Feb 7, 2022

Dan Alpert on Current Trends and Tensions in the US Economy

While largely successful, the US policy response to COVID-19 has left some challenges for the economy heading into 2022.
David Beckworth Senior Research Fellow , Dan Alpert

Hosted by David Beckworth of the Mercatus Center, Macro Musings is a new podcast which pulls back the curtain on the important macroeconomic issues of the past, present, and future.

Dan Alpert is an investment banker and a founding Managing Partner of Westwood Capital. He also regularly writes and speaks on big macro-structural issues. Dan joins David on Macro Musings to discuss recent macroeconomic events. Specifically, Dan and David discuss a post-Keynesian account of the global safe asset shortage, the impact of the US policy response to COVID-19, whether inflation will remain a problem heading into 2022, what’s driving the ‘Great Resignation’, whether capital assets are overvalued, and much more.

Read the full episode transcript:

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to macromusings@mercatus.gmu.edu.

David Beckworth: Dan, welcome to the show.

Dan Alpert: Happy to be here.

Beckworth: Great to have you on. Now, you bring both a scholarly view, but also a market participant view. And it's great to get someone like you on the show, someone who has skin in the game, or as you mentioned to me right before the show started, you follow the money. So your understanding of what's happening is based on what you see, what you do as a participant on Wall Street. So some of these issues I think are important to have that perspective. We're going to talk about inflation, the labor market challenges, excess savings debates. So I'm excited to get you on the show and talk about these issues.

Beckworth: Again, someone who has skin in the game, not just someone like David Beckworth, who works at a think tank, but someone who's on the street, making money, and has to make decisions based on some theory of the markets, the world, and so forth. All right. Dan, tell us a little bit about yourself. How did you get into this area of work and your journey to it?

Alpert: Well, I took a great degree at the University of Pennsylvania in public and urban policy. And it was a terrific program that was in part of a school that no longer exists called the School of Public and Urban Policy, that it was in cooperation with the Wharton School and the political science department at the university. At the time, in the 1970s, a lot of people my age thought we were going to go and change the world, and probably do that through a career in government or something related to government functions. But by 1980, Ronald Reagan was elected president. We all put on three piece suits and went off and became good capitalists. And so I was no exception, came back to New York, where I'm from, and found jobs that gave me the entree into what was a burgeoning world of finance.

Alpert: I mean, finance was going through an incredibly rapid series of changes in the 1980s and to a certain extent, democratization of finance, some of it not so good. And made my living and career basically chopping things up and putting them into syndications or securities, and eventually went on and created a number of products for which I was known earlier in my career, the first commercial mortgage backed security, the first aircraft engine security, a bunch of different things that were particularly notable. And then in 1995, founded a firm called Westwood Capital, which is now nearing 27 years of age. And I'm now nearing 64 years of age.

Beckworth: Just getting started. Yes. So along the way, you've done what I consider more scholarly work, or thoughtful work as well. So you're actually investing, you're an investment banker, like you mentioned, you've worked on commercial mortgage back securities, a number of other structured finance products, but you also have written a book and a number of papers. And I want to mention your 2013 book, The Age of Oversupply: Overcoming The Greatest Challenge To The Global Economy. You had a similar 2016 paper “Glut, The US Economy and American Worker In The Age Of Oversupply.” So how did you get interested in those issues?

Alpert: And don't forget my recent paper, “Inflation In The 21st Century.”

Beckworth: Yes. Thank you.

Alpert: But yeah, so back in 2007, obviously as a player in the mortgage market, what was going on in as early as March of 2007, which I think most at that point, I can honestly say nobody really noticed what was going on. But we started to detect high levels of default in residential mortgages. Now, of course there were people who were a little earlier than I. The Big Short is a great story of an old friend of mine who put his money in and did the right thing a lot earlier than I did. But the truth is that there's no mystery about what happened when you look back at it from the standpoint of 13 years later.

Alpert: But at that that point, it was a huge mystery. Nobody could figure out what went wrong. And so I started to tackle that from the standpoint of the markets, and also my degree that I had stashed in a drawer back in 1980 and hadn't really used very much, my academic training, and, and then started to write. And I had hooked up with guys like Dean Baker, Nouriel Roubini, and folks that were very early on in predicting what was about to happen, and took a structural view of it that was perhaps a little bit different, although complementary, to what they were thinking, which was tying the entire crisis to the emergence of the post-socialist nations and the transfer of production to exogenous labor forces, and then of course, the flows that go with that, creating an enormous savings glut, I guess. I hate using that word, but excess savings is probably more acceptable, enormous excess savings that drove interest rates further down.

Alpert: Of course, they had been falling for decades. So the flows that lead to that, I think, were very interesting in following. And so I wrote a paper called “The Way Forward” with Nouriel and guy named Bob Hockett up at the Cornell. And then I wrote the book, and that sort of got me in involved in the academic world, to make long story short, became a fellow at the Century Foundation, and then was offered a fellowship at Cornell. And I'm an adjunct professor there as well. So, that's what I'm doing today in the academic world.

Post Keynesian View of Safe Assets

Beckworth: Fantastic. Now, we want to move to the current period and the issues at hand, but I do want to ask one question about that period and the creation of safe assets, quote/unquote by Wall Street, AAA-rated mortgage back securities, CDOs, those things. Do you view those as a substitute or do they arise because there's this demand for safe assets that wasn't being provided by the government? As you know, late 2000s, the US government was running surpluses. The national debt was going down. So the supply of safe assets was disappearing. And so the private sector stepped in and provided a substitute. That's one of the interpretations, this safe asset demand, this excess savings, as you mentioned, has been there. And if the government wasn't going to meet it, then the private sector did. Is that a reasonable interpretation of what happened then?

Alpert: The decline in treasury issuance obviously is part of it, right? But I think the larger factor was not the surpluses that were being run, or the lack of treasury issuance, but the increased demand for treasuries from exogenous sources. And as it turned out, and I think that at that time, the jury was still out, but I think now the verdict's in. The sensitivity to rate on the part of that exogenous demand was near zero. Effectively, what they were doing is just storing their dollars. And the culprits are obviously China, Japan, et cetera. That we didn't quite understand at the time what was going on. We saw these large build-ups of foreign reserve. We saw significant amounts of excess savings in large multinationals begin to develop, but we didn't quite understand that to a large extent, they were relatively rate insensitive.

Alpert: They were just merely looking for a place to park money because after a while, you can't park trillions of dollars in a bank. You need to effectively hand it back to the central bank in the form of ... Or hand back to the government in the form of treasury obligations. And so as interest rates fell closer and closer to the effect of lower bound, the distinction between greenbacks and, and treasuries effectively became eliminated. So, I think, as I say, the verdict's in on that. It's quite clear that the excess savings demand for safe harbor is rate insensitive. And I think that's the key to all of this.

Beckworth: Now, just to flesh this out a little bit more.

Alpert: Sorry, I would add to that, especially now that real rates are negative.

Beckworth: Right, right, right.

Alpert: I mean, that's sort of the icing on the cake to that argument.

Beckworth: Yeah. But just to flesh this out a little bit more, if there had been more treasury supplied, then there would've been fewer problems in the real economy. Is that one way to look at that?

Alpert: At some point, sure, maybe because you would've had interest rates at a higher level. But you also would not have had the asset bubble that you had. I mean, the problems in the real economy in 2008 to 2012 were related to an enormous asset bubble that was fostered by those extraordinarily low interest rates and the mortgage rates and other borrowing rates that were tied to them. So the asset bubble itself, and you can say, similarly, today, we have the same issue. The asset bubble itself was the problem in the economy. It was creating a misallocation of capital, clearly, in the private sector, and certainly devastating results from the standpoint of folks who bought those securities, and led to the debacle that occurred. And there's a reasonable argument that the same thing is going to happen again.

Beckworth: Let's look at your framework for thinking about these issues, and then use that to move into the current issues that we're now considering. You have said you consider yourself a post-Keynesian when thinking through these issues. How did you come to that realization? And how do you find it useful as someone on the street, someone who has skin in the game? Why use this framework for thinking through the issues?

Alpert: Slowly and grudgingly is how I came. So the understanding of money is probably the biggest problem in getting to the point where you can declare yourself a post-Keynesian. Really, truly understanding the lessons of the post-Bretton Woods period, and the enormous break that we made in '71 to '73 with regard to all history prior to that point is something that you really need to wrap your head around intellectually. It's very, very hard for a lot of people to do because that's not what we teach in economics 101. That's not where most people touch on basic macroeconomics.

Alpert: In order to do that, you need to come to some conclusion about what's the meaning of all that excess savings, or the potential absence thereof. And when you start looking at how the treasury market functions and trades, and the classic issue right now is you have all this inflation, why are treasuries under 2%, 10-year under 2%? What creates that conundrum? You start to really understand the nature, the true nature of money. And a lot of that has to do with how money is created, the concept of bank money to begin with. And I know that many of your listeners may not fully understand the details, but hopefully most of them do. But the concept of independently created bank money is something you need to really wrap your head around to be able to understand it. And obviously, since I do that every day, I create money every day. That's what I do. I mean, I literally create money.

When you start looking at how the treasury market functions and trades, and the classic issue right now is you have all this inflation, why are treasuries under 2%, 10-year under 2%? What creates that conundrum? You start to really understand the nature, the true nature of money. And a lot of that has to do with how money is created, the concept of bank money to begin with.

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Beckworth: Nice.

Alpert: And I don't have a banking license. I'm an investment banker. But I create money. I create assets, and those assets are used to obtain loans and increase the broad money supply. That's what I do. So when you're in that business, you can see it functioning in a very tangible way. And so that's sort of very important. Then you start to move into issues such as government finance, and start to evaluate, "Well, what's really going on in a fiat currency world?"

Alpert: You have to make some ... You have to get back to your sort of prior views of the distinction between the global reserve currencies and other currencies, and sort of try to understand whether or not that matters all that much anymore. Because for many years, I thought it was very, very important. I've come to, to view it as just it's interesting, and it does create certainly an enormous obligation on the part of the reserve currency issuer to run a deficit all the time in order to supply the world with that reserve currency.

Alpert: And so to a certain extent, it's a potential negative as opposed to the positive that most people think it is. But in a full fiat currency world, what's more important is whether or not governments are borrowing in the currency they print, and whether or not the currency they print is useful in trade. And then that brings you back to trade flows. And so those are the areas that you need to sort of absorb and understand in order to move into the post-Keynesian way of thinking.

Beckworth: So you are an endogenous money creator then. You're actually making that broad measure of money grow as part of your work. Now, one question I have about your views as a post-Keynesian, I've had a few post-Keynesians on the show. I had Mark Lavoie and a few others. We'll provide links to their discussions as well. But I often find a common refrain among post-Keynesians, the ones I meet on Twitter and other friends as well, is that their view of interest rates is different than kind of my standard view of interest rates. I take, I think, a typical mainstream view that desired savings, desired investment, which I think is consistent with what you're saying about your excess savings story. So what view of interest rates do you take? And I sense from your discussion of global savings glut, you take kind of the standard view, but you're also a post-Keynesian at the same time. Is that right?

Alpert: Yeah. So the way around that, I think, is to say, "Yes, S equals I, but only over an extraordinarily long period of time."

Beckworth: That's fair.

Alpert: Such that in the near term, it's irrelevant. And once you can say that to yourself and hum it while you're walking down the street, then everything else falls into place. So savings, yes. Savings might equal investment, but just to quote the master himself, over the long run, we're all dead. And that, I think, is really the key is that we are hobbled to a certain extent by a simple equation that sounds like it should be true. It makes perfectly good sense that capital is a scarce commodity, that there's only so much of it. And that gives rise to things like crowding out theories and all sorts of other stuff that impacts a level of private investment of government is borrowing more. But once you reject the notion of S equals I on the short term, you get there. And so I don't know that ... I mean, there's much more to it than that. But I think that that is the sort of putting it in basic, macro concepts, that's where you need to get to be a post-Keynesian.

Beckworth: Well, I think a lot of mainstream macro folks would hold a similar view. They'd say, "Look, in a short run, it is the liquidity preference theory. It is the money view of interest rates in the short run. So central banks do have a lot of influence." And then you invoke this savings equal I, the kind of standard view over the long run. And as you said, where that long run kicks in may be at a point where we're all dead, but I think you can reconcile those two views.

Beckworth: And another way I've attempted to reconcile this. So some of my post-Keynesian friends would say, "The Fed could set the entire treasury yield curve if they wanted to, they just got to choose to do it." And I would say, okay, I believe, in theory, that is possible, but the Fed is also subject to a price stability mandate. So as long as the Fed is subject to that price stability mandate, it's not going to peg the 10-year treasury at zero. I mean, it could under a yield curve control regime, but it faces trade offs. If it wants price stability, it can't pin rates constant all the time.

Alpert: Let me just stop you for a second because what you did is you just overlaid law onto economics.

Beckworth: Oh, absolutely.

Alpert: Yeah. And I think the issue is if you're going to stay pure to the economics, you need to say to yourself, “At least open your mind to looking at government as a consolidated entity." And I think we all, you and I, and pretty much everybody who debates this understands that that's the core of the issue. If we don't consolidate the Fed and the Treasury for the purpose of the discussion, then post-Keynesians, Keynesians, and other people can't really have a discussion because the post-Keynesians are out there consolidating everything. So that's interesting from the standpoint of what their mandate is, but as a practical matter, I see a different problem than you do, but I still see a problem.

Alpert: And that is this. You've got people like Randy Wray and some of the MMT folks advocating PZIRP, permanent zero interest rate policy, which effectively, their view is focused on depriving of free income, capitalists of risk-free income. And look, my heartstrings go out over that. I get it. I happen to be a capitalist. I like my treasury bonus. But at the end of the day, I don't deserve ... Nobody dubbed me king and said that I deserve some sort of seigniorage that the government is obliged to dole out or share with me. So I understand their argument. I just, at the end of the day, have to shrug my shoulders because it is vitally important that we have a market mechanism for deciding what money costs. And therein lies the issue of why we need a treasury curve, why we need a risk-free curve.

Alpert: And again, I'm biased by where I sit, which is in the markets. I cannot conceive of a PZIRP world, can't conceive of it. You need people out there dickering over the one thing that treasuries are telling you because there are many economists who still believe ... By the way, nobody in the treasury market believes that there's a risk premium on US Treasury bonds. There's never been a risk premium on US Treasury. It's entirely theory. And yes, there's duration premiums when you look at different points on the curve. But there's no risk premium on bonds, on US government bonds.

Alpert: And so the only issue is that the market is getting together and projecting inflation risk. That's the exercise that's going on every day. And so in order for the many, many institutions and both banking and shadow banking to actually have a benchmark against an inflation to price the cost of money, you need that market function to go on. You need people with actual money to be betting on the level of future inflation. And so I see the world in a ... I see a PZIRP world as nonfunctional. And that's one of the things that separates me from the MMT crowd.

Beckworth: Oh, very interesting. Well, let's move on to the current situations that we are now encountering. As you know, there's been a lot of discussion on inflation, labor markets, excess savings. We want to get into that, but let's begin our conversation here by just maybe recapping. How do you view the policy response, the outcomes over the past two years? Was it a success, or did we unleash a Pandora's box of inflation worries to go with us? I mean, taking stock of what was accomplished these past few years, what's your grading of the response?

Evaluating the Policy Response to COVID-19

Alpert: Well, first of all, utter fascination. I mean, we finally did it. We ignored all of the operations of the economy and actually engaged in universal distribution of money directly to households, and in many cases, businesses. And that was incredibly successful because it was the hottest of hot money and it worked. It did exactly what it was intended to do, not only relieve the crisis and fully covered the gap in 2020 between the lost private sector income for both enterprises and households, but in 2021 did more than that, which was to supplement it by a very large number, such that when you actually look at the first three quarters of 2021 and annualize that supplement, you're talking about something like, on an annualized basis, about 3 trillion plus in increased total personal income that you would not have had, had those supplements not been there.

Alpert: So the bottom line is that we're still not quite caught up, meaning private sector incomes have not replaced the loss of those supplements that ended in September of 2021, not just talking about unemployment insurance, but I'm talking about everything, the whole package of things, including stimulus checks. So remarkably effective, a lesson for the future in terms of what to do in a recession, meaning the indirect and ineffective policies of stimulation, tax cuts, for example, have been notoriously ineffective, notoriously ineffective. And so what it did is it basically said, "Look, here's a tool that works. It works incredibly quickly, and it's very, very effective." So from that standpoint, great. I think we had a wonderful economic experiment.

The bottom line is that we're still not quite caught up, meaning private sector incomes have not replaced the loss of those supplements that ended in September of 2021, not just talking about unemployment insurance, but I'm talking about everything, the whole package of things, including stimulus checks.

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Alpert: In terms of the downside, I mean, we can talk moral hazard all you want at any point in this conversation, which I think is not really an issue here because we had this thing called a pandemic. But from the standpoint of the downside, clearly, I mean, you'd have to be blind to not understand that with the March act, the final one, the amount of stimulus, was additional stimulus, was in excess of what was required. Now let's face it, pointing fingers at people for that is ridiculous. We had no idea what was going to happen, whether the vaccines were going to be effective, how fast they were going to roll out, whether the virus would be responsive to it. I mean, we didn't know anything. And keep in mind that by the time the act was promulgated and passed, I mean, it was months of political debate. So this was not something that just happened in March. It happened the entire first quarter.

Alpert: So at that point in time, people were scared. They wanted to make sure that the economy didn't fall off a cliff again. No one expected the pandemic to be with us for the length of time that it had been by that point. And so people chose safety, at the end of the day, over the risk of potentially igniting inflation. Now, the rest of the lesson has not yet been written. And it will be very, very interesting to find out what happens.

Alpert: What I see today, and I'm not stepping on your next question, I hope, but what I see today is quite clearly a fairly rapid dissipation of household capacity to continue to spend. You see it in both contraction of personal income relative to spending, both growth, but spending is growing much faster than incomes, which is not sustainable. And you see it in a contraction of retail sales, and you see it in a whole bunch of other data that is going to point to changes in demand later in 2022. And I say later, I don't mean much later. I mean, certainly by the end of the first quarter and going into the second.

Alpert: Second thing is we had these pandemic-related supply chain interruptions, which were massive. I mean, we've all been reading about them. One of the things about these supply chain interruptions is that they operated in a snake-like fashion. They started way back when China shut its factories in early 2020. And the effect of that on contracted demand, the inability to get things… The contracted supply was offset by the fact that nobody was buying anything because everybody was locked down and it was not much of a problem. But as soon as people had money in their pockets and could go out again, the demand increased. The factories were open again, but we had a problem with ships, getting them. They were in the wrong places.

Alpert: The ships eventually found their way to the right places. Remember the period of time when crews were not allowed off the ships to load them because they were worried about disease. Anyway, that problem was solved. Then you had the whole issue of getting the containers to the States and the other parts of the world, and then unloading them, no room at the piers, and then actually the last mile issues of getting them to the distribution center. So this whole thing sort of metastasized over time and became this grand crisis by the summer of 2021.

Alpert: That ultimately turned into a perfect storm, a lot of it calendar-based, simply because you had the normal Christmas restocking occurring in August, September, and October, at the height of that demand that was induced by all of that stimulus we just spoke about. And so, as a result, you had this enormous spike in inflation.

What I see today is quite clearly a fairly rapid dissipation of household capacity to continue to spend. You see it in both contraction of personal income relative to spending, both growth, but spending is growing much faster than incomes, which is not sustainable. And you see it in a contraction of retail sales, and you see it in a whole bunch of other data that is going to point to changes in demand later in 2022.

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Alpert: Now, I don't think it takes a genius to figure out, and I'm not a genius, to figure out that when you relax those supply chain problems, and you decrease the amount of personal income that's in people's pockets, and you work off some of the excess savings in households, you're going to see a collapse in demand and a huge boomerang effect in supply. Meaning you're going to see a lot of goods looking for customers, and you will see a decline in prices. And so this era, I think, will go down in history as a really good test of what happens when you have too much money chasing too few goods in the most classical of senses.

Beckworth: So I share your view. I think this year we will see a turnaround in inflation for many of the same reasons you just outlined. Do you think it's fair to say that those who did predict high inflation in 2021, I'll mention some, Larry Summers, Mohamed El-Erian, were they right for the wrong reasons?

Alpert: I think that's a wonderful way of putting it. They were absolutely right. By the way, when you look at Olivier Blanchard and Mohamed, and, and Mohamed El-Erian, and Larry Summers and Jason Furman for a while was in that camp, they all approached it from slightly different perspectives. I know having spoken to Olivier over the last few months, his thinking and his recent writing is rather developed on this. And I think if I were to point to anyone whose thinking has really worked through this problem from beginning to end, it's Blanchard. I think he's done a great job. Larry is Larry. He's going to continue to sell whatever he's selling until it's no longer saleable. And from the standpoint of, El-Erian, he is concerned about monetary policy.

Alpert: And, and I think a lot of people are concerned about monetary policy. My good friend, Paul McCulley, with whom I collaborate fairly often, his view is more oriented towards the monetary than the fiscal side, maybe I'm a little bit more focused on the fiscal side and coming up with a sustainable monetary approach going forward. And Mohamed is definitely in that camp. So, all the people who raised concerns about inflation, again, turned out to be right in the short term, but they all had sort of different approaches to it.

One of the things about these supply chain interruptions is that they operated in a snake-like fashion. They started way back when China shut its factories in early 2020...The contracted supply was offset by the fact that nobody was buying anything because everybody was locked down and it was not much of a problem. But as soon as people had money in their pockets and could go out again, the demand increased.

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Beckworth: One of the points you mentioned is this change in spending preferences by households during the pandemic, even over last year, when things looked like they were improving. And we saw this big substitution from services into goods, and especially durable goods, people working from home. And one of the stories told is that that's not sustainable over the long run. Over the long run, there's going to be a transition back to the original mix pre-pandemic. Do you think that's right, and that will have a bearing on the prices we face?

Alpert: I honestly don't know whether we're going to go back to the level of demand for services that we had pre-pandemic. It stands to reason that we should, but I'm sitting here ... One of the things about aggregate data when it comes to the United States is it is fairly heavily skewed by what's going on in large cities. And the CPI itself is really a city's index. So I'm sitting in the largest of America cities, looking out at a bunch of empty office buildings and retail stores that are boarded up and vacant. And it's really quite something to behold. Now, maybe New York is worse than many cities, but still, you've seen a fairly substantial collapse of the retail economy, for example.

Alpert: I'm very concerned about the office economy as well. Obviously, we're going to be in what I call a period of no cranes. My life has been a period of cranes and no cranes. When I look out at the skyline of New York, we're going to have a period of no cranes for several years. There's not going to be anything built. So that's going to kill your construction sector, and it's going to kill demand for things that supply the construction sector, and for jobs in that area. But the broader issue is what are people going to do in the service economy?

Alpert: Well, hospitality and leisure. Do I think that we're going to go back to the status quo ante when it comes to, say, the hotel industry and business travel? I don't think so. Why? Because we've let the genie out of the bottle. This thing that we're ... I'm talking to you on Zoom right now. And I've done road shows for bond offerings, which used to be done on private jets, on Zoom. And quite frankly, the sell side and the buy side are quite content with it. I don't think the buy side ever wants to see another investment banker cross their threshold in-person because it's incredibly efficient to sell bonds over Zoom. So do I think that we're going to recover all of the elements of the service economy post-crisis? I say the jury's out, but I really have my doubts.

Beckworth: What about the argument that the good consumption will change post-pandemic for two reasons, one ... Or at least the price effect of good consumption. Number one would be that there's only so many goods we can buy, fill our houses with so many TVs, so many bikes. That's one argument, which may or may not be good. The second one, though, I find more appealing, or at least a stronger argument, is that goods, particularly durable goods, if you look at their prices, they were on a deflationary spiral for 25 years due to globalization and such. And you see they spike dramatically over the past year or so. And it strikes me that that same process is going to kick back in once the supply chain issues are all sorted out. So good prices will come down once we get to the other side of the pandemic. Thoughts?

We're going to be in what I call a period of no cranes. My life has been a period of cranes and no cranes. When I look out at the skyline of New York, we're going to have a period of no cranes for several years. There's not going to be anything built. So that's going to kill your construction sector, and it's going to kill demand for things that supply the construction sector, and for jobs in that area.

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Alpert: Oh, absolutely. I think you're spot on. There's a couple of things I would point out in connection with that. One is I did a graph back in October of last year, and it showed that through October, maybe it was September, I can't remember which, the total inflation in tradable goods, meaning the basket of goods that we buy from abroad from December of 2018, not '19, in the aggregate had been only 2.18%. And why? Because they had declined in price so dramatically from that point and all the way through, into the pandemic because there was no demand in the first half of 2020. And the price declines were so dramatic that, yeah, sure, they've increased year over year by a huge percentage, but it's kind of ridiculous if you just look at that. That's why I get on the phone with reporters all the time, and I say, "Stop doing these year over year analyses. They're nonsense." But they don't listen. The upshot, though, is that, I think you're right. There's only so much you can buy. Moreover, when you stuff money in people's pocket, and you tell them they can't party, they go on Amazon. It's recreation. It becomes ... My wife calls it retail therapy.

Beckworth: Nice.

Alpert: And that is, we are a consumer society. We're taught from the earliest age, cartoons on Saturdays, if they do that anymore, I don't know, to buy things. And it supposedly gives us satisfaction. Although, when you get to my age, it gives you far less for some reason. So that's the way this country works. And it's not surprising that when people had the money to do it, nothing else spend it on, they went out and bought junk.

Beckworth: Yeah. On the retail therapy side, I think that's true. I mean, at our house here, you see a Amazon Prime truck, "Are they coming to our house, to our house? Did we get a package today?" It's kind of like this expectation.

Alpert: Like Christmas every day, right?

Beckworth: It is, it is. Right. Right. "Who ordered something from Amazon?" So it becomes kind of a, you're right, an emotionally enriching experience when you've been locked up for a long time in your home. I want to go back to a point you raised about the service sector. And one of the big debates around that is this talk of a Great Resignation, the labor side of this. And you've written on this. You've talked about it. So give us your thoughts on this debate.

Do I think that we're going to recover all of the elements of the service economy post-crisis? I say the jury's out, but I really have my doubts.

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On the ‘Great Resignation’

Alpert: Well, it's catchy. So I get it. People like to put great in front of everything. I can't believe nobody has caught on to my characterization of the pandemic as the great pandemic. I mean, what could be greater, right?

Beckworth: Fair. Fair

Alpert: But the Great Resignation is a little bit of a misnomer, and I think really misunderstood, dramatically misunderstood, actually. In the lower hourly wage categories, leisure and hospitality being one, retail, healthcare workers, administrative and waste sector, which is temps, you had folks that were making average weekly incomes that were incredibly low pre-pandemic. I'll just put up a number for the sake of, of understanding. People are always talking about fight for 15 on the left. And I laugh about it because in the sectors that are paying 15, which is chiefly leisure and hospitality, where the average wage is about 16 across 16 million workers. So it's very low, for a lot of them even lower than that, but that that sector offers an average of 25, 26 hours of work a week.

Alpert: So it's not the hourly wage that is the big problem that we have. It's the enormous decline in hours worked in many sectors, and on average, in private sector jobs, over the course of the period from 1960 to today. I mean, we literally have lost about three and a half, four hours of average hours worked across the entirety of the jobs that are production and non-supervisory jobs that are included in the establishment survey. And why is that? Because we've moved to an era of just-in-time labor. We don't hire people to sit around. We hire them when we need them to work. And we tell them they have shifts that are very tight, and you're working the breakfast shift, not the lunch shift, and so forth.

Alpert: So the upshot to all of this is that, I think, is the bigger issue going forward when it comes to the Great Resignation because when you multiply those numbers out, the amount of benefits that were being doled out during the period through September of 2021 were, quite frankly ... I mean, the left, doesn't like to talk about it, but it's hard to ignore the numbers, was dramatically higher for many people, so much higher that for many leisure and hospitality workers, they actually were able to rack up a buffer that enabled some of them to, on average, in my calculations, in the leisure and hospitality sector, if you were a worker that hadn't worked at all in 2021, was just receiving benefits and comparing it to your salary pre-pandemic, you had racked up about 10 weeks of additional buffer that would enable you to stay out of work.

Alpert: Well, from September to the end of the year is kind of call it 10 weeks. It was September 16th, so the end of the year. And so it's not surprising that people in those low pay sectors didn't come back. Now, certainly wages were increased in those sectors, because they had to be to get people back. And they did drive some returns. But I think what we're going to see is starting probably about now is far greater re-population of these jobs, simply because people run out of money. I hate to ... I mean, it sounds very callous, but that's the truth.

Alpert: The only thing that delayed it was Omicron. So, I mean, people don't rush out their doors to go contract disease. And if the latest data is correct on Omicron, again, I'm biased by sitting here in New York, we've seemed to have turned the corner, and rates of infection are going down, plus the fact I think there's a greater understanding of what Omicron really is. Four of my six kids have tested positive over the course of the holidays, and nobody's gotten sick other than a sniffle or two.

Alpert: And so as a result, I think it may turn out, and of course, I'm not a virologist or epidemiologist. I have no idea what I'm talking about, but this mutation may turn out to be the saving grace. You might get a lot of people with antibodies who will be resistant to COVID-19 in general. But my cousin, who's an oncologist, had a conversation with me last night. He says, "What we don't want is a mutation that is as communicable as Omicron and as virulent as Delta." And so we're hoping that doesn't happen. But assuming that doesn't happen, and the vaccines keep getting adjusted every 90 days or so to the latest mutation, maybe 120 days, we should be out of this. And then I think you'll see the rest of those. We're missing four and a half million workers in terms of the establishment survey job count. And I think you'll see them back sometime by the end of the quarter, for sure.

It's not the hourly wage that is the big problem that we have. It's the enormous decline in hours worked in many sectors, and on average, in private sector jobs, over the course of the period from 1960 to today. I mean, we literally have lost about three and a half, four hours of average hours worked across the entirety of the jobs that are production and non-supervisory jobs that are included in the establishment survey. And why is that? Because we've moved to an era of just-in-time labor. We don't hire people to sit around. We hire them when we need them to work.

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Beckworth: So you touched on this debate that's going on right now, and that's over excess savings. You kind of alluded to it, those savings being, or that cushion going down. What is your thought? Is this a productive conversation? Are excess savings a big deal? Some people would say, "Oh, it's just a residual. You're just measuring the flip side of a deficit." Others would say, "Well, no, it's important for economic decision making." Where do you stand on that?

Alpert: Well, with respect to excess household savings that resulted from the pandemic period, at this point, the data is very, very clear. It's heavily concentrated in the top quintile. And so it's almost irrelevant from the standpoint of propensity to spend. I don't want to say it's fully irrelevant, but it's getting there. The erosion of that excess in the bottom three quintiles is almost complete. And in that second quintile, it's pretty much gone.

Alpert: So as you get through that second quintile, that has a much higher propensity to spend than the top one, you're going to really see a collapse in demand that results from the so-called excess savings. It's hard to distinguish when you start looking at the top quintile and you look at wealth, how much of it is market derived and how much of it is ... You can look at cash in the bank, but you can also say, how do you know the cash in the bank wasn't that said, "Market's high. I'm going to sell my stock and put it in the bank?" So it becomes very, very difficult, very difficult to track.

Beckworth: That's a great segue into the last topic I'm going to cover with you, and that's asset markets. As you write, capital asset complex questions – why have asset prices been so high? Are they overvalued? How do we think about them? Or how do you think about them as someone who actually, again, has skin in the game, and is on Wall Street, making decisions based on these prices?

Are Capital Assets Overvalued?

Alpert: Yeah. I mean, look, it's skin in the game and also the era in which I have lived as an adult. I mean, I left school at the height of the inflation crisis, right as Paul Volcker was putting on the brakes. Of course, when you're a young guy and somebody says, "You're in a horrible recession." You're like, "Whatever, I got to get a job." So you're not focused on the horrible recession, but apparently we were in a terrible one and I was amazed that I could actually carve out a career.

Alpert: But looking back at that time, I had no idea. But the truth is that over the course of the period of time from 1980 through the next 40 years, interest rates have dropped almost consistently. And to the point where in my lifetime, they hit almost zero. Well, they hit zero on a policy rate basis, but they certainly, on a long term and straight basis, came to the effect of lower bound. And interest rates in other countries did hit zero.

Alpert: So, that obviously has enormous impact on asset prices. And being in the business that I'm in, you can see that demonstrably. It has an effect on every capital asset price out there, including stocks. Bonds, obviously, sovereign bonds, don't qualify as capital assets in my book. They're just merely money substitutes. So the issue of focusing on bond prices, I think, is a waste of time. But the issue of the rest of the capital asset complex, I tend to follow Minsky's Construct, which is to say you have goods prices and the price of labor on the one hand, and you have the price of capital assets on the other hand, and they're both determined independently. And a lot of that is due the way debt is utilized for each.

Alpert: When you have a building, and you go out and ... Again, I keep looking out my window. There's all these office buildings. You have an office building, and you go out and borrow a bunch of money, especially on a non-recourse basis, the only thing that you care about is the cost of the money. And that determines what you're able to afford to pay for the building. So as the cost of money goes down, the building becomes immediately worth more. But it's more complex than that because you've also shifted risk. You no longer actually have any risk of loss other than the equity that you've put in. The bank now is assuming enormous amounts of risk on that structure, especially as they follow values higher. And you're about to see that here in New York because the entire asset complex and offices is about to collapse.

The truth is that over the course of the period of time from 1980 through the next 40 years, interest rates have dropped almost consistently. And to the point where in my lifetime, they hit almost zero. Well, they hit zero on a policy rate basis, but they certainly, on a long term and straight basis, came to the effect of lower bound. And interest rates in other countries did hit zero. So, that obviously has enormous impact on asset prices.

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Alpert: Don't let anybody in the office business hear me. They're going to be very angry. But it's inevitable because nobody wants the space. So the shifting, what Minsky wrote, was the shifting of risk relative to, say, productive assets, like factories that create widgets and what have you, is really the primary issue. And so capital assets, I think, have a very, very different complexion in terms of how they're priced than productive assets, goods-producing assets. The only mental extension that you need to do then is to say, "Okay, so what about stocks?" I think it's pretty easy to understand that stocks are part of the whole issue of alternative investment theory, which is, if you can't get a risk-free or low-risk return, you're going to be incentivized to take things that have high risk associated with them.

Alpert: Obviously equities are more risky than debt. And so that's going to drive the price of equities. As you get closer to the effect of lower bound, that's going to drive the price of equities higher. And that obviously is exactly what's happened over the course of the last several decades. It doesn't necessarily mean that the multiples that have been attributed to equities are valid or reliable. It just simply means that the earnings that you would have on something that would be lower risk are less attractive. And so you're willing to take more risk.

Alpert: And I made this comment. I was giving a talk last week to a bunch of pension fund managers. I said, "Imagine this. For the last 15 years prior to this crisis, we were in an era of incredibly low inflation. And yet multiples on stocks got higher and higher and higher." It stands to reason that the reason you should take risk is out of fear of loss of purchasing power. And yet no one faced fear of loss of purchasing power. They simply were buying because they didn't like the nominal returns that they were earning on low-risk investments.

Alpert: The proof of the pudding is if I have a pile of cash, just greenbacks, and I put it on the table in a deflationary environment, it earns money. I do nothing with it. I take no risk. I watch it grow in value because its purchasing power goes up. And if you're near that point, as you get closer and closer to that point, you should be taking less and less risk. And yet the opposite happened. So you have to ask yourself why. And the reason for that is there is a base level, and there have been several papers written on it, people think it's about 3%. There's a base level of return that if aren't making it on their capital, they get very, very antsy. And they are constantly trying to replicate it and produce it at risk that just makes no sense at all.

Beckworth: So to summarize, the key, not only, but the key driver in surging asset prices is this long, downward march of interest rates? Is that right?

Alpert: Absolutely. I call it the Great X, interest rates and asset prices.

Beckworth: Oh, okay. Oh, that's clever. Nice. Very nice. Yes. Well, I think that's important. And I agree with that. And it's a great explanation. But it also sheds light on the complaints that are often thrown at the Fed for creating wealth inequality. The way I would interpret that and I would see this is that the Fed is simply following that downward march of rates when it sets its interest rate policy. I mean, it has some flexibility in the short term, but it's largely following these structural, global forces that are driving rates down. And so it's not the Fed causing these asset prices to go up to create wealth inequality. It's the global forces that are driving it. Is that right?

Alpert: Oh, it's more than that, actually. I think that's just the tip of the iceberg. The Fed now has 12 years of history of pushing on a string. I mean, monetary policy in a continuous global excess savings glut. I used both words there. How do you like that?

Beckworth: Nice.

Alpert: In that environment, you can do anything you want with monetary policy, including bringing the policy rate down to zero, or even establishing a policy rate in negative territory if they want to do that, which they're not. That that does nothing. It effectively is you're driving against a brick wall. QE, all this talk about taper. I went on television the first day of trading in 2013, I guess it was. It was 2013. I get the years confused, but whatever the point in time, the treasuries had spiked up to 3%. And I said, "This ends now." Because the market itself won't support these interest rates. There's too much capital out there. And of course, that was the absolute ... December, whatever it was, the last day of trading, was the peak in the market. And then everything went back down from there.

Alpert: But looking at Fed policy, it's not that Fed policy's been wrong. They followed the right playbook, but I think anybody, most people at the Fed, most people on the board of governors and the FOMC would acknowledge that the policy itself ... By the way, not being damaging. And by the way, I exclude everything the Fed does in times of emergency. What they did in the first quarter of 2020, obviously, was clearly necessary. But the protracted period of QE, the fear of removing it, those of us who are active in the markets knew that QE was not the issue. And right now, we're talking about a little spike up in interest rates from 1.5 to 1.85 in the 10-year over the last few days. That's the market doing a knee jerk. And that, too, will pass because, again, it's supply and demand. It is simple supply and demand in the treasury market.

Beckworth: Well, Dan, I agree with that largely. And I think it'll be interesting to see what happens to monetary policy moving forward. If we're stuck in this low-interest-rate world, will they get new tools? Will there be greater coordination? We saw greater coordination during the pandemic, but will this be something that occurs on a sustained basis? Or will they be given new tools, negative interest rates, as you mentioned? Maybe they'll be allowed to buy other assets beyond government securities. But it'll be interesting to see how this dynamic plays out over time. But with that, our time is up. Our guest today has been Dan Alpert. Dan, thank you so much for coming it on the show.

Alpert: Enjoyed it. Thank you.

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