David Bahnsen Explains Our Inflation Problem

BUCK: David Bahnsen is with us now. He is the founder, managing partner, and chief investment officer of The Bahnsen Group, wealth management firm with over $3 billion in client capital. And he’s got a great piece, A Comprehensive Primer on the Fed and Inflation on National Review. David, thanks for being with us.

BAHNSEN: Thanks for having me.

BUCK: What does everyone need to know about inflation? It’s numbers, math, people can kind of say, yeah, you know, I guess “it is what it is.” It’s gonna be pretty big. Why does this matter to folks?

BAHNSEN: The number-one thing I want people to understand is inflation is not new. All of a sudden in the last year, for a combination of reasons, it really isn’t just one thing. But for, you know, let’s say forgive different things, the inflation number got noticeable. People feel it now.

And yet, ideally, if you’re a central banker and a politician who wants to live above your means, the greatest way to deal with that excessive debt is to inflate over time at a number that will not offend people, cause them to do what we’re doing now, right, getting up in arms about it with 5, 6, 7% inflation.

So if you can just do 2 to 3% every year, you’re still gonna get to borrow a hundred dollars and pay back $70. It’s a pretty good deal.

You’re gonna inflate away 30% of the value over a certain period of time and that’s why politicians like inflation but I think people have to understand that we are dealing not merely with an inflation problem, right now food and gas prices have gone up.

We’re dealing with a problem that existed way before Biden and way before covid, and that is no economic growth. We have averaged half of our annual growth rate that we were used to since World War II. We’ve averaged half of it since the financial crisis.

CLAY: David, how do we get our growth rate back up, obviously? That’s been a massive political land mine for years and years. And also, this is kind of a second part of this, how do you do it, how do you get the growth rate back up with not at this point accelerating inflation simultaneously because that seems to be a really difficult putt to sink?

BAHNSEN: Yeah, well, let’s start with that second one ’cause it’s a really important thing economically and this is sort of the thing I’m most passionate about. Growth is not inflationary. Inflation is inflationary. Having too much money chasing too few goods is inflationary. Having more goods and more services is not inflationary.

Production, what we call the supply side of the economy, this is what Ronald Reagan did, is he boosted the supply side of the economy and it was counterinflationary because we had so much more activity, more wealth creation, more goods and services. That is not inflationary. And this whole idea what they call a Phillips curve, well, where if people are making more money, that must be inflationary and full employment is bad, it creates inflation, it is not true.

Now, what you want is not inflationary growth, but growth in and of itself is not inflationary. How do you create growth? It’s called incentives. Humans want to grow. Humans want to act. This is how God made us. But what you have to have is the right incentives. And our whole economic framework in our country for a hundred years has been based on incentivizing people to consume. It’s nonsense.

Do you wake up every day needing to be told to eat a good breakfast or really enjoy your dinner? We don’t need incentives to consume. We need incentives to produce. And this is how you get the growth rate up. You get an energy sector that wants to compete with Russia and Middle Eastern oligarchs. You get tax structure, regulatory structures that motivates people to start new businesses. That’s counterinflationary. That is what the meat of the economy is.

BUCK: David Bahnsen with us now, founder, managing partner, chief executive officer of The Bahnsen Group, he’s written A Comprehensive Primer on the Fed and Inflation. David, how bad do you think inflation’s going to get this year and how much of this is really attributable to Democrat policies, regulations, and actions, particularly in the last 12 months or so?

BAHNSEN: So, I’m gonna say something that makes a lot of my Republican friends upset and then is gonna make my Democrat friends, if I had too many of them, really upset.

I actually do not think the biggest cause of the inflation has been the Fed and has been Biden’s huge spending bill last year. I do think it’s government policy. But I think it’s rather than just that extra liquidity they let slosh around, which, quite candidly, after the first round of people spending it, it really kind of stopped getting spent. We have what’s called a very low velocity of the money.

The problem was the labor shortages, that we incentivized people to not work, to not go back to work, to not work more hours. And I think that is a government policy problem, and it was incredibly inflationary because we were unable to meet the demand that was inevitably gonna surge after they finally reopened our economy.

I don’t think the actual headline inflation rate goes a lot higher from here, but what’s gonna happen in my opinion is it will come down near the end of the year in what we call disinflation. The rate 6 inflation is still going higher but it’s at a lower level than the year before, okay?

So, let’s say you get 4 or 5% inflation. That’s lower than 7 but it’s a lot higher than 2 and that’s where we were before covid. Actually, they couldn’t even get to 2% before that.

So, ultimately I think that what we’re gonna see is the Fed take a victory lap that they brought the inflation rate down from what it was and yet is still gonna leave us with higher food prices, higher energy prices because they haven’t got to the core of the problem which is supply-side.

CLAY: David, there seems to be an expectation now or at least increasing expectation that we may be headed for inflation, based on the challenges that Fed is going to have trying to bring down inflation —

BUCK: A recession.

CLAY: Yeah, recession.

BUCK: You said inflation.

CLAY: Yeah, we’ve already got inflation. Do you think we’re headed for recession or do you think we’re going to be able to avoid it?

BAHNSEN: Well, I don’t know that they’ll be able to avoid it. But here’s what I believe. The Fed will blink.

I do not believe that the Fed is gonna be willing — now, will it be too little, too late? It’s very possible. But I think that the history of the Fed going back to the late nineties and where he they coined this term, the Greenspan Put, I think when credit spread widens — once the stock market starts getting hit, all things that haven’t really happened yet, when they start happening I think all of a sudden the Fed will find a way to chicken out.

We have got to normalize monetary policy, but the reason is not just because of inflation. The reason is that it is totally unnatural. It’s distorting economic activity and leaves the Fed without any bullets in their gun. What if we have a real emergency, you know, like covid, a financial crisis, a 9/11.

These different things that have happened over the last 20 years, the Fed can’t do anything about it if they’re at zero percent or 1%. They have to normalize, but they’re so afraid of disrupting the stock market, the housing market; so I don’t know if we’ll end up seeing a recession or not. It’s hard to predict that with 3 or 4% unemployment, and yet I don’t believe that if they don’t address the supply side of the economy then even if we don’t see recession we’re gonna see really unimpressive growth and that’s, frankly, just as bad for our kids and grandkids.

BUCK: David Bahnsen, founder, managing partner of The Bahnsen Group. David, thanks for being with us here on Clay and Buck.

BAHNSEN: Thanks for having me.