effect of interest
[17:25] rates. Okay? So monetary policy plays a
[17:28] big role. If you care about finance well
[17:30] it plays a huge role in the value of
[17:32] assets. When monetary policy is very
[17:34] loose that tends to increase the the
[17:36] value of assets and that's
[17:38] one of the mechanism the central banks
[17:40] use to expand aggregate demand when they
[17:42] want to expand aggregate demand. They
[17:43] want people to feel if you are in a
[17:45] recession you want people to feel richer
[17:47] so they spend more and so on and so
[17:48] forth.
[17:50] What happened here?
[17:51] This decline you can also explain it
[17:53] fully with the hiking interest. Remember
[17:55] I showed you that the interest rate
[17:57] began to rise very rapidly here.
[17:59] Well last year the equity market in the
[18:02] US and most major equity markets around
[18:04] the world declined by 20% or more.
[18:07] You can explain all that decline simply
[18:09] by the increase in the interest rate. So
[18:11] that's another thing we need to
[18:11] understand is why is it the interest why
[18:14] is it the interest rate matters so much
[18:16] for something like equity? So we want to
[18:18] value assets and we want to see what is
[18:19] the effect of the interest rate and then
[18:22] we're going to think about well why
[18:23] would the central bank worry or not
[18:25] worry about these things and so on and
[18:27] so forth. But the truth is that
[18:28] financial markets
[18:30] and the central banks
[18:32] interact all the time. I mean
[18:34] it's the
[18:35] If you are in again in into Wall Street
[18:37] type thing you're going to be watching
[18:40] every day every time that the monetary
[18:42] minutes the minutes of the central banks
[18:44] are released you're going to be watching
[18:45] because it has a big implication
[18:48] uh for the value of your equity.
[18:51] Actually something very interesting of
[18:52] this nature happened last week. On
[18:54] Friday
[18:56] uh
[18:57] last Friday
[18:58] um the there was a release of payroll
[19:01] numbers. So it's an employment index.
[19:04] Okay? Employment numbers.
[19:06] And
[19:08] people expected uh
[19:10] and and the the payroll to increase to
[19:13] so to add non-farm payroll we'll talk
[19:16] about these things later by about
[19:17] 190,000
[19:19] workers.
[19:21] At 8:30 well and this
[19:23] you're seeing here is the behavior of
[19:25] the same index I showed you before but
[19:27] the futures. So these things you can
[19:29] trade before the market actually opens.
[19:31] The market in the US opens at 9:30 a.m.
[19:33] but you can trade futures since Asia
[19:36] times. Okay?
[19:38] Anyway so this is the path. It's all
[19:39] very quiet tranquil. Everyone is waiting
[19:41] the release of this news at 8:30 a.m.
[19:44] At 8:30 a.m.
[19:46] great news for the labor market.
[19:49] Not only
[19:50] not
[19:51] the the the actual change in the payroll
[19:54] was not 190k. It was over a 500,000k.
[19:58] So, enormous addition of jobs
[20:01] to the economy.
[20:02] And look what happens to the equity
[20:03] market. Boom.
[20:05] It imploded immediately.
[20:07] So, this is wonderful news now for the
[20:08] economy. Lots of jobs. The equity market
[20:11] imploded as a result of that.
[20:14] Why do you think that happened?
[20:18] I've already given you a little bit of
[20:19] the ingredients for why
[20:21] for an answer
[20:22] in in in in the previous slides.
[20:26] The reason I'm showing you this is
[20:27] because it's a in in one in 15 minutes,
[20:31] it summarizes all that I was talking
[20:32] about in the previous 30 minutes.
[20:36] Why do you think that happened?
[20:38] This is wonderful news.
[20:40] Why why the stock market should
[20:42] crash like 2% from top to bottom as a
[20:45] result of that.
[20:47] Um
[20:48] because there's a lot more
[20:50] labor because
[20:51] um that
[20:52] gives a lot more um supply of
[20:56] um that thing and thus it increases the
[20:59] price because high supply.
[21:02] No, but uh okay, that's an interesting
[21:06] Okay, that that's an interesting
[21:08] explanation. It's not the one I have in
[21:10] mind.
[21:11] It's a this this explanation says,
[21:13] "Look, that means firms hire lots of
[21:15] people, so the price
[21:17] that means there's going to be lots of
[21:19] supply of whatever goods they're
[21:20] producing. The price of those goods is
[21:22] going to decline and that's going to be
[21:23] bad for profits." That's the story you
[21:24] had in mind?
[21:25] Yeah.
[21:28] Maybe there's some of that, but I I'm
[21:30] willing to bet that it's not the main
[21:31] thing.
[21:34] Is
[21:35] So, the only clue I'll give you is that
[21:37] I already talked about these things 5
[21:39] minutes ago.
[21:44] Um employment is very closely um related
[21:48] to inflation rates. Yes. to uh 0.81, so
[21:51] this could be result of expectations of
[21:53] higher uh continued high inflation.
[21:54] Okay, you're very close. One step more.
[21:57] Yes.
[21:59] That that means that that means that so
[22:02] expect higher interest rates. Okay, that
[22:04] there you are. So, what happens? Uh the
[22:07] bank the
[22:08] the shareholders wouldn't have done
[22:10] anything if they thought that the Fed
[22:12] would not be able to see this data.
[22:15] But they know that the Fed also sees
[22:16] this data. They say, "Whoa, these guys
[22:18] are going to be worried because the
[22:19] economy's going to keep overheating.
[22:21] They're going to have to hike interest
[22:22] rates even more in order to cool down
[22:24] this economy." Okay? I already showed
[22:27] you that what happens in the labor
[22:28] market is very connected to what happens
[22:30] in with inflation. The the central bank
[22:32] knows that. And now they get this big
[22:34] surprise that means they're not really
[22:36] been able to they're not been successful
[22:38] at really slowing down one of the main
[22:40] drivers of inflation.
[22:42] And so
[22:43] financial markets are very
[22:44] forward-looking. They say, "Whoa, this
[22:46] is coming. This is only means that
[22:47] they're going to
[22:48] financial markets were betting that that
[22:51] the Fed was going to begin to cut
[22:53] interest rate
[22:54] uh in six four months more or so."
[22:57] And if you look at what the forwards
[22:59] deal there is, so what the market you
[23:01] can you can extract what the market
[23:02] thinks. Right after this, it only got
[23:05] immediately pushed out to the end of of
[23:07] the year. Okay, so so it's precisely
[23:09] this anticipation that the central bank
[23:11] will have to do something. And and so I
[23:13] thought it was
[23:14] very interesting from that point of
[23:16] view.
[23:19] Recessions, well
[23:20] Look, and these are all very good news,
[23:23] but
[23:24] everyone knows that the Fed needs to
[23:26] cool off the economy.
[23:28] So, despite the fact that we're getting
[23:30] good news now,
[23:32] uh people expect the majority of people
[23:35] expect a recession in the US for this
[23:37] year.
[23:38] I'm not going to explain this bar
[23:39] graphic here, but these are forecasters.
[23:41] These are professional forecasters and
[23:44] more than half of them uh
[23:47] so the median of them thinks that there
[23:49] is a 65% probability that there is a
[23:51] recession in the US this year.
[23:55] I'm a little Well, we're going to talk a
[23:56] lot about this. And probably you're
[23:58] going to be getting news about this
[24:00] while we're taking the course. So, this
[24:01] is going to be a sort of picture that
[24:03] we're going to discuss
[24:04] extensively. Uh
[24:06] and the reason for the recession is
[24:08] nothing else than the reason you ask at
[24:11] this forecast, "Why do you think we may
[24:13] have a recession?" Well, because the Fed
[24:16] is trying to fight inflation. It's going
[24:18] to keep hiking interest rate and at some
[24:19] point it may break something.
[24:22] Okay?
[24:23] And and and that's that's the reason.
[24:25] But we're going to all these things you
[24:26] are going to be able to understand very
[24:28] clearly hopefully through models.
[24:31] The last thing I want to say before
[24:33] uh
[24:34] telling you a little bit the rules of
[24:35] the game
[24:37] is that I said before that the story I
[24:39] told you about the US is more or less
[24:41] what has happened all around, you know?
[24:43] I was in Chile uh
[24:46] a month ago. I'm Chilean and they have
[24:48] the same story. They started hiking
[24:50] interest rate a little earlier because
[24:51] they had more inflation than the US, but
[24:53] they're going through the same cycle. Um
[24:58] There's one big economy, the second
[24:59] largest economy in the world that has
[25:01] not been part of this,
[25:03] which is China.
[25:05] China was very aggressive in the COVID
[25:07] uh policy, you know? So, zero COVID
[25:10] policy. So, they really slowed down
[25:12] their economy. That's a consequence.
[25:13] They didn't want to do that, but as a
[25:14] result of a very strict COVID policy,
[25:17] they essentially shut down big parts of
[25:19] the economy for a long time. That, by
[25:21] the way, had big impact in the rest of
[25:24] the world through the
[25:25] network of production, the chains of
[25:27] production and stuff like that. That was
[25:29] inflationary in itself. That part is
[25:31] dissipating.
[25:32] But but for the the their own economy,
[25:35] for the domestic economy, that really
[25:36] slowed down China. An economy that, you
[25:39] know, grew typically at 5 and 1/2 to 6%.
[25:42] A lot higher 15 years ago. I'm going to
[25:45] try to understand why later on.
[25:47] But last year, I don't know, it was 3%
[25:49] or or or less.
[25:51] Numbers in China are
[25:53] difficult to
[25:55] to figure out. They're not equally
[25:58] transparent to other numbers.
[26:00] But but in any event, but it's very
[26:01] clear that China slowed down a lot.
[26:04] And that policy recently changed.
[26:06] Okay, the zero COVID policy has changed.
[26:10] And so there's great expectation that
[26:11] now there's going to be a big boom in
[26:13] China because they're lagging behind. I
[26:15] mean, in in in the US when COVID began
[26:18] to dissipate, we got a huge boost to
[26:20] growth. And that's part of the reason we
[26:21] got all this inflation is because we had
[26:23] lots of growth
[26:25] coming out of the recession that
[26:26] happened in COVID. And the more or less
[26:28] the same is expected in China. And one
[26:31] of the big reasons behind those big
[26:33] bounce backs is well, people are
[26:34] desperate. They want to spend on
[26:36] something. They want to go to
[26:37] restaurants and cinemas and stuff like
[26:38] that.
[26:39] And the other one is they have the means
[26:41] to do it because they couldn't spend on
[26:43] anything for a while, you know? And so
[26:44] they can travel and
[26:46] and stuff like that. So, so people
[26:48] expect and this is a
[26:50] very large economy that suddenly sort of
[26:53] wakes up.
[26:55] You know, that's a big thing for China,
[26:57] but it's also a big thing for the world.
[27:00] You know, what what happens in China
[27:01] doesn't stay in China. It's a big giant,
[27:04] so it moves. And for some countries it's
[27:06] very very important. In this picture
[27:08] here it shows what is the impact on
[27:10] different regions of the world on the
[27:12] growth rate in different regions of the
[27:13] world of an increase in by 1% in the
[27:17] rate of growth of China.
[27:19] One of the the most
[27:21] uh
[27:22] obviously all the neighbors are benefit
[27:24] a lot. But Latin America benefits even
[27:26] more. Why is that? Well, because Latin
[27:29] America produces lots of commodities and
[27:32] China consumes lots of commodity when
[27:34] it's building and and stuff like that.
[27:36] And so that's the reason big impact on
[27:37] Latin America. So, this is
[27:39] a piece of good news for the world in
[27:41] the sense that activity will go up.
[27:44] But
[27:46] it's good news on average,
[27:49] but it may be too much of a good thing
[27:50] as well. Why? Because many economies are
[27:53] going through what we described before.
[27:55] They're trying to bring down inflation.
[27:56] They don't want more demand. They want
[27:58] less for now because we're going to
[28:00] understand the connection later on how
[28:02] demand connects to inflation, but but
[28:05] you want less. And now you're going to
[28:06] get this the this impulse from China,
[28:09] which is going to fuel more inflation.
[28:11] It's okay for China because they don't
[28:12] have an inflation problem. But it may be
[28:14] a problem for many of the countries that
[28:16] are trying to uh undo uh the
[28:19] inflationary
[28:21] consequences of the previous expansion,
[28:23] the expansion that followed COVID.
[28:26] Okay, anyways, but this is the kind of
[28:27] things we're going to be talking about.
[28:29] The I said the course is not going to be
[28:31] mathy, but it's going to be all about
[28:33] models. The next lecture is the most
[28:35] boring lecture of the course. I
[28:37] tell you in advance because it's
[28:38] definitions. I need to go through
[28:39] definitions. At least I get bored.
[28:41] But but the rest those always which are
[28:44] little models, but simple models, okay?
[28:46] But the models
[28:48] are going to try to explain the kind of
[28:49] things I I I discussed today. So, that's
[28:51] what this course is about. It's It's
[28:53] It's
[28:54] is ideally, if we're successful, you're
[28:57] going to be able to read something like
[28:58] the World Economic Outlook, which will
[29:00] have lots of pictures like these,
[29:03] and you're going to be able to write a
[29:04] little equation, very simple, on the
[29:06] side to try to understand what is going
[29:07] on there. And to catch the mistakes as
[29:09] well.
[29:10] Okay? I we all have less mistakes than
[29:12] the Wall Street Journal, but but you
[29:13] will catch mistakes. You'll see. You'll
[29:16] be proud of it.