May 1, 2026
30. Rates Up, Inflation Back, and Who’s Really Running the Fed
Six months ago, the Fed dot plot was pointing toward rate cuts. The consensus on Wall Street, in academia, and in financial media was convergent: relief was coming for borrowers. Professor Edwin Burton saw it differently.
In this episode of Rubber Meets the Road Economics, Burton — one of the University of Virginia's most respected financial economists — returns to explain why that consensus has now fully reversed, and what it signals for the months ahead. The Fed held its target this week at 3.5–3.75%. But the real story isn't what the Fed did. It's what the market is doing — and why Burton believes the pressure is decisively upward on rates.
The conversation covers:
- Why money supply growth jumping from ~3–4% to 7% annually in just three months is the real inflation indicator nobody's watching
- Burton's revised inflation forecast: from 2.5% to approximately 4% by year-end
- How the Iran War's closure of the Strait of Hormuz is affecting Brent crude (briefly $128/barrel) — and why America is relatively insulated while Europe and Asia aren't
- The American household budget crisis hiding in plain sight: $10,000/year in property taxes, $20–25,000/year in healthcare, on a median Virginia income of $80,000
- Why Jamie Dimon's bond crisis warning deserves a serious hearing — and why the nation's liquidity problem matters more than its asset base
- The Spirit Airlines bailout debate: why bankruptcy is the right tool, and why the government should get out of the way
- The single most clarifying argument in this episode — that interest rates are set by supply and demand in the $14 trillion daily repo market, not by whoever carries a briefcase into the Eccles Building
- Why Kevin Warsh's simultaneous goals of lower rates and a smaller Fed balance sheet are "two incompatible views" — and why he'll find that out fast
This episode is essential listening for investors recalibrating bond exposure, economists tracking monetary transmission, and anyone trying to understand why economic aggregates look reasonable while family budgets feel impossible.
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Welcome to the Rubber Meets the Road Economics, the podcast where we explore the driving forces behind today's economy and their real world implications.
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Join Investor Hunter Craig as he interviews Professor Edwin Burton from the University of Virginia, delving into the complexities of economics with clarity and insight.
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Whether you're an economics enthusiast or just curious about how economic policies affect your daily life, you're in the right place.
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Let's get started.
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We're here today.
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Rubber meets the road Economics with world renowned Professor Edwin t Burton.
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Professor today, the yield on the US Treasury two month 3.68%
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yield on the US Treasury 10 year.
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4.39%.
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Six months ago, everybody was talking about reducing rates.
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Now they're talking about raising rates.
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Rates are rising.
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Moderately professor, what's going on in the very short end? The fed's current target was kept this week, and that's three and a half to three and three quarters.
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That's a target for funds, but it's really the target for the repo market.
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And ultimately the bills in the repo market trade essentially the same.
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So everything in the short end and the two and three month end is about 360.
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Somewhere in that area, some maybe 365.
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That means no real change and the pressure's up.
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The pressure is for higher rates, not lower rates.
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So there's a kind of a sea change in opinion by Fed Watchers that the next move is more likely to be up than down.
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And that I think is, is correct.
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the Fed has been under enormous pressure.
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And by the way, some of the central banks and other countries in, both England and in the Euro zone, the Euro Central bank rate pressure is pushing up in those countries as well.
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And what's happening is the central banks are now beginning to accelerate their, money supply.
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a little bit, not a huge amount, but a little bit.
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Because they're, essentially in the short end of the market trying to keep the rates from exploding.
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And that means you buy short end paper, either treasuries or you, become active in the repo market in that same direction, where effectively you're buying things that pushes rates back down.
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So the pressure's on.
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It's not like the economy is slowing and rates are falling.
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They're not, the economy is still, Pushing along at about a 2% annualized rate.
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and that seems to be maintained into the second quarter here, and there's every likelihood that'll probably continue into the third and fourth quarter.
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So that means no, real relief and mortgage rates have now popped a little bit more.
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the 15 year mortgage is up to six and a half, and the 30 year is six and three quarters.
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Those are.
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Pretty high rates, but the market's getting used to it and you're beginning to have a little bit more activity in the housing market, even at these kind of numbers.
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So what was built in, as we got into the beginning of the year, everyone was looking for rates to fall.
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People had to dot plot where If you're on the federal open market committee, you submit your estimates for how many rate cuts there're gonna be.
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And, most people were guessing, two for the year, some were guessing three for the year.
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Now the guesses are by and large, zero for the year.
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And, people are talking about two rate cuts, into 27.
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I don't know, you look at the budget situation, I think the story for the next two, three years, unless the economy weakens dramatically, the story's gonna be pressure upward on rates.
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We're not done with that, and I think there's a little bit of pressure coming now on the inflation front.
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I had thought the last time we met that inflation would probably look like two and a half percent at the end of the year, even after you wash out all the energy price hikes here over the next two or three months.
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I don't know.
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I think it now looks more like 4% because there's been an increase in the money supply growth rate.
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From around three or 4% to the last three months, they're pumping it at 7% annual rate.
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I think that's gonna continue 'cause they're, what they're trying to do is to keep the rates from going up in the short end.
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They're trying desperately to hold the three and a half to three and three quarter range on the target funds rate and.
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If I had to predict, I would guess they're not gonna be able to do that.
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And so I think this is a guess, not a very scientific prediction, but it looks like all the pressures to push the rates higher.
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And so it's very likely that before you get to the end of the year, if the economy's still growing, you're gonna see three and three quarters to four.
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You're gonna see them reverse coerce on lowering the target range and recognize that.
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These rates are moving higher.
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you're very close in the 30 year bond to 5%.
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You're within two basis points of that and it traded above 5% yesterday.
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so you might see the 30 year push through five.
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the 10 year may push its way toward five.
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Uh, maybe as high as four and a half to five area.
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I think there are a couple surprises here.
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One is that the economy is as strong as it is.
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I think a lot of us may included.
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Thought by now the economy might be a little bit weaker.
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The other big surprise is the muted response to the, dramatic increase in the price of oil.
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It's almost doubled since, February, and yet the stock market is about 4% higher than it was when it happened, when, Iran War started.
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So that's a surprise.
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We would've thought it.
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115, $120 rent, crude oil.
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The stock market would get whacked, but it, the stock market's doing fine.
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Professor, we're at war with Iran.
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What effect does the war have on the US economy? The war is fascinating actually.
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uh, it's a great tragedy, but on the other hand, from an analytical standpoint, it's quite interesting and the main economic impact on the world is the cutting off of supplies coming through the strait of Horus, and that's pushed, Brent crude prices briefly.
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They traded at 1 28 yesterday, but then they came back off of that to about one 16 on the close.
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so the big impact is price of oil.
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That has a huge impact on Asia.
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and it has a very big impact on Europe, Europe's besieged by the cost of the Ukrainian effort, against Russia, which more and more of the expenditures on that are being pushed away from the US and on to Europe.
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the US is affected mainly by the high price of oil, but there'll be no oil shortage in the us.
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We produce enough to satisfy our own needs, but if we do export more, that could, put a little pressure On us, but us is relatively insulated from problems of a major oil spike, I think, but the rest of the world isn't.
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and so, that's the pressure that's on the Trump administration.
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It's not really so much in the us.
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People talk about the high price at the pump, but I think American, consumers are honestly more affected by the increase in healthcare costs and the increase in property taxes and things like that, which are much larger items than their budget.
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Than what gas is the, at the, pump in their cars.
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you look at the numbers, the average home in America costs 400,000 a year Average property taxes in suburban America, two and a half percent a year.
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That's $10,000 every single year.
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That's a big number.
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that's much more, uh, problem for the average American budget.
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And I think healthcare, same deal.
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Healthcare insurance is just through the roof.
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The healthcare costs are through the roof, and they can amount to as much as 20, 25,000 a year for a family of four.
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Now, these are devastating numbers and so if you look at a state like Virginia, where the average family income is about 80,000 a year.
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If you've got $10,000 in property taxes going out every year, 20,000 in health insurance going out, every year, social security on.
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An income like that is about roughly around 10,000.
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Close a little bit more than that.
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All of a sudden you've got 40,000 disappearing and you haven't even paid your income tax and you haven't even started buying groceries or anything else.
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So I think the economy is doing okay, but I think the average family is not doing okay.
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This is a very tough economy for the average family and for.
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Low income families and there's not much relief unless you can figure out a way to make healthcare a little bit cheaper.
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And unless you can figure out a way to get property taxes down, shaving 50 cents off the price of gasoline isn't really gonna move the needle.
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That's not where the real pain is right now.
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Well, quite to the contrary, gas prices are expensive, but food's going higher.
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Unbelievably real estate taxes are going higher.
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Americans are feeling the punch.
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So Jamie Diamond this week warned of some kind of bond crisis.
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He said rising global government debt, including the US debt could lead to some kind of bond crisis.
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We're currently the US 40 trillion in debt, running an annual deficit of almost 2 trillion.
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Bringing in roughly 5 trillion in revenue, do you agree with Jamie Doon? A hundred percent.
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I think he's absolutely right.
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The reason you have economic catastrophes and bankruptcies and everything else is not what people commonly think.
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They often think, the assets are not as big as the liabilities, and that's how you go broke.
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That's not how you go broke.
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Your assets can be way over your liabilities.
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You go broke, but you don't have any liquidity.
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Can't pay the interest on the debt.
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And the US taxpayers gotta find a way to pay the interest on US treasuries.
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I remember an interesting debate I had with Steve Moore here in Charlottesville some years ago.
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I raised the issue that the biggest problem the US faces is the national debt.
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And he said, no, we've got so much, wealth in this country.
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We have all these land, raw land out in Arizona and Wyoming.
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I said, what would be the price of that if you sold it all in the next 15 minutes? That's always the problem.
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You may have a lot of assets.
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But if you have to liquefy them in the next 15 minutes, you're probably not gonna get a hundred percent value on it.
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In fact, you probably have to give a very big discount, to start doing that.
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And it, it's probably not a good plan to wanna sell half of America raw land to, finance.
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The national debt might be a little better to look very hard at the expenditures and ask yourself why you have to spend this much money.
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The government does a whole lot of things it shouldn't be doing.
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And by the way, Let me cite one that's coming up.
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Spirit Airlines is falling apart as people know, watching the papers and the administrations propose stepping up to the plate and buying 'em.
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That's a real mistake.
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They should let Spirit Airlines go bankrupt.
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those of you out listening to this, have you ever flown on Delta Airlines? Yeah, I bet you have.
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And not only that, Delta Airlines could have been bankrupt when you flew it.
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There's nothing wrong with a bankrupt airline.
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The debt holders take over, continue to fly the plane.
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And that's what would happen with Spirit.
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either that or they would sell all the planes to some other airline and you'd hop right on that other airline.
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thing about Spirit is the equity holders who could've made a lot of money if Spirit worked, it didn't work.
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So they should take the head, that's what bankruptcy is, and they should get out of the way, turn the company over to the debt holders, redo the balance sheet.
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And either emerged as a new company as Delta did, as, United did and, and many other airlines have done.
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I think almost every American over the age of 40 has stepped onto the plane of a bankrupt airline while it was bankrupt.
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They didn't care.
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They flew it.
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It's not the end of the world.
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the, the Trump administration should step away from that and not bankroll the spirit, let it go.,
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Those planes won't disappear.
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They won't disintegrate, and those employees, they'll get back to work.
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It's not like the employees will all go away.
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Those are, routes that people need planes to be flying 'em and they'll be back flying 'em.
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Somebody else might not be spirit, might be somebody else.
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There was an opportunity, as, you know, to sell to JetBlue I think the Biden administration made a very serious error in not letting that transaction go through.
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there's way too much government interference when company A wants to buy company B.
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Maybe the government should, look the other way or take a holiday and let some of these things happen.
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Let the free market, if company A wants to buy company B, let it happen.
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now look at the outcome.
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You've got, spirit can't make it, but I think the Trump administration is wrong with the bailout.
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Bailouts are a mistake.
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That's why we have bankruptcy.
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Bankruptcy is a great process and many, many wonderful companies have gone through it and come out of it, and certainly many airlines have gone through it.
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Professor, why do so many people in the finance community believe the Federal Reserve sets rates? Clearly, they can move rates by buying treasuries or enter into the reverse repo market.
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If the Fed could set rates, why, why not set the rate at zero if there are no economic consequences? And we all live happily ever after.
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You know, it's funny, when we teach, 18 and 19 year olds, economics, we teach 'em that prices are set by supply and demand.
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So if you wanna know what the price of car, what determines it, you look at the supply of cars and you look at the demand for cars and where they intersect.
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That's the so-called equilibrium price.
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When we look at interest rates, we don't think so.
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We think there's a wizard of laws sitting behind a curtain and I mean, he determines it, or she or whoever happens to be sitting behind the curtain.
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I don't know why people believe that interest rates are set by the market, the biggest competitive market in the world.
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It's not the New York Stock Exchange.
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It's the overnight repo market that's multiple in size compared to market.
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How big market, how big is that Professor It can be as many as 14 trillion on a given day.
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And of course the New York Stock Exchange is nothing like that.
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And that's a very competitive market.
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people do huge size.
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I mean, right here at the University of Virginia, I'm sure our people average probably $500 million a day in the repo market.
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That's a lot more than they trade stocks every day.
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so it's.
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surprising that when people ask what determines overnight interest rates, they think it's some human being somewhere.
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Would you say that about cars? Would you know what determines the price of a Chevrolet? Well, it's the guy in Arizona who's got a, crystal ball, and he, he tells us what it is.
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I mean, it's ridiculous.
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It's a supply and demand, and what's happening is the demand for Loanable funds is going through the roof.
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You've got the government borrowing, you've got the hyperscalers borrowing like crazy to build data centers all over the world.
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People are borrowing Europe's, borrowing like crazy.
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And guess what? The supply is kind of fixed by the aggregate savings of the entire world.
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So if you have a huge increase in demand and the supply is fixed, what happens? Well, if I ask that question of an 18-year-old sitting in my freshman, economics class, he'd say, oh, I guess the price goes up.
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Correct, right answer.
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But that's not the answer any of the media gives.
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If they wanna know which way rates are gonna go, follow that guy around with a briefcase.
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Oh, see that old guy with glasses, A lawyer there.
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And Jay Powell, he's a lawyer by background.
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Not surprising, he doesn't know a lot of economics.
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And by the way, wash a lawyer.
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Then incoming one as well.
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He is not an economist.
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but the truth is supply and demand determine interest rates.
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And demand is outstripping.
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Supply rates are headed up.
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Lemme give you another area where this is true.
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What if you wanted to know the price of X, you'd do the same thing, wouldn't you? You'd look at demand and supply for X and come up with a price, not if it's the money supply.
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If you want know what happens to inflation, which is the change in the price of money.
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The last thing anybody looks at is the money supply.
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It's really strange.
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even in the academic literature, you never see any references to the money supply.
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And Jay Powell never mentioned it once in all the years he sat on the Federal Reserve.
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Held press conferences.
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When he talked about what determines the price of money, the one thing he never mentioned was the supply and demand for money.
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No, it was determined by the labor market.
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Oh, well look here.
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This is what's happening in the labor market, says Jay Powell.
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Any other market, it's like you wanna know why peanuts cost what they do.
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Well, let's go look at what's happening in the sugar market.
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Look at the sugar market demand's going up, supplies going this way that determines the price of peanuts.
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It's the same kind of analysis we have on inflation.
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We look at all these other markets and we start talking about how inflation's determined by all these other markets.
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Well, it's not Inflation took off in this country after 2020 because we increased the money supply by 50% in 16 months.
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That meant the price of money collapsed.
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That's caused inflation.
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Inflation is a decline in the value of money.
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That's what it is by definition.
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And, we may be looking at that again.
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The money supply slowed down to the three 4% area in the US and that saw a softening of inflation, but now it's ticking up again.
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Now people have decided increasing the money supply is costless.
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We can just increase the money supply we want.
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There'll be no effect.
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And so they're at it again.
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And if they continue to do that, inflation will come back.
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I'm now guessing we're looking at maybe about a 4% inflation rate when we hit the end of the year, but that's not baked into the current.
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Market if we have 4% inflation when we hit December, after all the energy numbers have washed through the economy in the summer, 4% inflation that implies higher than 5% 30 year, that implies higher than four and a half percent on the 10 year, and that's higher than where we are today.
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So if, life is nothing but guesswork, if I had to guess, looking out, I think the pressure's on rates going higher and I think.
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The subdued inflation story is probably over.
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Uh, you're gonna see bad numbers in the summer.
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I wouldn't pay a lot of attention to those because energy is gonna affect the CPI numbers that you look at.
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But once you wash through all of those, I think you're gonna see a little bit of a resurgence.
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Not a big one, but a little bit of a resurgence.
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unless Wash decides he wants lower rates.
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Now, if the president gets washed to pursue lower rates, there's only one way to do it.
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You have to increase the money supply pretty dramatically.
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And I'm not sure how much you'd have to do, maybe, depending on what you want, if you want a quarter point drop in, the target range, that probably would cost you a trillion and a half, 2 trillion in new money.
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That'd be about a 10% increase in the money supply.
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Which makes inflation worse.
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Over time.
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Oh yeah.
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And raises rates later.
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And, interest rates go up when inflation goes up.
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So, Warsh has two incompatible, positions about the Federal Reserve.
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He wants lower rates, but he also wants a smaller balance sheet.
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Well, a smaller balance sheet means you've gotta sell treasuries.
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If you sell treasuries, does that mean their rates go down? I don't think so.
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The way you get rates down is buy treasuries.
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If you sell treasuries, the rates are gonna go up and so will every other short term instrument.
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So you can't, with your right hand sell treasuries and with your left hand expect rates to go down.
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those two views are incompatible he'll find that out right away.
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Professor, thank you.
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These are volatile times more to come.
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We need to do a podcast in a week or so about the Iran war.
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Thank you, professor.
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Thank you, hunter.
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Always a pleasure.
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Thank you for joining us for the Rubber Meets the Road Economics Podcast.
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If you enjoyed the discussion, remember to subscribe and stay updated with future episodes.
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Join us soon for more conversations about modern economics on the rubber meets the Road Economics Podcast.
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Welcome to the Rubber Meets the Road Economics, the podcast where we explore the driving forces behind today's economy and their real world implications.
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Join Investor Hunter Craig as he interviews Professor Edwin Burton from the University of Virginia, delving into the complexities of economics with clarity and insight.
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Whether you're an economics enthusiast or just curious about how economic policies affect your daily life, you're in the right place.
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Let's get started.
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We're here today.
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Rubber meets the road Economics with world renowned Professor Edwin t Burton.
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Professor today, the yield on the US Treasury two month 3.68%
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yield on the US Treasury 10 year.
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4.39%.
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Six months ago, everybody was talking about reducing rates.
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Now they're talking about raising rates.
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Rates are rising.
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Moderately professor, what's going on in the very short end? The fed's current target was kept this week, and that's three and a half to three and three quarters.
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That's a target for funds, but it's really the target for the repo market.
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And ultimately the bills in the repo market trade essentially the same.
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So everything in the short end and the two and three month end is about 360.
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Somewhere in that area, some maybe 365.
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That means no real change and the pressure's up.
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The pressure is for higher rates, not lower rates.
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So there's a kind of a sea change in opinion by Fed Watchers that the next move is more likely to be up than down.
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And that I think is, is correct.
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the Fed has been under enormous pressure.
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And by the way, some of the central banks and other countries in, both England and in the Euro zone, the Euro Central bank rate pressure is pushing up in those countries as well.
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And what's happening is the central banks are now beginning to accelerate their, money supply.
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a little bit, not a huge amount, but a little bit.
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Because they're, essentially in the short end of the market trying to keep the rates from exploding.
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And that means you buy short end paper, either treasuries or you, become active in the repo market in that same direction, where effectively you're buying things that pushes rates back down.
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So the pressure's on.
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It's not like the economy is slowing and rates are falling.
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They're not, the economy is still, Pushing along at about a 2% annualized rate.
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and that seems to be maintained into the second quarter here, and there's every likelihood that'll probably continue into the third and fourth quarter.
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So that means no, real relief and mortgage rates have now popped a little bit more.
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the 15 year mortgage is up to six and a half, and the 30 year is six and three quarters.
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Those are.
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Pretty high rates, but the market's getting used to it and you're beginning to have a little bit more activity in the housing market, even at these kind of numbers.
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So what was built in, as we got into the beginning of the year, everyone was looking for rates to fall.
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People had to dot plot where If you're on the federal open market committee, you submit your estimates for how many rate cuts there're gonna be.
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And, most people were guessing, two for the year, some were guessing three for the year.
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Now the guesses are by and large, zero for the year.
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And, people are talking about two rate cuts, into 27.
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I don't know, you look at the budget situation, I think the story for the next two, three years, unless the economy weakens dramatically, the story's gonna be pressure upward on rates.
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We're not done with that, and I think there's a little bit of pressure coming now on the inflation front.
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I had thought the last time we met that inflation would probably look like two and a half percent at the end of the year, even after you wash out all the energy price hikes here over the next two or three months.
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I don't know.
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I think it now looks more like 4% because there's been an increase in the money supply growth rate.
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From around three or 4% to the last three months, they're pumping it at 7% annual rate.
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I think that's gonna continue 'cause they're, what they're trying to do is to keep the rates from going up in the short end.
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They're trying desperately to hold the three and a half to three and three quarter range on the target funds rate and.
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If I had to predict, I would guess they're not gonna be able to do that.
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And so I think this is a guess, not a very scientific prediction, but it looks like all the pressures to push the rates higher.
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And so it's very likely that before you get to the end of the year, if the economy's still growing, you're gonna see three and three quarters to four.
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You're gonna see them reverse coerce on lowering the target range and recognize that.
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These rates are moving higher.
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you're very close in the 30 year bond to 5%.
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You're within two basis points of that and it traded above 5% yesterday.
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so you might see the 30 year push through five.
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the 10 year may push its way toward five.
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Uh, maybe as high as four and a half to five area.
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I think there are a couple surprises here.
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One is that the economy is as strong as it is.
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I think a lot of us may included.
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Thought by now the economy might be a little bit weaker.
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The other big surprise is the muted response to the, dramatic increase in the price of oil.
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It's almost doubled since, February, and yet the stock market is about 4% higher than it was when it happened, when, Iran War started.
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So that's a surprise.
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We would've thought it.
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115, $120 rent, crude oil.
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The stock market would get whacked, but it, the stock market's doing fine.
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Professor, we're at war with Iran.
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What effect does the war have on the US economy? The war is fascinating actually.
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uh, it's a great tragedy, but on the other hand, from an analytical standpoint, it's quite interesting and the main economic impact on the world is the cutting off of supplies coming through the strait of Horus, and that's pushed, Brent crude prices briefly.
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They traded at 1 28 yesterday, but then they came back off of that to about one 16 on the close.
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so the big impact is price of oil.
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That has a huge impact on Asia.
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and it has a very big impact on Europe, Europe's besieged by the cost of the Ukrainian effort, against Russia, which more and more of the expenditures on that are being pushed away from the US and on to Europe.
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the US is affected mainly by the high price of oil, but there'll be no oil shortage in the us.
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We produce enough to satisfy our own needs, but if we do export more, that could, put a little pressure On us, but us is relatively insulated from problems of a major oil spike, I think, but the rest of the world isn't.
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and so, that's the pressure that's on the Trump administration.
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It's not really so much in the us.
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People talk about the high price at the pump, but I think American, consumers are honestly more affected by the increase in healthcare costs and the increase in property taxes and things like that, which are much larger items than their budget.
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Than what gas is the, at the, pump in their cars.
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you look at the numbers, the average home in America costs 400,000 a year Average property taxes in suburban America, two and a half percent a year.
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That's $10,000 every single year.
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That's a big number.
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that's much more, uh, problem for the average American budget.
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And I think healthcare, same deal.
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Healthcare insurance is just through the roof.
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The healthcare costs are through the roof, and they can amount to as much as 20, 25,000 a year for a family of four.
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Now, these are devastating numbers and so if you look at a state like Virginia, where the average family income is about 80,000 a year.
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If you've got $10,000 in property taxes going out every year, 20,000 in health insurance going out, every year, social security on.
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An income like that is about roughly around 10,000.
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Close a little bit more than that.
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All of a sudden you've got 40,000 disappearing and you haven't even paid your income tax and you haven't even started buying groceries or anything else.
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So I think the economy is doing okay, but I think the average family is not doing okay.
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This is a very tough economy for the average family and for.
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Low income families and there's not much relief unless you can figure out a way to make healthcare a little bit cheaper.
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And unless you can figure out a way to get property taxes down, shaving 50 cents off the price of gasoline isn't really gonna move the needle.
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That's not where the real pain is right now.
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Well, quite to the contrary, gas prices are expensive, but food's going higher.
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Unbelievably real estate taxes are going higher.
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Americans are feeling the punch.
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So Jamie Diamond this week warned of some kind of bond crisis.
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He said rising global government debt, including the US debt could lead to some kind of bond crisis.
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We're currently the US 40 trillion in debt, running an annual deficit of almost 2 trillion.
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Bringing in roughly 5 trillion in revenue, do you agree with Jamie Doon? A hundred percent.
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I think he's absolutely right.
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The reason you have economic catastrophes and bankruptcies and everything else is not what people commonly think.
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They often think, the assets are not as big as the liabilities, and that's how you go broke.
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That's not how you go broke.
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Your assets can be way over your liabilities.
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You go broke, but you don't have any liquidity.
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Can't pay the interest on the debt.
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And the US taxpayers gotta find a way to pay the interest on US treasuries.
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I remember an interesting debate I had with Steve Moore here in Charlottesville some years ago.
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I raised the issue that the biggest problem the US faces is the national debt.
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And he said, no, we've got so much, wealth in this country.
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We have all these land, raw land out in Arizona and Wyoming.
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I said, what would be the price of that if you sold it all in the next 15 minutes? That's always the problem.
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You may have a lot of assets.
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But if you have to liquefy them in the next 15 minutes, you're probably not gonna get a hundred percent value on it.
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In fact, you probably have to give a very big discount, to start doing that.
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And it, it's probably not a good plan to wanna sell half of America raw land to, finance.
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The national debt might be a little better to look very hard at the expenditures and ask yourself why you have to spend this much money.
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The government does a whole lot of things it shouldn't be doing.
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And by the way, Let me cite one that's coming up.
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Spirit Airlines is falling apart as people know, watching the papers and the administrations propose stepping up to the plate and buying 'em.
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That's a real mistake.
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They should let Spirit Airlines go bankrupt.
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those of you out listening to this, have you ever flown on Delta Airlines? Yeah, I bet you have.
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And not only that, Delta Airlines could have been bankrupt when you flew it.
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There's nothing wrong with a bankrupt airline.
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The debt holders take over, continue to fly the plane.
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And that's what would happen with Spirit.
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either that or they would sell all the planes to some other airline and you'd hop right on that other airline.
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thing about Spirit is the equity holders who could've made a lot of money if Spirit worked, it didn't work.
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So they should take the head, that's what bankruptcy is, and they should get out of the way, turn the company over to the debt holders, redo the balance sheet.
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And either emerged as a new company as Delta did, as, United did and, and many other airlines have done.
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I think almost every American over the age of 40 has stepped onto the plane of a bankrupt airline while it was bankrupt.
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They didn't care.
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They flew it.
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It's not the end of the world.
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the, the Trump administration should step away from that and not bankroll the spirit, let it go.,
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Those planes won't disappear.
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They won't disintegrate, and those employees, they'll get back to work.
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It's not like the employees will all go away.
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Those are, routes that people need planes to be flying 'em and they'll be back flying 'em.
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Somebody else might not be spirit, might be somebody else.
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There was an opportunity, as, you know, to sell to JetBlue I think the Biden administration made a very serious error in not letting that transaction go through.
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there's way too much government interference when company A wants to buy company B.
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Maybe the government should, look the other way or take a holiday and let some of these things happen.
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Let the free market, if company A wants to buy company B, let it happen.
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now look at the outcome.
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You've got, spirit can't make it, but I think the Trump administration is wrong with the bailout.
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Bailouts are a mistake.
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That's why we have bankruptcy.
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Bankruptcy is a great process and many, many wonderful companies have gone through it and come out of it, and certainly many airlines have gone through it.
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Professor, why do so many people in the finance community believe the Federal Reserve sets rates? Clearly, they can move rates by buying treasuries or enter into the reverse repo market.
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If the Fed could set rates, why, why not set the rate at zero if there are no economic consequences? And we all live happily ever after.
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You know, it's funny, when we teach, 18 and 19 year olds, economics, we teach 'em that prices are set by supply and demand.
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So if you wanna know what the price of car, what determines it, you look at the supply of cars and you look at the demand for cars and where they intersect.
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That's the so-called equilibrium price.
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When we look at interest rates, we don't think so.
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We think there's a wizard of laws sitting behind a curtain and I mean, he determines it, or she or whoever happens to be sitting behind the curtain.
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I don't know why people believe that interest rates are set by the market, the biggest competitive market in the world.
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It's not the New York Stock Exchange.
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It's the overnight repo market that's multiple in size compared to market.
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How big market, how big is that Professor It can be as many as 14 trillion on a given day.
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And of course the New York Stock Exchange is nothing like that.
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And that's a very competitive market.
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people do huge size.
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I mean, right here at the University of Virginia, I'm sure our people average probably $500 million a day in the repo market.
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That's a lot more than they trade stocks every day.
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so it's.
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surprising that when people ask what determines overnight interest rates, they think it's some human being somewhere.
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Would you say that about cars? Would you know what determines the price of a Chevrolet? Well, it's the guy in Arizona who's got a, crystal ball, and he, he tells us what it is.
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I mean, it's ridiculous.
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It's a supply and demand, and what's happening is the demand for Loanable funds is going through the roof.
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You've got the government borrowing, you've got the hyperscalers borrowing like crazy to build data centers all over the world.
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People are borrowing Europe's, borrowing like crazy.
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And guess what? The supply is kind of fixed by the aggregate savings of the entire world.
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So if you have a huge increase in demand and the supply is fixed, what happens? Well, if I ask that question of an 18-year-old sitting in my freshman, economics class, he'd say, oh, I guess the price goes up.
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Correct, right answer.
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But that's not the answer any of the media gives.
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If they wanna know which way rates are gonna go, follow that guy around with a briefcase.
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Oh, see that old guy with glasses, A lawyer there.
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And Jay Powell, he's a lawyer by background.
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Not surprising, he doesn't know a lot of economics.
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And by the way, wash a lawyer.
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Then incoming one as well.
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He is not an economist.
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but the truth is supply and demand determine interest rates.
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And demand is outstripping.
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Supply rates are headed up.
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Lemme give you another area where this is true.
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What if you wanted to know the price of X, you'd do the same thing, wouldn't you? You'd look at demand and supply for X and come up with a price, not if it's the money supply.
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If you want know what happens to inflation, which is the change in the price of money.
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The last thing anybody looks at is the money supply.
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It's really strange.
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even in the academic literature, you never see any references to the money supply.
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And Jay Powell never mentioned it once in all the years he sat on the Federal Reserve.
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Held press conferences.
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When he talked about what determines the price of money, the one thing he never mentioned was the supply and demand for money.
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No, it was determined by the labor market.
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Oh, well look here.
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This is what's happening in the labor market, says Jay Powell.
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Any other market, it's like you wanna know why peanuts cost what they do.
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Well, let's go look at what's happening in the sugar market.
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Look at the sugar market demand's going up, supplies going this way that determines the price of peanuts.
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It's the same kind of analysis we have on inflation.
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We look at all these other markets and we start talking about how inflation's determined by all these other markets.
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Well, it's not Inflation took off in this country after 2020 because we increased the money supply by 50% in 16 months.
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That meant the price of money collapsed.
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That's caused inflation.
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Inflation is a decline in the value of money.
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That's what it is by definition.
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And, we may be looking at that again.
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The money supply slowed down to the three 4% area in the US and that saw a softening of inflation, but now it's ticking up again.
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Now people have decided increasing the money supply is costless.
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We can just increase the money supply we want.
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There'll be no effect.
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And so they're at it again.
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And if they continue to do that, inflation will come back.
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I'm now guessing we're looking at maybe about a 4% inflation rate when we hit the end of the year, but that's not baked into the current.
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Market if we have 4% inflation when we hit December, after all the energy numbers have washed through the economy in the summer, 4% inflation that implies higher than 5% 30 year, that implies higher than four and a half percent on the 10 year, and that's higher than where we are today.
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So if, life is nothing but guesswork, if I had to guess, looking out, I think the pressure's on rates going higher and I think.
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The subdued inflation story is probably over.
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Uh, you're gonna see bad numbers in the summer.
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I wouldn't pay a lot of attention to those because energy is gonna affect the CPI numbers that you look at.
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But once you wash through all of those, I think you're gonna see a little bit of a resurgence.
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Not a big one, but a little bit of a resurgence.
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unless Wash decides he wants lower rates.
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Now, if the president gets washed to pursue lower rates, there's only one way to do it.
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You have to increase the money supply pretty dramatically.
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And I'm not sure how much you'd have to do, maybe, depending on what you want, if you want a quarter point drop in, the target range, that probably would cost you a trillion and a half, 2 trillion in new money.
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That'd be about a 10% increase in the money supply.
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Which makes inflation worse.
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Over time.
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Oh yeah.
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And raises rates later.
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And, interest rates go up when inflation goes up.
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So, Warsh has two incompatible, positions about the Federal Reserve.
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He wants lower rates, but he also wants a smaller balance sheet.
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Well, a smaller balance sheet means you've gotta sell treasuries.
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If you sell treasuries, does that mean their rates go down? I don't think so.
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The way you get rates down is buy treasuries.
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If you sell treasuries, the rates are gonna go up and so will every other short term instrument.
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So you can't, with your right hand sell treasuries and with your left hand expect rates to go down.
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those two views are incompatible he'll find that out right away.
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Professor, thank you.
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These are volatile times more to come.
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We need to do a podcast in a week or so about the Iran war.
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Thank you, professor.
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Thank you, hunter.
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Always a pleasure.
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Thank you for joining us for the Rubber Meets the Road Economics Podcast.
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If you enjoyed the discussion, remember to subscribe and stay updated with future episodes.
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