Joe Brown — Warsh is Wrong About Inflation

0:00 — The setup: grading a new Fed chair's first Jackson Hole speech

• Kevin Warsh's first speech as Fed chairman, at Jackson Hole: "I don't think he knows what he's doing."
• Pre-empts the obvious objection — "I get it how arrogant that sounds… some random guy on YouTube" — with the historical defence: "we've had a few bozos in this position in the past and so they are not above being wrong entirely about the effects of their own monetary policy decisions."
• Structure of the video: a handful of key points from the speech, each scored right or wrong.

0:46 — Point 1, conceded: the economy really is resilient

• Warsh's takeaway — the economy is surprisingly resilient and strong — "to this point, I would pretty much agree."
• The evidence: S&P 500 earnings growth "over 47% year-over-year," the fastest since 2021, with earnings growing faster than prices. "From a corporate profit perspective and an asset price perspective, those two parts of the economy are doing extremely well."

1:11 — The metric Warsh left out: average hourly earnings

• Chart of average hourly earnings of all employees, with the pre-2020 trend drawn in for comparison.
• Against the "prices went up, wages didn't" narrative: under $30/hr in 2020, over $37/hr now — "almost a 25% increase over the last six years." "That is not actually true."
• The stronger claim is about the slope, not the level: "it's not like there was a brief spike and the trend is now trending the same as it was before. The actual growth rate is faster now." (He does concede the cost of living rose too — this is the wage side of the ledger, not a real-income verdict.)

3:50 — Point 2, conceded: read job openings, not unemployment

• "The next thing that I think does not get talked about enough at all is the opposite of unemployment, and that is job openings." Latest JOLTS: 7.4 million openings.
• The provocative inference: with millions of unfilled postings, "it's safe to assume you can ignore unemployment statistics… if you are unemployed, the fact that you do not have a job means you do not want a job."
• Two mechanisms he offers for that choice: outside income that beats a low-paying opening, and openings requiring a skill the unemployed person won't go and acquire.
• The contrast that gives the indicator its meaning: high unemployment with no openings would be "a very, very bad situation, kind of like the Great Depression. Everybody wanted a job, nobody could get one." He pre-concedes the openings number may be inflated by ghost postings and argues the conclusion survives it.
• So Warsh's view that the economy could survive tighter conditions — "he's probably right about that."

5:26 — Point 3, rejected: the Fed cannot stop driving the bond market

• Warsh's stated wish: the Fed as "a silent player off on the sidelines that's responding to what the market is doing," instead of the market front-running the Fed.
• Brown: impossible while you control the money supply, run QE/QT and set short rates — "you are in control of the economy to a much larger extent than every individual free market player."

6:09 — Price controls on bread are obviously mad; price controls on money are policy

• Economics 101: a committee setting the price of bread, gasoline or water produces "a misallocation of resources… that price no longer signaling scarcity or abundance. It's always and everywhere a complete disaster anywhere it's ever tried."
• "However, when it comes to the cost of money, everybody just loses their minds and thinks, oh yeah, that'll work out great." Interest rates are the price of acquiring money.
• Why that price is not a side-show: money "is literally half of every transaction" — every good, service or hour sold has a dollar on the other side — so the Fed "exerts a high amount of control over every transaction that happens in the entire economy."

7:15 — Killing forward guidance concentrates volatility, it doesn't remove it

• "When he talks, the bond market moves" — whether he wants to be watched or not, "he is the main input. He is the main driver."
• Ending forward guidance doesn't stop the market pricing the Fed. "It's just going to mean more volatility of the market responding more in real time to what they do rather than in advance… it just concentrates it into a shorter amount of time."
• Practical read for a bond investor: expect the same total repricing, delivered later and in bigger single-day moves around meetings and data.

7:56 — Point 4, rejected: short rates are the wrong instrument for inflation

• Warsh reiterated the vow to get inflation to the 2% target and named short-term rates as the tool, saying the Fed's other tools — Brown reads this as the balance sheet, QE/QT — should be "reserved for crisis only" and used extremely sparingly, bleeding the balance sheet off in the meantime.
• "The problem with that is that's not the main tool that can address inflation. You can hike rates at the short end all you want, but if it doesn't do anything to the actual creation of the money supply, all you're doing is making production more expensive and so inflation will persist."

8:34 — The chart: money-supply growth vs CPI, and money rising since 2023

• Two lines: money-supply growth y/y (blue) against CPI growth y/y (green) — "a very very tight correlation between the rate of growth in the money supply and the rate of growth in prices."
• "Since 2023, the money supply has been increasing… just moving up and to the right. So, why are we surprised that inflation is sticky and sticking around and higher than what everybody wants when the money supply is increasing?"

9:12 — The intuition, run both ways: double the money, then double the goods

• Double the money supply overnight — $10,000 in checking becomes $20,000 — and nobody works for the old wage or sells the old pizza for seven bucks: "prices of everything, wages and goods and services would pretty much double," because the quantity of stuff didn't change.
• Run it the other way at 10:02: hold money fixed and double the cars, houses and labour (his hypothetical: "a robotic army fleet that can do all the jobs that we do"). "Immediately, prices of everything would collapse. Wealth increases." With two houses you'd sell one for $200,000 or $100,000 — "the scarcity goes down. The cost of everything goes down."
• The model in one line: both are happening at once, "and it's the ratio between that that determines prices overall." Prices rise "when the growth of the money supply exceeds the growth rate of all the stuff."

11:36 — The second-order trap: tightening can make inflation worse

• "A little bit of a snowball effect." Dearer debt means dearer production financing: "it's harder for companies to hire… to borrow and invest in research and development… to invest in growth and building new productive capacity."
• That shrinks the denominator of his ratio — "it's harder for the stock of wealth to get bigger faster" — so "by raising short-term interest rates while the money supply still grows, you can make inflation worse."
• The stated requirement: slow money creation while letting production grow at the same pace "or ideally even faster." Both halves, or the policy backfires.

12:17 — His prescription is fiscal, not monetary — and the closing verdict

• "You need to get the boot of the government off the neck of the private economy." The chain he lays out: deregulation and lower government spending → free-market interest rates fall → cheaper production → more stuff → lower prices, "and meanwhile, the money supply doesn't grow nearly as fast."
• Closing verdict: "no matter how much Warsh says that they vow to reach their 2% target, they're not going to be able to do that by just increasing short-term interest rates without causing a massive, massive, massive crash." He signs off hoping it doesn't come to that.