WEBVTT 00:00:16.480 --> 00:00:21.000 Okay, let's uh 00:00:18.760 --> 00:00:25.040 let's start. So, 00:00:21.000 --> 00:00:28.600 hello everyone. Um welcome to 1402, 00:00:25.039 --> 00:00:30.000 uh introduction to microeconomics. 00:00:28.600 --> 00:00:31.520 Um 00:00:30.000 --> 00:00:34.399 I won't teach today, so that's a good 00:00:31.519 --> 00:00:36.479 news. Uh I will start on Wednesday. 00:00:34.399 --> 00:00:38.280 So, what I want to today is essentially 00:00:36.479 --> 00:00:40.399 tell you what macro is about, 00:00:38.280 --> 00:00:44.719 macroeconomics is about, 00:00:40.399 --> 00:00:47.399 and uh also the rules of of the game. 00:00:44.719 --> 00:00:50.479 So, what a difference a single letter 00:00:47.399 --> 00:00:52.280 makes. Many of you must have taken 1401. 00:00:50.479 --> 00:00:54.079 In fact, some of you may be taking it 00:00:52.280 --> 00:00:55.840 concurrently. It's a lecture right 00:00:54.079 --> 00:00:57.320 before mine. 00:00:55.840 --> 00:01:00.000 And uh 00:00:57.320 --> 00:01:01.799 you know, that's microeconomics, 1401, 00:01:00.000 --> 00:01:04.359 and this is macroeconomics, and it 00:01:01.799 --> 00:01:06.200 doesn't take a lot of imagination to 00:01:04.359 --> 00:01:08.359 realize that this course is about big 00:01:06.200 --> 00:01:10.240 things, no? We don't look at small 00:01:08.359 --> 00:01:13.079 things. That's what micro is about. 00:01:10.239 --> 00:01:15.519 Micro looks at a household, at a firm, 00:01:13.079 --> 00:01:18.039 at an industry. Uh 00:01:15.519 --> 00:01:20.039 in macro, we don't do that. We look at 00:01:18.040 --> 00:01:22.520 the whole economy. We think about the 00:01:20.040 --> 00:01:24.080 US. We think about China. 00:01:22.519 --> 00:01:26.280 Uh we don't think about an individual 00:01:24.079 --> 00:01:28.759 price. We think about inflation, so the 00:01:26.280 --> 00:01:30.480 rate of change of all prices. We don't 00:01:28.760 --> 00:01:32.400 think about whether a particular worker 00:01:30.480 --> 00:01:34.280 is employed or unemployed. We think of 00:01:32.400 --> 00:01:37.080 whether the rate of unemployment is very 00:01:34.280 --> 00:01:38.519 high or low, things of that kind. Okay? 00:01:37.079 --> 00:01:39.719 When we look at two countries, we look 00:01:38.519 --> 00:01:41.759 at the exchange rate, which is the 00:01:39.719 --> 00:01:43.400 relative price of two currencies, not 00:01:41.760 --> 00:01:45.280 two individual goods in two different 00:01:43.400 --> 00:01:48.719 countries, but the whole currency, and 00:01:45.280 --> 00:01:50.400 so on. So, that's what macro is about. 00:01:48.719 --> 00:01:52.079 Now, you could think that macro is 00:01:50.400 --> 00:01:54.400 nothing else than the sum of lots of 00:01:52.079 --> 00:01:56.159 micros, no? After all, that's what an 00:01:54.400 --> 00:01:58.280 economy is made of. A population, a 00:01:56.159 --> 00:02:00.000 whole population is made of lots of 00:01:58.280 --> 00:02:02.840 individuals that can be analyzed with 00:02:00.000 --> 00:02:05.599 the tools of 1401 and and the sequence 00:02:02.840 --> 00:02:07.280 that follows uh 1401. 00:02:05.599 --> 00:02:09.359 But that doesn't work. And there are 00:02:07.280 --> 00:02:10.919 parallels in physics about this, and so 00:02:09.360 --> 00:02:12.760 on. The way you want to study sort of 00:02:10.919 --> 00:02:14.799 big bodies is different from the way you 00:02:12.759 --> 00:02:17.719 want to understand the movements of a 00:02:14.800 --> 00:02:21.400 small elements. And and that's the case 00:02:17.719 --> 00:02:23.719 in macro. In macro, there's a big 00:02:21.400 --> 00:02:27.039 line of research that has to do with uh 00:02:23.719 --> 00:02:28.840 the microfoundations of macroeconomics. 00:02:27.039 --> 00:02:31.159 But even in that case, which is very 00:02:28.840 --> 00:02:33.360 close to micro, uh 00:02:31.159 --> 00:02:35.919 most of the action ends up happening in 00:02:33.360 --> 00:02:38.560 the non-micro part, in the interactions, 00:02:35.919 --> 00:02:40.559 in in the in the equilibrium aspects 00:02:38.560 --> 00:02:42.199 of the system. So, so it's a much more 00:02:40.560 --> 00:02:43.960 complicated object, and if you were to 00:02:42.199 --> 00:02:46.639 build it from the micro, it would be an 00:02:43.960 --> 00:02:48.159 incredibly complicated object. So, one 00:02:46.639 --> 00:02:50.959 of the things we need to do in 00:02:48.159 --> 00:02:53.159 macroeconomics is take some shortcuts. 00:02:50.960 --> 00:02:55.800 And and and that's what makes macro a 00:02:53.159 --> 00:02:58.159 lot of an art. It's not a science per 00:02:55.800 --> 00:02:59.920 se. It's some sort of a science. It has 00:02:58.159 --> 00:03:01.680 the tools of a science, 00:02:59.919 --> 00:03:03.119 but it's a lot about shortcuts and 00:03:01.680 --> 00:03:04.520 tricks, and so on, to capture the 00:03:03.120 --> 00:03:06.920 essence of a problem that is very 00:03:04.520 --> 00:03:11.520 complex if you were to model it in in 00:03:06.919 --> 00:03:13.439 the all the gory details. Okay? And um 00:03:11.520 --> 00:03:15.560 and in this course, we're going to 00:03:13.439 --> 00:03:17.199 exaggerate on that sense. We're not 00:03:15.560 --> 00:03:18.759 going to do anything complicated. I 00:03:17.199 --> 00:03:19.719 promise you that. Some occasionally, 00:03:18.759 --> 00:03:21.479 conceptually, things will be 00:03:19.719 --> 00:03:24.000 complicated, but the math will not be 00:03:21.479 --> 00:03:25.519 complicated. Okay? 00:03:24.000 --> 00:03:27.479 Uh so, we're going to keep things very 00:03:25.520 --> 00:03:30.000 very simple. I want to communicate the 00:03:27.479 --> 00:03:31.599 essence of the big macroeconomic 00:03:30.000 --> 00:03:33.960 relationships. 00:03:31.599 --> 00:03:36.239 This is not a PhD course. If you were to 00:03:33.960 --> 00:03:38.240 take a a PhD course in macro, it would 00:03:36.240 --> 00:03:39.760 be a very mathy type course. 00:03:38.240 --> 00:03:42.640 In fact, most of the people that do 00:03:39.759 --> 00:03:44.439 apply in micro in our PhD program 00:03:42.639 --> 00:03:46.079 complain against macro because they find 00:03:44.439 --> 00:03:47.840 it too mathy, and so on. Okay? But 00:03:46.080 --> 00:03:50.960 that's not going to be the case here. 00:03:47.840 --> 00:03:52.840 That's not what this course is about. 00:03:50.960 --> 00:03:55.240 My goal, 00:03:52.840 --> 00:03:57.319 so if this is a successful course, is 00:03:55.240 --> 00:03:58.960 not that you come out being a researcher 00:03:57.319 --> 00:04:01.000 in macro out of this. Hopefully, you'll 00:03:58.960 --> 00:04:03.280 have a career eventually and do all the 00:04:01.000 --> 00:04:05.879 next steps that you need to do that. But 00:04:03.280 --> 00:04:07.520 I want you to be able to do is to read 00:04:05.879 --> 00:04:09.240 something like this. This is a World 00:04:07.520 --> 00:04:12.159 Economic Outlook. It's a publication 00:04:09.240 --> 00:04:14.200 that the IMF puts out every 6 months, in 00:04:12.159 --> 00:04:16.238 which it tells you what the how it sees 00:04:14.199 --> 00:04:18.358 the world and where where heading, and 00:04:16.238 --> 00:04:20.599 so on. No equations there. Lots of 00:04:18.358 --> 00:04:23.000 tables and stuff like that. I'd like you 00:04:20.600 --> 00:04:25.000 to be able to read that kind of document 00:04:23.000 --> 00:04:26.800 very clearly. I would like you to be 00:04:25.000 --> 00:04:28.879 able to read something, say, the Wall 00:04:26.800 --> 00:04:30.920 Street Journal, and read it even 00:04:28.879 --> 00:04:31.920 critically. Sometimes disagreeing with 00:04:30.920 --> 00:04:33.920 what's in there. 00:04:31.920 --> 00:04:35.520 Financial Times, The Economist. That's 00:04:33.920 --> 00:04:37.920 the goal of this course. It's not a lot 00:04:35.519 --> 00:04:39.839 more than that. It's just that. If you 00:04:37.920 --> 00:04:41.400 do a summer inter- in Wall Street, and 00:04:39.839 --> 00:04:42.639 you work in a macro hedge fund or 00:04:41.399 --> 00:04:43.799 whatever, 00:04:42.639 --> 00:04:45.639 this is going to be a good course for 00:04:43.800 --> 00:04:47.120 that. I mean, this is what traders 00:04:45.639 --> 00:04:48.439 really know. They don't know a lot more 00:04:47.120 --> 00:04:50.959 than that. Many traders should know 00:04:48.439 --> 00:04:53.000 that. They don't. But this that's the 00:04:50.959 --> 00:04:54.839 level of knowledge. I'm not 00:04:53.000 --> 00:04:57.040 if it gets to be very complicated, I'm 00:04:54.839 --> 00:04:59.079 failing. That's not what I want to do 00:04:57.040 --> 00:05:01.200 here. 00:04:59.079 --> 00:05:02.839 The typical lecture, again, this is not 00:05:01.199 --> 00:05:04.439 a lecture. The next The first lecture 00:05:02.839 --> 00:05:06.519 will be on Wednesday. 00:05:04.439 --> 00:05:07.920 The typical lecture, and not in the 00:05:06.519 --> 00:05:09.000 first part of the course, because you're 00:05:07.920 --> 00:05:11.280 not going to have the tools, the 00:05:09.000 --> 00:05:13.199 definitions, and so on, to do it. 00:05:11.279 --> 00:05:14.359 What I want to do is 00:05:13.199 --> 00:05:15.159 is 00:05:14.360 --> 00:05:17.960 uh 00:05:15.160 --> 00:05:19.240 spend 5 to 10 minutes early on. Again, 00:05:17.959 --> 00:05:20.519 the first part of the course, we can't 00:05:19.240 --> 00:05:22.400 do that because you don't have the still 00:05:20.519 --> 00:05:25.120 the knowledge to do that. 00:05:22.399 --> 00:05:27.199 But as as you start building tools, 00:05:25.120 --> 00:05:29.000 I want to be able to sort of 00:05:27.199 --> 00:05:30.959 talk about current events, something 00:05:29.000 --> 00:05:32.920 that is happening out there that I find 00:05:30.959 --> 00:05:36.000 I find interesting, or something I 00:05:32.920 --> 00:05:37.400 received that morning may even uh the 00:05:36.000 --> 00:05:39.399 the morning of the lecture, in which I 00:05:37.399 --> 00:05:40.799 which I find interesting. And if I think 00:05:39.399 --> 00:05:42.319 you already have the tools to begin to 00:05:40.800 --> 00:05:43.960 understand it, I'm going to be 00:05:42.319 --> 00:05:45.680 repetitive. I'm going to sort of come 00:05:43.959 --> 00:05:48.359 back to three, four times to the same 00:05:45.680 --> 00:05:49.800 topic. Hopefully, you'll be know you'll 00:05:48.360 --> 00:05:51.160 be more advanced in your knowledge in 00:05:49.800 --> 00:05:52.800 the later stages, so you'll be able to 00:05:51.160 --> 00:05:54.720 understand it more and more. 00:05:52.800 --> 00:05:56.240 Okay? So, the typical lecture will have 00:05:54.720 --> 00:05:58.600 5 to 10 minutes, in which we'll talk 00:05:56.240 --> 00:05:59.639 about some facts, something that is 00:05:58.600 --> 00:06:01.480 going on. 00:05:59.639 --> 00:06:03.039 For example, a picture like this. This 00:06:01.480 --> 00:06:05.480 is I received it this morning. I think 00:06:03.040 --> 00:06:07.000 this came from Goldman, I think. Goldman 00:06:05.480 --> 00:06:08.520 Sachs, yes. 00:06:07.000 --> 00:06:11.120 And what you have in that picture, 00:06:08.519 --> 00:06:14.000 again, don't worry about details today, 00:06:11.120 --> 00:06:16.759 is you have two lines. One of them is a 00:06:14.000 --> 00:06:18.639 measure of uh 00:06:16.759 --> 00:06:21.680 uh wages, 00:06:18.639 --> 00:06:22.959 wage growth, compensation to workers, 00:06:21.680 --> 00:06:25.199 and another one is a measure of 00:06:22.959 --> 00:06:27.199 inflation. Again, all those definitions 00:06:25.199 --> 00:06:29.159 will come in the next lecture. 00:06:27.199 --> 00:06:30.599 Uh and inflation, so it's the rate at 00:06:29.160 --> 00:06:32.280 which, you know, you must have heard 00:06:30.600 --> 00:06:34.000 about inflation. It's something prices 00:06:32.279 --> 00:06:35.759 are rising, no? 00:06:34.000 --> 00:06:37.040 And what that picture shows you is that 00:06:35.759 --> 00:06:38.879 these two series are very highly 00:06:37.040 --> 00:06:41.840 correlated. 00:06:38.879 --> 00:06:44.159 Okay? So, when wage growth is high, 00:06:41.839 --> 00:06:45.719 inflation tends to be high. Okay? And 00:06:44.160 --> 00:06:47.200 that's a big issue on these days. 00:06:45.720 --> 00:06:49.680 There's a lot of concern about this 00:06:47.199 --> 00:06:49.680 stuff. 00:06:50.120 --> 00:06:53.840 So, let me let me try to explain a 00:06:51.920 --> 00:06:55.800 little bit what is a concern on these 00:06:53.839 --> 00:06:57.039 days. Again, 00:06:55.800 --> 00:06:58.560 if you don't understand anything, it 00:06:57.040 --> 00:06:59.520 doesn't matter. 00:06:58.560 --> 00:07:01.920 If you don't understand anything I'm 00:06:59.519 --> 00:07:03.519 saying right now, in the last lecture, 00:07:01.920 --> 00:07:05.319 then it matters. But now it doesn't 00:07:03.519 --> 00:07:06.799 matter, you know? I'm just trying to 00:07:05.319 --> 00:07:08.800 give you a flavor of the kind of things 00:07:06.800 --> 00:07:10.439 we'll be talking about. 00:07:08.800 --> 00:07:11.960 That picture there, 00:07:10.439 --> 00:07:13.759 again, a variable that we'll define in 00:07:11.959 --> 00:07:15.599 the next lecture, not now, shows you the 00:07:13.759 --> 00:07:17.560 unemployment rate. You don't need any 00:07:15.600 --> 00:07:19.680 specific definition 00:07:17.560 --> 00:07:21.280 to know that to feel, at least get a 00:07:19.680 --> 00:07:23.800 sense that, well, if unemployment is 00:07:21.279 --> 00:07:24.959 high, workers aren't very happy. It's 00:07:23.800 --> 00:07:26.199 not a good thing to have lots of 00:07:24.959 --> 00:07:27.959 unemployment. 00:07:26.199 --> 00:07:30.879 And what that series shows you, the 00:07:27.959 --> 00:07:32.759 shaded areas are recessions in the US. 00:07:30.879 --> 00:07:34.399 What that series shows you is that 00:07:32.759 --> 00:07:36.120 typically in recessions, unemployment 00:07:34.399 --> 00:07:37.759 goes up. So, that's one of the features 00:07:36.120 --> 00:07:40.360 one of the main features of a recession 00:07:37.759 --> 00:07:42.560 is that unemployment is high. 00:07:40.360 --> 00:07:45.520 This episode here 00:07:42.560 --> 00:07:47.360 is is called the Great Recession, as a 00:07:45.519 --> 00:07:49.560 parallel for the Great Depression. The 00:07:47.360 --> 00:07:51.800 US had the Great Depression in the '30s. 00:07:49.560 --> 00:07:53.439 This is the Great Recession, the biggest 00:07:51.800 --> 00:07:55.960 sort of recession outside of the Great 00:07:53.439 --> 00:07:57.040 Depression in the US. And it's also 00:07:55.959 --> 00:07:59.199 known 00:07:57.040 --> 00:08:00.680 as the Global Financial Crisis, because 00:07:59.199 --> 00:08:02.479 this was a recession all around the 00:08:00.680 --> 00:08:04.959 world. And what you can see is that 00:08:02.480 --> 00:08:07.240 unemployment went very high. 00:08:04.959 --> 00:08:09.560 That's a very feature a telltale sign of 00:08:07.240 --> 00:08:11.800 a of of a big recession. And then it 00:08:09.560 --> 00:08:13.199 took a long time. This was in in in sort 00:08:11.800 --> 00:08:15.639 of recovery. 00:08:13.199 --> 00:08:16.920 COVID was a massive shock to the labor 00:08:15.639 --> 00:08:18.319 market. So, not surprisingly, 00:08:16.920 --> 00:08:19.920 unemployment the unemployment rate did 00:08:18.319 --> 00:08:21.959 spike there. 00:08:19.920 --> 00:08:23.800 But then it also recovered a lot faster 00:08:21.959 --> 00:08:25.959 than it recovered from that. 00:08:23.800 --> 00:08:28.360 And today, we have unemployment rates 00:08:25.959 --> 00:08:30.120 that are at historically low levels. And 00:08:28.360 --> 00:08:33.120 that's a big issue. 00:08:30.120 --> 00:08:36.320 The rate of unemployment in the US is at 00:08:33.120 --> 00:08:37.918 historically low levels. Okay? Way below 00:08:36.320 --> 00:08:38.479 what is normal 00:08:37.918 --> 00:08:40.439 uh 00:08:38.479 --> 00:08:42.800 forget recessions, obviously way below 00:08:40.440 --> 00:08:44.720 what is in if it happens in recession. 00:08:42.799 --> 00:08:46.759 But even way below what is normal, what 00:08:44.720 --> 00:08:49.160 happens during normal times. 00:08:46.759 --> 00:08:49.159 Okay? 00:08:49.360 --> 00:08:56.039 Closely related to that is wage growth. 00:08:53.399 --> 00:08:58.000 I have just one measure of wages there. 00:08:56.039 --> 00:08:59.240 It's a wage It's a It's a series of 00:08:58.000 --> 00:09:01.320 wages that is 00:08:59.240 --> 00:09:03.919 that is particularly that that what I'm 00:09:01.320 --> 00:09:05.640 about to say is particularly sharp, 00:09:03.919 --> 00:09:08.000 which is the wages of in the 00:09:05.639 --> 00:09:09.919 accommodation and food service sectors. 00:09:08.000 --> 00:09:13.039 So, wages have been rising very steadily 00:09:09.919 --> 00:09:15.000 and and very fast recently everywhere, 00:09:13.039 --> 00:09:16.559 particularly in sectors like these, you 00:09:15.000 --> 00:09:18.320 know, where we have some problems with 00:09:16.559 --> 00:09:20.279 what we call labor supply. But we'll 00:09:18.320 --> 00:09:21.800 I'll get back to that. Okay? So, those 00:09:20.279 --> 00:09:23.679 are two facts. We have unemployment at 00:09:21.799 --> 00:09:26.479 extremely low levels, 00:09:23.679 --> 00:09:27.919 and we have wage growth at a very high 00:09:26.480 --> 00:09:29.480 fast pace. 00:09:27.919 --> 00:09:30.959 Now, that sounds wonderful, no? I mean, 00:09:29.480 --> 00:09:33.320 what else do you want? An economy in 00:09:30.960 --> 00:09:34.759 which few people are unemployed, 00:09:33.320 --> 00:09:37.640 and and 00:09:34.759 --> 00:09:39.799 and wages are growing a lot. I mean, if 00:09:37.639 --> 00:09:41.960 this was micro, this would be fantastic. 00:09:39.799 --> 00:09:43.599 Say, "Okay, look. The guy is employed, 00:09:41.960 --> 00:09:45.360 and he's getting a high wage. This is 00:09:43.600 --> 00:09:48.680 great." 00:09:45.360 --> 00:09:51.639 Well, not so fast for macro. 00:09:48.679 --> 00:09:52.879 Not so fast because I already showed you 00:09:51.639 --> 00:09:54.000 in the first picture that I showed you 00:09:52.879 --> 00:09:56.759 to motivate, there's a connection 00:09:54.000 --> 00:09:58.440 between wage growth and inflation. 00:09:56.759 --> 00:10:00.480 And that's what we're experiencing. The 00:09:58.440 --> 00:10:03.120 normal level of inflation for an economy 00:10:00.480 --> 00:10:05.279 like the US is around 2%. That's normal. 00:10:03.120 --> 00:10:08.279 That's what central banks target in an 00:10:05.279 --> 00:10:10.519 economy like the US, in the Euro area. 00:10:08.279 --> 00:10:12.519 Japan has been dreaming with 2% but he 00:10:10.519 --> 00:10:14.240 hasn't been able for decades to get it 00:10:12.519 --> 00:10:16.199 but although 00:10:14.240 --> 00:10:18.159 now they are but but they weren't for a 00:10:16.200 --> 00:10:20.120 couple of decades to get to 2% but 00:10:18.159 --> 00:10:22.600 that's about and we will discuss later 00:10:20.120 --> 00:10:24.600 in the course why 2% is about right for 00:10:22.600 --> 00:10:26.360 economies of the size of the US and so 00:10:24.600 --> 00:10:28.159 on. 00:10:26.360 --> 00:10:30.279 Obviously in in recessions these things 00:10:28.159 --> 00:10:32.480 can go low and that's what 00:10:30.279 --> 00:10:35.159 you know that in the COVID recessions 00:10:32.480 --> 00:10:37.279 inflation went to zero essentially. 00:10:35.159 --> 00:10:40.159 But then it began to pick up and it's 00:10:37.279 --> 00:10:42.159 now at levels which are unheard of in 00:10:40.159 --> 00:10:44.799 the US since the '80s. 00:10:42.159 --> 00:10:47.279 Okay? So depending on the particular 00:10:44.799 --> 00:10:49.279 measure you use of inflation is around 6 00:10:47.279 --> 00:10:52.600 and 1/2% to 8%. That's the level of 00:10:49.279 --> 00:10:55.439 inflation we have which is way way above 00:10:52.600 --> 00:10:57.399 what is considered a normal reasonable 00:10:55.440 --> 00:10:59.760 target for the central banks for the 00:10:57.399 --> 00:11:02.159 inflation. Okay? So that's a problem. We 00:10:59.759 --> 00:11:04.960 have had some good news recently in that 00:11:02.159 --> 00:11:06.679 inflation clearly picked already. 00:11:04.960 --> 00:11:08.280 Again definition of inflation formal 00:11:06.679 --> 00:11:10.079 definition inflation happens in the next 00:11:08.279 --> 00:11:12.039 lecture but 00:11:10.080 --> 00:11:14.639 it already picked and it's declining but 00:11:12.039 --> 00:11:15.719 it's still a very very high level and 00:11:14.639 --> 00:11:17.639 that's a problem. That's a big 00:11:15.720 --> 00:11:18.920 macroeconomic problem and one of the 00:11:17.639 --> 00:11:21.039 things we want to understand in this 00:11:18.919 --> 00:11:22.879 course is well what to do about it. How 00:11:21.039 --> 00:11:25.000 do you do how do you deal with that? 00:11:22.879 --> 00:11:27.759 What do central banks need to do 00:11:25.000 --> 00:11:29.639 in order to deal with that? Now 00:11:27.759 --> 00:11:32.639 I've been talking about the US but this 00:11:29.639 --> 00:11:33.319 is not specific to the US. 00:11:32.639 --> 00:11:36.838 Uh 00:11:33.320 --> 00:11:40.240 this is episode this recovery from COVID 00:11:36.839 --> 00:11:41.640 is is incredibly common across different 00:11:40.240 --> 00:11:43.320 regions of the world. I mean you see it 00:11:41.639 --> 00:11:45.439 everywhere with a few exceptions and I'm 00:11:43.320 --> 00:11:46.520 going to talk about one major exception 00:11:45.440 --> 00:11:49.440 in a minute. 00:11:46.519 --> 00:11:51.039 But but it's it's it's it's widespread. 00:11:49.440 --> 00:11:52.880 It's a widespread phenomenon that you 00:11:51.039 --> 00:11:56.120 know we had high unemployment then we 00:11:52.879 --> 00:11:58.600 had sort of very high uh 00:11:56.120 --> 00:12:00.560 uh well I haven't told you that part yet 00:11:58.600 --> 00:12:02.480 but then we had sort of low inflation 00:12:00.559 --> 00:12:04.039 then inflation pick up enormously and 00:12:02.480 --> 00:12:06.920 now we're all worried about this very 00:12:04.039 --> 00:12:08.120 high levels of inflation. In fact 00:12:06.919 --> 00:12:09.799 uh 00:12:08.120 --> 00:12:11.279 if you look at sort of what happened 00:12:09.799 --> 00:12:13.719 between the great recession and the 00:12:11.279 --> 00:12:16.360 COVID recession it was pretty normal to 00:12:13.720 --> 00:12:18.839 have 70 to 80% of the economies in the 00:12:16.360 --> 00:12:22.000 world having inflation levels at or 00:12:18.839 --> 00:12:23.600 below 2%. So that's a norm. You so if if 00:12:22.000 --> 00:12:25.919 I throw you into a country say drop you 00:12:23.600 --> 00:12:27.480 into a country the normal thing would be 00:12:25.919 --> 00:12:29.199 well it's about 2% that's the level of 00:12:27.480 --> 00:12:30.519 inflation. Obviously if I drop you in 00:12:29.200 --> 00:12:32.480 Argentina you're going to find a much 00:12:30.519 --> 00:12:35.399 bigger number no? 00:12:32.480 --> 00:12:39.519 10,000% but but but but the the bulk of 00:12:35.399 --> 00:12:41.838 the countries were around uh 2% or so. 00:12:39.519 --> 00:12:44.199 Today you don't find any country with 00:12:41.839 --> 00:12:46.880 inflation below 2%. 00:12:44.200 --> 00:12:49.800 Okay? Not even Japan that for years were 00:12:46.879 --> 00:12:51.519 in deflation and trying to get sort of 00:12:49.799 --> 00:12:52.559 uh above zero. That's what they all they 00:12:51.519 --> 00:12:54.199 wanted. 00:12:52.559 --> 00:12:57.879 Not even in Japan you have inflation 00:12:54.200 --> 00:13:00.600 below 2% So this thing I show you and 00:12:57.879 --> 00:13:02.439 for more or less the same reasons uh is 00:13:00.600 --> 00:13:05.040 happening everywhere. 00:13:02.440 --> 00:13:08.000 Not exactly the same factors is the same 00:13:05.039 --> 00:13:09.959 episode in for example in 00:13:08.000 --> 00:13:11.159 and then with differences 00:13:09.960 --> 00:13:13.720 depending on the structure of the 00:13:11.159 --> 00:13:15.279 economy or in additional shocks. In 00:13:13.720 --> 00:13:16.680 Europe for example they have very high 00:13:15.279 --> 00:13:17.439 inflation. 00:13:16.679 --> 00:13:19.199 Uh 00:13:17.440 --> 00:13:20.880 but the problem is not 00:13:19.200 --> 00:13:23.040 the origin of the problem the 00:13:20.879 --> 00:13:24.720 the bulk of the of the problem is the 00:13:23.039 --> 00:13:26.599 same as in the US. 00:13:24.720 --> 00:13:28.879 But the but at the margin they're 00:13:26.600 --> 00:13:31.279 different. In in Europe the big driver 00:13:28.879 --> 00:13:32.519 of inflation the big recent driver of 00:13:31.279 --> 00:13:35.079 inflation 00:13:32.519 --> 00:13:37.079 is unlike the US which is I is aggregate 00:13:35.080 --> 00:13:39.120 demand I will discuss later is 00:13:37.080 --> 00:13:40.440 essentially the war in Ukraine. That has 00:13:39.120 --> 00:13:42.480 increased the price of energy and the 00:13:40.440 --> 00:13:43.680 price of energy has led to lots of 00:13:42.480 --> 00:13:46.240 inflation. So there are different 00:13:43.679 --> 00:13:48.120 reasons but all of them are sort of 00:13:46.240 --> 00:13:51.039 different reasons that you add on top of 00:13:48.120 --> 00:13:54.600 what is a common story which is that we 00:13:51.039 --> 00:13:57.838 overheated coming out of the COVID COVID 00:13:54.600 --> 00:14:00.200 episode and and and now 00:13:57.839 --> 00:14:01.600 we're struggling struggling with that. 00:14:00.200 --> 00:14:03.120 Now the main tool and we're going to 00:14:01.600 --> 00:14:05.920 talk a lot about this in this course. 00:14:03.120 --> 00:14:07.320 The main tool that central banks have to 00:14:05.919 --> 00:14:08.199 deal with inflation is the interest 00:14:07.320 --> 00:14:10.440 rate. 00:14:08.200 --> 00:14:12.759 Okay? So for reasons you'll understand 00:14:10.440 --> 00:14:15.280 later uh although you may have an 00:14:12.759 --> 00:14:17.439 intuition about some of those now 00:14:15.279 --> 00:14:19.600 obviously when the central bank lowers 00:14:17.440 --> 00:14:21.520 the interest rates then that helps the 00:14:19.600 --> 00:14:23.839 economy to expand. 00:14:21.519 --> 00:14:25.399 Uh and when it increases interest rate 00:14:23.839 --> 00:14:26.959 then it does the opposite. Raising 00:14:25.399 --> 00:14:28.078 interest rate makes mortgages more 00:14:26.958 --> 00:14:30.359 expensive makes everything more 00:14:28.078 --> 00:14:32.239 expensive so people tend to consume less 00:14:30.360 --> 00:14:34.879 firms tend to invest less and so on 00:14:32.240 --> 00:14:38.639 because it's more expensive to invest to 00:14:34.879 --> 00:14:39.799 borrow to to do something. Okay? And and 00:14:38.639 --> 00:14:41.519 there 00:14:39.799 --> 00:14:43.958 there you see it. I mean this was the 00:14:41.519 --> 00:14:46.078 level of the interest rate in the US 00:14:43.958 --> 00:14:48.399 before COVID. When COVID came boom they 00:14:46.078 --> 00:14:49.879 brought it all the way down. It happens 00:14:48.399 --> 00:14:52.000 that you cannot bring interest rate a 00:14:49.879 --> 00:14:53.559 lot lower than zero. That's the reason 00:14:52.000 --> 00:14:55.799 it stayed close to zero there. We're 00:14:53.559 --> 00:14:57.279 going to talk about that later on. 00:14:55.799 --> 00:14:58.958 But then eventually they realized that 00:14:57.279 --> 00:15:00.519 were behind the curve. Inflation had 00:14:58.958 --> 00:15:01.239 picked up a lot and the central banks 00:15:00.519 --> 00:15:02.600 were 00:15:01.240 --> 00:15:04.360 behind it behind the curve. So they 00:15:02.600 --> 00:15:06.120 began to hike rates 00:15:04.360 --> 00:15:08.639 in a hurry. Okay? And that's what we 00:15:06.120 --> 00:15:09.480 have been experiencing for for the last 00:15:08.639 --> 00:15:10.958 uh 00:15:09.480 --> 00:15:13.360 year or so. 00:15:10.958 --> 00:15:14.159 Okay? Very fast increase in the interest 00:15:13.360 --> 00:15:15.519 rate. 00:15:14.159 --> 00:15:17.279 Now this is a course about 00:15:15.519 --> 00:15:19.559 macroeconomics but I happen to do a lot 00:15:17.279 --> 00:15:21.319 of research between macro and finance so 00:15:19.559 --> 00:15:24.359 I'm going to put a little bit more of a 00:15:21.320 --> 00:15:26.600 component of finance into in the in the 00:15:24.360 --> 00:15:28.680 I think I'm going to do most of that 00:15:26.600 --> 00:15:30.839 in the last third of the course. 00:15:28.679 --> 00:15:34.559 But monetary policy has lots of 00:15:30.839 --> 00:15:36.920 implications for for for for finance for 00:15:34.559 --> 00:15:38.239 equity values for the stock market and 00:15:36.919 --> 00:15:40.319 stuff like that. 00:15:38.240 --> 00:15:41.440 So what you see here 00:15:40.320 --> 00:15:44.120 is the 00:15:41.440 --> 00:15:48.800 the this line here is the is the S S S 00:15:44.120 --> 00:15:51.279 S&P X 500. It's the index the main 00:15:48.799 --> 00:15:52.799 index of equity in the US of shares. 00:15:51.279 --> 00:15:56.159 Okay? And there are several indices 00:15:52.799 --> 00:15:58.078 Nasdaq S&P Dow and so on. This is the 00:15:56.159 --> 00:16:00.039 main index the most comprehensive the 00:15:58.078 --> 00:16:01.919 one that takes the largest 00:16:00.039 --> 00:16:03.759 the largest companies 00:16:01.919 --> 00:16:05.240 and so on and so forth. 00:16:03.759 --> 00:16:07.720 And when you can see what happens here 00:16:05.240 --> 00:16:09.959 is that when COVID happened the 00:16:07.720 --> 00:16:11.200 the surprise that we had really a 00:16:09.958 --> 00:16:13.399 pandemia 00:16:11.200 --> 00:16:15.360 then the stock market crashed. It 00:16:13.399 --> 00:16:16.480 declined like 30% or something like that 00:16:15.360 --> 00:16:17.959 at the time. 00:16:16.480 --> 00:16:19.039 That's interesting of assets. I mean 00:16:17.958 --> 00:16:21.559 that's one of 00:16:19.039 --> 00:16:23.759 one characteristic of of 00:16:21.559 --> 00:16:26.439 equity that I like a lot. Other risky 00:16:23.759 --> 00:16:28.120 assets as well but but but but they like 00:16:26.440 --> 00:16:30.000 a lot they they anticipate what happens. 00:16:28.120 --> 00:16:31.759 What happened there is 00:16:30.000 --> 00:16:34.200 the stock market the shareholders 00:16:31.759 --> 00:16:36.600 realized that something big was negative 00:16:34.200 --> 00:16:38.360 and big was happening in front of us so 00:16:36.600 --> 00:16:40.560 it was time to sell you know and so the 00:16:38.360 --> 00:16:41.879 equity market collapsed. 00:16:40.559 --> 00:16:43.838 What happens next is even more 00:16:41.879 --> 00:16:45.240 interesting for a macroeconomist 00:16:43.839 --> 00:16:47.360 which is this 00:16:45.240 --> 00:16:48.959 this big boom here. 00:16:47.360 --> 00:16:51.159 It's an enormous boom. The the economy 00:16:48.958 --> 00:16:53.559 here is still was at levels of activity 00:16:51.159 --> 00:16:54.958 below what it had before COVID but the 00:16:53.559 --> 00:16:56.919 stock market the value of the stock 00:16:54.958 --> 00:16:59.039 market had way exceeded 00:16:56.919 --> 00:17:00.240 the level we had before 00:16:59.039 --> 00:17:01.399 the pandemia. 00:17:00.240 --> 00:17:03.560 Okay? 00:17:01.399 --> 00:17:05.679 And the main driver of that I've shown 00:17:03.559 --> 00:17:07.639 that in some papers. The main driver of 00:17:05.679 --> 00:17:10.240 that is not I mean people tell lots of 00:17:07.640 --> 00:17:12.439 stories you know you know Amazon and so 00:17:10.240 --> 00:17:14.519 on and so on but Tesla blah blah. If you 00:17:12.439 --> 00:17:17.519 look at the aggregate the main reason 00:17:14.519 --> 00:17:18.959 for that rise was monetary policy. Was 00:17:17.519 --> 00:17:20.759 you can explain 00:17:18.959 --> 00:17:21.839 all that increase in the equity value in 00:17:20.759 --> 00:17:23.519 the US 00:17:21.838 --> 00:17:25.799 of the index not individual shares of 00:17:23.519 --> 00:17:28.319 the index by the effect of interest 00:17:25.799 --> 00:17:30.678 rates. Okay? So monetary policy plays a 00:17:28.319 --> 00:17:32.639 big role. If you care about finance well 00:17:30.679 --> 00:17:34.560 it plays a huge role in the value of 00:17:32.640 --> 00:17:36.759 assets. When monetary policy is very 00:17:34.559 --> 00:17:38.599 loose that tends to increase the the 00:17:36.759 --> 00:17:40.240 value of assets and that's 00:17:38.599 --> 00:17:42.599 one of the mechanism the central banks 00:17:40.240 --> 00:17:43.759 use to expand aggregate demand when they 00:17:42.599 --> 00:17:45.000 want to expand aggregate demand. They 00:17:43.759 --> 00:17:47.039 want people to feel if you are in a 00:17:45.000 --> 00:17:48.519 recession you want people to feel richer 00:17:47.039 --> 00:17:50.480 so they spend more and so on and so 00:17:48.519 --> 00:17:51.920 forth. 00:17:50.480 --> 00:17:53.960 What happened here? 00:17:51.920 --> 00:17:55.920 This decline you can also explain it 00:17:53.960 --> 00:17:57.240 fully with the hiking interest. Remember 00:17:55.920 --> 00:17:59.840 I showed you that the interest rate 00:17:57.240 --> 00:18:02.440 began to rise very rapidly here. 00:17:59.839 --> 00:18:04.439 Well last year the equity market in the 00:18:02.440 --> 00:18:07.400 US and most major equity markets around 00:18:04.440 --> 00:18:09.480 the world declined by 20% or more. 00:18:07.400 --> 00:18:11.160 You can explain all that decline simply 00:18:09.480 --> 00:18:11.920 by the increase in the interest rate. So 00:18:11.160 --> 00:18:14.640 that's another thing we need to 00:18:11.920 --> 00:18:16.320 understand is why is it the interest why 00:18:14.640 --> 00:18:18.000 is it the interest rate matters so much 00:18:16.319 --> 00:18:19.919 for something like equity? So we want to 00:18:18.000 --> 00:18:22.200 value assets and we want to see what is 00:18:19.920 --> 00:18:23.440 the effect of the interest rate and then 00:18:22.200 --> 00:18:25.600 we're going to think about well why 00:18:23.440 --> 00:18:27.159 would the central bank worry or not 00:18:25.599 --> 00:18:28.799 worry about these things and so on and 00:18:27.159 --> 00:18:30.400 so forth. But the truth is that 00:18:28.799 --> 00:18:32.639 financial markets 00:18:30.400 --> 00:18:34.720 and the central banks 00:18:32.640 --> 00:18:35.560 interact all the time. I mean 00:18:34.720 --> 00:18:37.960 it's the 00:18:35.559 --> 00:18:40.039 If you are in again in into Wall Street 00:18:37.960 --> 00:18:42.319 type thing you're going to be watching 00:18:40.039 --> 00:18:44.000 every day every time that the monetary 00:18:42.319 --> 00:18:45.678 minutes the minutes of the central banks 00:18:44.000 --> 00:18:48.000 are released you're going to be watching 00:18:45.679 --> 00:18:51.360 because it has a big implication 00:18:48.000 --> 00:18:52.599 uh for the value of your equity. 00:18:51.359 --> 00:18:54.599 Actually something very interesting of 00:18:52.599 --> 00:18:56.079 this nature happened last week. On 00:18:54.599 --> 00:18:57.359 Friday 00:18:56.079 --> 00:18:58.720 uh 00:18:57.359 --> 00:19:01.639 last Friday 00:18:58.720 --> 00:19:04.120 um the there was a release of payroll 00:19:01.640 --> 00:19:06.240 numbers. So it's an employment index. 00:19:04.119 --> 00:19:08.319 Okay? Employment numbers. 00:19:06.240 --> 00:19:10.720 And 00:19:08.319 --> 00:19:13.359 people expected uh 00:19:10.720 --> 00:19:16.039 and and the the payroll to increase to 00:19:13.359 --> 00:19:17.879 so to add non-farm payroll we'll talk 00:19:16.039 --> 00:19:19.519 about these things later by about 00:19:17.880 --> 00:19:21.320 190,000 00:19:19.519 --> 00:19:23.720 workers. 00:19:21.319 --> 00:19:25.678 At 8:30 well and this 00:19:23.720 --> 00:19:27.440 you're seeing here is the behavior of 00:19:25.679 --> 00:19:29.040 the same index I showed you before but 00:19:27.440 --> 00:19:31.320 the futures. So these things you can 00:19:29.039 --> 00:19:33.799 trade before the market actually opens. 00:19:31.319 --> 00:19:36.480 The market in the US opens at 9:30 a.m. 00:19:33.799 --> 00:19:38.240 but you can trade futures since Asia 00:19:36.480 --> 00:19:39.640 times. Okay? 00:19:38.240 --> 00:19:41.720 Anyway so this is the path. It's all 00:19:39.640 --> 00:19:44.679 very quiet tranquil. Everyone is waiting 00:19:41.720 --> 00:19:46.679 the release of this news at 8:30 a.m. 00:19:44.679 --> 00:19:49.240 At 8:30 a.m. 00:19:46.679 --> 00:19:50.840 great news for the labor market. 00:19:49.240 --> 00:19:51.839 Not only 00:19:50.839 --> 00:19:54.000 not 00:19:51.839 --> 00:19:58.639 the the the actual change in the payroll 00:19:54.000 --> 00:20:01.079 was not 190k. It was over a 500,000k. 00:19:58.640 --> 00:20:02.640 So, enormous addition of jobs 00:20:01.079 --> 00:20:03.720 to the economy. 00:20:02.640 --> 00:20:05.400 And look what happens to the equity 00:20:03.720 --> 00:20:07.240 market. Boom. 00:20:05.400 --> 00:20:08.840 It imploded immediately. 00:20:07.240 --> 00:20:11.480 So, this is wonderful news now for the 00:20:08.839 --> 00:20:14.759 economy. Lots of jobs. The equity market 00:20:11.480 --> 00:20:18.000 imploded as a result of that. 00:20:14.759 --> 00:20:18.000 Why do you think that happened? 00:20:18.359 --> 00:20:21.679 I've already given you a little bit of 00:20:19.640 --> 00:20:22.960 the ingredients for why 00:20:21.680 --> 00:20:26.560 for an answer 00:20:22.960 --> 00:20:27.840 in in in in the previous slides. 00:20:26.559 --> 00:20:31.359 The reason I'm showing you this is 00:20:27.839 --> 00:20:32.879 because it's a in in one in 15 minutes, 00:20:31.359 --> 00:20:36.279 it summarizes all that I was talking 00:20:32.880 --> 00:20:36.280 about in the previous 30 minutes. 00:20:36.839 --> 00:20:40.639 Why do you think that happened? 00:20:38.759 --> 00:20:42.640 This is wonderful news. 00:20:40.640 --> 00:20:45.200 Why why the stock market should 00:20:42.640 --> 00:20:47.480 crash like 2% from top to bottom as a 00:20:45.200 --> 00:20:48.559 result of that. 00:20:47.480 --> 00:20:50.279 Um 00:20:48.559 --> 00:20:51.679 because there's a lot more 00:20:50.279 --> 00:20:52.559 labor because 00:20:51.680 --> 00:20:56.400 um that 00:20:52.559 --> 00:20:59.679 gives a lot more um supply of 00:20:56.400 --> 00:21:02.480 um that thing and thus it increases the 00:20:59.680 --> 00:21:06.560 price because high supply. 00:21:02.480 --> 00:21:08.240 No, but uh okay, that's an interesting 00:21:06.559 --> 00:21:10.240 Okay, that that's an interesting 00:21:08.240 --> 00:21:11.120 explanation. It's not the one I have in 00:21:10.240 --> 00:21:13.200 mind. 00:21:11.119 --> 00:21:15.759 It's a this this explanation says, 00:21:13.200 --> 00:21:17.960 "Look, that means firms hire lots of 00:21:15.759 --> 00:21:19.119 people, so the price 00:21:17.960 --> 00:21:20.840 that means there's going to be lots of 00:21:19.119 --> 00:21:22.279 supply of whatever goods they're 00:21:20.839 --> 00:21:23.319 producing. The price of those goods is 00:21:22.279 --> 00:21:24.720 going to decline and that's going to be 00:21:23.319 --> 00:21:25.960 bad for profits." That's the story you 00:21:24.720 --> 00:21:28.039 had in mind? 00:21:25.960 --> 00:21:30.240 Yeah. 00:21:28.039 --> 00:21:31.639 Maybe there's some of that, but I I'm 00:21:30.240 --> 00:21:33.799 willing to bet that it's not the main 00:21:31.640 --> 00:21:33.800 thing. 00:21:34.359 --> 00:21:37.919 Is 00:21:35.480 --> 00:21:39.759 So, the only clue I'll give you is that 00:21:37.920 --> 00:21:42.240 I already talked about these things 5 00:21:39.759 --> 00:21:42.240 minutes ago. 00:21:44.160 --> 00:21:51.440 Um employment is very closely um related 00:21:48.240 --> 00:21:53.079 to inflation rates. Yes. to uh 0.81, so 00:21:51.440 --> 00:21:54.759 this could be result of expectations of 00:21:53.079 --> 00:21:57.720 higher uh continued high inflation. 00:21:54.759 --> 00:21:59.000 Okay, you're very close. One step more. 00:21:57.720 --> 00:22:02.000 Yes. 00:21:59.000 --> 00:22:04.559 That that means that that means that so 00:22:02.000 --> 00:22:07.640 expect higher interest rates. Okay, that 00:22:04.559 --> 00:22:08.720 there you are. So, what happens? Uh the 00:22:07.640 --> 00:22:10.400 bank the 00:22:08.720 --> 00:22:12.839 the shareholders wouldn't have done 00:22:10.400 --> 00:22:15.080 anything if they thought that the Fed 00:22:12.839 --> 00:22:16.559 would not be able to see this data. 00:22:15.079 --> 00:22:18.439 But they know that the Fed also sees 00:22:16.559 --> 00:22:19.519 this data. They say, "Whoa, these guys 00:22:18.440 --> 00:22:21.000 are going to be worried because the 00:22:19.519 --> 00:22:22.039 economy's going to keep overheating. 00:22:21.000 --> 00:22:24.559 They're going to have to hike interest 00:22:22.039 --> 00:22:27.159 rates even more in order to cool down 00:22:24.559 --> 00:22:28.559 this economy." Okay? I already showed 00:22:27.160 --> 00:22:30.080 you that what happens in the labor 00:22:28.559 --> 00:22:32.559 market is very connected to what happens 00:22:30.079 --> 00:22:34.599 in with inflation. The the central bank 00:22:32.559 --> 00:22:36.519 knows that. And now they get this big 00:22:34.599 --> 00:22:38.799 surprise that means they're not really 00:22:36.519 --> 00:22:40.359 been able to they're not been successful 00:22:38.799 --> 00:22:42.200 at really slowing down one of the main 00:22:40.359 --> 00:22:43.559 drivers of inflation. 00:22:42.200 --> 00:22:44.559 And so 00:22:43.559 --> 00:22:46.039 financial markets are very 00:22:44.559 --> 00:22:47.879 forward-looking. They say, "Whoa, this 00:22:46.039 --> 00:22:48.960 is coming. This is only means that 00:22:47.880 --> 00:22:51.600 they're going to 00:22:48.960 --> 00:22:53.079 financial markets were betting that that 00:22:51.599 --> 00:22:54.879 the Fed was going to begin to cut 00:22:53.079 --> 00:22:57.519 interest rate 00:22:54.880 --> 00:22:59.040 uh in six four months more or so." 00:22:57.519 --> 00:23:01.240 And if you look at what the forwards 00:22:59.039 --> 00:23:02.678 deal there is, so what the market you 00:23:01.240 --> 00:23:05.480 can you can extract what the market 00:23:02.679 --> 00:23:07.519 thinks. Right after this, it only got 00:23:05.480 --> 00:23:09.559 immediately pushed out to the end of of 00:23:07.519 --> 00:23:11.279 the year. Okay, so so it's precisely 00:23:09.559 --> 00:23:13.559 this anticipation that the central bank 00:23:11.279 --> 00:23:14.960 will have to do something. And and so I 00:23:13.559 --> 00:23:16.359 thought it was 00:23:14.960 --> 00:23:18.600 very interesting from that point of 00:23:16.359 --> 00:23:18.599 view. 00:23:19.119 --> 00:23:23.719 Recessions, well 00:23:20.759 --> 00:23:24.839 Look, and these are all very good news, 00:23:23.720 --> 00:23:26.600 but 00:23:24.839 --> 00:23:28.480 everyone knows that the Fed needs to 00:23:26.599 --> 00:23:30.319 cool off the economy. 00:23:28.480 --> 00:23:32.079 So, despite the fact that we're getting 00:23:30.319 --> 00:23:35.039 good news now, 00:23:32.079 --> 00:23:37.359 uh people expect the majority of people 00:23:35.039 --> 00:23:38.240 expect a recession in the US for this 00:23:37.359 --> 00:23:39.559 year. 00:23:38.240 --> 00:23:41.640 I'm not going to explain this bar 00:23:39.559 --> 00:23:44.480 graphic here, but these are forecasters. 00:23:41.640 --> 00:23:47.120 These are professional forecasters and 00:23:44.480 --> 00:23:49.079 more than half of them uh 00:23:47.119 --> 00:23:51.479 so the median of them thinks that there 00:23:49.079 --> 00:23:55.399 is a 65% probability that there is a 00:23:51.480 --> 00:23:55.400 recession in the US this year. 00:23:55.480 --> 00:23:58.480 I'm a little Well, we're going to talk a 00:23:56.640 --> 00:24:00.080 lot about this. And probably you're 00:23:58.480 --> 00:24:01.720 going to be getting news about this 00:24:00.079 --> 00:24:03.079 while we're taking the course. So, this 00:24:01.720 --> 00:24:04.440 is going to be a sort of picture that 00:24:03.079 --> 00:24:06.799 we're going to discuss 00:24:04.440 --> 00:24:08.759 extensively. Uh 00:24:06.799 --> 00:24:11.919 and the reason for the recession is 00:24:08.759 --> 00:24:13.359 nothing else than the reason you ask at 00:24:11.920 --> 00:24:16.080 this forecast, "Why do you think we may 00:24:13.359 --> 00:24:18.039 have a recession?" Well, because the Fed 00:24:16.079 --> 00:24:19.879 is trying to fight inflation. It's going 00:24:18.039 --> 00:24:22.119 to keep hiking interest rate and at some 00:24:19.880 --> 00:24:23.200 point it may break something. 00:24:22.119 --> 00:24:25.000 Okay? 00:24:23.200 --> 00:24:26.559 And and and that's that's the reason. 00:24:25.000 --> 00:24:28.480 But we're going to all these things you 00:24:26.559 --> 00:24:31.039 are going to be able to understand very 00:24:28.480 --> 00:24:33.480 clearly hopefully through models. 00:24:31.039 --> 00:24:34.599 The last thing I want to say before 00:24:33.480 --> 00:24:35.759 uh 00:24:34.599 --> 00:24:37.359 telling you a little bit the rules of 00:24:35.759 --> 00:24:39.720 the game 00:24:37.359 --> 00:24:41.359 is that I said before that the story I 00:24:39.720 --> 00:24:43.240 told you about the US is more or less 00:24:41.359 --> 00:24:46.119 what has happened all around, you know? 00:24:43.240 --> 00:24:48.440 I was in Chile uh 00:24:46.119 --> 00:24:50.079 a month ago. I'm Chilean and they have 00:24:48.440 --> 00:24:51.799 the same story. They started hiking 00:24:50.079 --> 00:24:53.919 interest rate a little earlier because 00:24:51.799 --> 00:24:58.000 they had more inflation than the US, but 00:24:53.920 --> 00:24:59.920 they're going through the same cycle. Um 00:24:58.000 --> 00:25:01.480 There's one big economy, the second 00:24:59.920 --> 00:25:03.279 largest economy in the world that has 00:25:01.480 --> 00:25:05.279 not been part of this, 00:25:03.279 --> 00:25:07.920 which is China. 00:25:05.279 --> 00:25:10.119 China was very aggressive in the COVID 00:25:07.920 --> 00:25:12.360 uh policy, you know? So, zero COVID 00:25:10.119 --> 00:25:13.678 policy. So, they really slowed down 00:25:12.359 --> 00:25:14.839 their economy. That's a consequence. 00:25:13.679 --> 00:25:17.320 They didn't want to do that, but as a 00:25:14.839 --> 00:25:19.599 result of a very strict COVID policy, 00:25:17.319 --> 00:25:21.799 they essentially shut down big parts of 00:25:19.599 --> 00:25:24.119 the economy for a long time. That, by 00:25:21.799 --> 00:25:25.678 the way, had big impact in the rest of 00:25:24.119 --> 00:25:27.199 the world through the 00:25:25.679 --> 00:25:29.000 network of production, the chains of 00:25:27.200 --> 00:25:31.160 production and stuff like that. That was 00:25:29.000 --> 00:25:32.519 inflationary in itself. That part is 00:25:31.160 --> 00:25:35.320 dissipating. 00:25:32.519 --> 00:25:36.879 But but for the the their own economy, 00:25:35.319 --> 00:25:39.480 for the domestic economy, that really 00:25:36.880 --> 00:25:42.760 slowed down China. An economy that, you 00:25:39.480 --> 00:25:45.039 know, grew typically at 5 and 1/2 to 6%. 00:25:42.759 --> 00:25:47.359 A lot higher 15 years ago. I'm going to 00:25:45.039 --> 00:25:49.599 try to understand why later on. 00:25:47.359 --> 00:25:51.359 But last year, I don't know, it was 3% 00:25:49.599 --> 00:25:53.480 or or or less. 00:25:51.359 --> 00:25:55.879 Numbers in China are 00:25:53.480 --> 00:25:58.039 difficult to 00:25:55.880 --> 00:26:00.360 to figure out. They're not equally 00:25:58.039 --> 00:26:01.639 transparent to other numbers. 00:26:00.359 --> 00:26:04.599 But but in any event, but it's very 00:26:01.640 --> 00:26:06.840 clear that China slowed down a lot. 00:26:04.599 --> 00:26:10.119 And that policy recently changed. 00:26:06.839 --> 00:26:11.839 Okay, the zero COVID policy has changed. 00:26:10.119 --> 00:26:13.279 And so there's great expectation that 00:26:11.839 --> 00:26:15.639 now there's going to be a big boom in 00:26:13.279 --> 00:26:18.359 China because they're lagging behind. I 00:26:15.640 --> 00:26:20.520 mean, in in in the US when COVID began 00:26:18.359 --> 00:26:21.879 to dissipate, we got a huge boost to 00:26:20.519 --> 00:26:23.759 growth. And that's part of the reason we 00:26:21.880 --> 00:26:25.040 got all this inflation is because we had 00:26:23.759 --> 00:26:26.679 lots of growth 00:26:25.039 --> 00:26:28.759 coming out of the recession that 00:26:26.679 --> 00:26:31.040 happened in COVID. And the more or less 00:26:28.759 --> 00:26:33.440 the same is expected in China. And one 00:26:31.039 --> 00:26:34.960 of the big reasons behind those big 00:26:33.440 --> 00:26:36.320 bounce backs is well, people are 00:26:34.960 --> 00:26:37.279 desperate. They want to spend on 00:26:36.319 --> 00:26:38.919 something. They want to go to 00:26:37.279 --> 00:26:39.879 restaurants and cinemas and stuff like 00:26:38.920 --> 00:26:41.120 that. 00:26:39.880 --> 00:26:43.000 And the other one is they have the means 00:26:41.119 --> 00:26:44.959 to do it because they couldn't spend on 00:26:43.000 --> 00:26:46.960 anything for a while, you know? And so 00:26:44.960 --> 00:26:48.720 they can travel and 00:26:46.960 --> 00:26:50.799 and stuff like that. So, so people 00:26:48.720 --> 00:26:53.519 expect and this is a 00:26:50.799 --> 00:26:55.159 very large economy that suddenly sort of 00:26:53.519 --> 00:26:57.519 wakes up. 00:26:55.160 --> 00:27:00.200 You know, that's a big thing for China, 00:26:57.519 --> 00:27:01.720 but it's also a big thing for the world. 00:27:00.200 --> 00:27:04.000 You know, what what happens in China 00:27:01.720 --> 00:27:06.240 doesn't stay in China. It's a big giant, 00:27:04.000 --> 00:27:08.039 so it moves. And for some countries it's 00:27:06.240 --> 00:27:10.240 very very important. In this picture 00:27:08.039 --> 00:27:12.000 here it shows what is the impact on 00:27:10.240 --> 00:27:13.679 different regions of the world on the 00:27:12.000 --> 00:27:17.160 growth rate in different regions of the 00:27:13.679 --> 00:27:19.440 world of an increase in by 1% in the 00:27:17.160 --> 00:27:21.360 rate of growth of China. 00:27:19.440 --> 00:27:22.120 One of the the most 00:27:21.359 --> 00:27:24.399 uh 00:27:22.119 --> 00:27:26.759 obviously all the neighbors are benefit 00:27:24.400 --> 00:27:29.800 a lot. But Latin America benefits even 00:27:26.759 --> 00:27:32.119 more. Why is that? Well, because Latin 00:27:29.799 --> 00:27:34.000 America produces lots of commodities and 00:27:32.119 --> 00:27:36.279 China consumes lots of commodity when 00:27:34.000 --> 00:27:37.839 it's building and and stuff like that. 00:27:36.279 --> 00:27:39.559 And so that's the reason big impact on 00:27:37.839 --> 00:27:41.919 Latin America. So, this is 00:27:39.559 --> 00:27:44.759 a piece of good news for the world in 00:27:41.920 --> 00:27:46.519 the sense that activity will go up. 00:27:44.759 --> 00:27:49.119 But 00:27:46.519 --> 00:27:50.960 it's good news on average, 00:27:49.119 --> 00:27:53.639 but it may be too much of a good thing 00:27:50.960 --> 00:27:55.559 as well. Why? Because many economies are 00:27:53.640 --> 00:27:56.960 going through what we described before. 00:27:55.559 --> 00:27:58.200 They're trying to bring down inflation. 00:27:56.960 --> 00:28:00.679 They don't want more demand. They want 00:27:58.200 --> 00:28:02.160 less for now because we're going to 00:28:00.679 --> 00:28:05.160 understand the connection later on how 00:28:02.160 --> 00:28:06.440 demand connects to inflation, but but 00:28:05.160 --> 00:28:09.400 you want less. And now you're going to 00:28:06.440 --> 00:28:11.400 get this the this impulse from China, 00:28:09.400 --> 00:28:12.679 which is going to fuel more inflation. 00:28:11.400 --> 00:28:14.600 It's okay for China because they don't 00:28:12.679 --> 00:28:16.080 have an inflation problem. But it may be 00:28:14.599 --> 00:28:19.919 a problem for many of the countries that 00:28:16.079 --> 00:28:21.399 are trying to uh undo uh the 00:28:19.920 --> 00:28:23.279 inflationary 00:28:21.400 --> 00:28:26.080 consequences of the previous expansion, 00:28:23.279 --> 00:28:27.480 the expansion that followed COVID. 00:28:26.079 --> 00:28:29.799 Okay, anyways, but this is the kind of 00:28:27.480 --> 00:28:31.880 things we're going to be talking about. 00:28:29.799 --> 00:28:33.759 The I said the course is not going to be 00:28:31.880 --> 00:28:35.720 mathy, but it's going to be all about 00:28:33.759 --> 00:28:37.319 models. The next lecture is the most 00:28:35.720 --> 00:28:38.400 boring lecture of the course. I 00:28:37.319 --> 00:28:39.799 tell you in advance because it's 00:28:38.400 --> 00:28:41.840 definitions. I need to go through 00:28:39.799 --> 00:28:44.319 definitions. At least I get bored. 00:28:41.839 --> 00:28:46.639 But but the rest those always which are 00:28:44.319 --> 00:28:48.359 little models, but simple models, okay? 00:28:46.640 --> 00:28:49.720 But the models 00:28:48.359 --> 00:28:51.959 are going to try to explain the kind of 00:28:49.720 --> 00:28:53.720 things I I I discussed today. So, that's 00:28:51.960 --> 00:28:54.720 what this course is about. It's It's 00:28:53.720 --> 00:28:57.400 It's 00:28:54.720 --> 00:28:58.799 is ideally, if we're successful, you're 00:28:57.400 --> 00:29:00.800 going to be able to read something like 00:28:58.799 --> 00:29:03.079 the World Economic Outlook, which will 00:29:00.799 --> 00:29:04.279 have lots of pictures like these, 00:29:03.079 --> 00:29:06.039 and you're going to be able to write a 00:29:04.279 --> 00:29:07.559 little equation, very simple, on the 00:29:06.039 --> 00:29:09.240 side to try to understand what is going 00:29:07.559 --> 00:29:10.158 on there. And to catch the mistakes as 00:29:09.240 --> 00:29:12.559 well. 00:29:10.159 --> 00:29:13.960 Okay? I we all have less mistakes than 00:29:12.559 --> 00:29:16.319 the Wall Street Journal, but but you 00:29:13.960 --> 00:29:18.799 will catch mistakes. You'll see. You'll 00:29:16.319 --> 00:29:18.799 be proud of it.