Lecture 1: Introduction to 14.02 Principles of Macroeconomics
Summary
TLDRIn this introductory lecture to Macroeconomics, Professor Ricardo J. Caballero outlines the course's focus on large-scale economic phenomena like inflation, unemployment, and exchange rates, contrasting it with Microeconomics. He emphasizes the importance of understanding macroeconomic relationships and the role of central banks in managing inflation through interest rates, while also touching on the impact of global events like China's economic policies.
Takeaways
- π The course 1402, Introduction to Macroeconomics, focuses on large-scale economic issues rather than individual entities like households or firms.
- π Macroeconomics is distinct from microeconomics, which studies smaller economic units. Macro looks at the economy as a whole, considering factors like inflation and unemployment rates.
- π The relationship between macroeconomics and microeconomics is complex, with macro often requiring simplifications and shortcuts due to the complexity of modeling the entire economy.
- π The course aims to teach students to understand and interpret macroeconomic data and reports, such as the World Economic Outlook published by the IMF, without delving into overly complex mathematics.
- πΌ The course will cover current events and their macroeconomic implications, aiming to provide a practical understanding of how macroeconomic principles apply to real-world situations.
- π The connection between wage growth and inflation is a key topic, with recent trends showing a high correlation between the two, which is a concern for policymakers.
- π The impact of macroeconomic policies, such as interest rate adjustments by central banks, is significant and can be observed in various aspects of the economy, including the stock market.
- π‘ Monetary policy, particularly the setting of interest rates, is a primary tool used by central banks to manage inflation and economic growth.
- π³ The economic recovery from the COVID pandemic has been widespread, but China's strict COVID policies have set it apart, with expectations of a significant economic rebound as these policies change.
- π The global economy is interconnected, and changes in one major economy, like China, can have significant ripple effects on other regions, particularly those that are economically linked or dependent on certain commodities.
Q & A
What is the primary focus of macroeconomics?
-Macroeconomics focuses on the study of the economy as a whole, examining large-scale phenomena such as inflation, unemployment rates, and exchange rates, rather than individual households, firms, or industries.
How does macroeconomics differ from microeconomics?
-Microeconomics looks at small-scale economic units like households, firms, or industries, while macroeconomics considers the economy as a whole, focusing on aggregate measures like national income, inflation, and unemployment.
What is the significance of the exchange rate in macroeconomics?
-In macroeconomics, the exchange rate is important as it represents the relative price of two currencies, reflecting the economic health and competitiveness of one country relative to another.
Why is it not accurate to consider macroeconomics as simply the sum of many microeconomics?
-Macroeconomics cannot be reduced to the sum of microeconomics because the interactions and equilibrium aspects of a whole economy are more complex and cannot be fully captured by simply aggregating individual behaviors.
What is the role of shortcuts and tricks in macroeconomics?
-Shortcuts and tricks are used in macroeconomics to simplify complex economic phenomena, making it more manageable to understand and analyze the big picture without getting bogged down in every detail.
What is the goal of the course 'Introduction to Macroeconomics'?
-The goal of the course is to help students understand the essence of macroeconomic relationships, enabling them to read and interpret economic reports like the World Economic Outlook and critically engage with economic news.
How does the course plan to integrate current events into the lectures?
-The course plans to discuss current events, especially those related to macroeconomic phenomena, early in the lectures to help students apply the theoretical concepts they are learning to real-world situations.
What is the relationship between wage growth and inflation as discussed in the script?
-The script suggests that there is a high correlation between wage growth and inflation, indicating that when wages increase significantly, inflation tends to rise as well.
Why might a decrease in unemployment lead to an increase in inflation?
-A decrease in unemployment can lead to an increase in inflation because a lower unemployment rate often indicates a stronger economy with more demand for goods and services, which can drive up prices.
What is the primary tool that central banks use to deal with inflation?
-The primary tool that central banks use to deal with inflation is the adjustment of interest rates, with higher interest rates generally used to cool down an overheating economy.
How does the script describe the impact of China's economic policies on the global economy?
-The script describes China's strict COVID policies as having slowed down its economy, which had a significant impact on global supply chains and commodity prices. The easing of these policies is expected to boost China's economy and potentially affect global inflation.
Outlines
π Introduction to Macroeconomics
Ricardo J. Caballero introduces the course 1402, 'Introduction to Macroeconomics', explaining the difference between macroeconomics and microeconomics. He emphasizes that macroeconomics focuses on large-scale economic issues such as inflation, unemployment rates, and exchange rates, rather than individual prices or specific firms. He also discusses the complexity of macroeconomics and the need for simplifications and shortcuts in analysis, highlighting that the course will focus on understanding the essence of macroeconomic relationships rather than delving into complex mathematical models. The goal is to equip students with the ability to read and critically analyze economic reports and news, such as the World Economic Outlook by the IMF.
π Current Economic Events and Their Implications
Caballero discusses the typical structure of his lectures, which will include a segment on current economic events. He uses examples like wage growth and inflation rates to illustrate how these macroeconomic indicators are interconnected. He explains that wage growth and inflation are highly correlated, and this relationship is a significant concern in the current economic climate. Additionally, he touches on the concept of recessions, highlighting the Great Recession and the COVID recession, and how these economic downturns are characterized by high unemployment rates. The lecture aims to build students' understanding of these concepts by revisiting them as they acquire more tools and definitions throughout the course.
π Global Economic Recovery and Inflation Concerns
The lecture delves into the global economic recovery post-COVID and the subsequent rise in inflation. Caballero notes that while inflation has recently peaked and is declining, it remains at historically high levels. He discusses the role of central banks in managing inflation through interest rate policies, explaining how lowering interest rates can stimulate economic expansion, while raising them can cool down an overheating economy. The lecture also touches on the impact of the war in Ukraine on energy prices and inflation, particularly in Europe. Caballero emphasizes the widespread nature of the economic challenges faced by different regions of the world, despite the specific drivers of inflation varying by region.
π The Impact of Monetary Policy on Financial Markets
Caballero explores the intersection of macroeconomics and finance, focusing on how monetary policy affects equity values and the stock market. He uses the example of the S&P 500 index to illustrate the impact of interest rate changes on asset values. During the COVID pandemic, the stock market initially crashed due to the anticipated negative impact of the pandemic but later experienced a significant boom, primarily driven by monetary policy. The lecture also discusses the recent decline in equity markets, which can be attributed to the rapid increase in interest rates. Caballero highlights the importance of understanding the relationship between interest rates and asset valuation, as well as the anticipation of central bank actions by financial markets.
π Employment Data and Its Effect on Financial Markets
In this section, Caballero discusses the relationship between employment data, inflation, and financial markets. He uses the example of a recent positive employment report that unexpectedly led to a stock market crash. The explanation lies in the anticipation that the Federal Reserve would react to the strong employment data by raising interest rates further to combat inflation. This expectation of tighter monetary policy led to a sell-off in the stock market. Caballero emphasizes the forward-looking nature of financial markets and their sensitivity to economic data that can influence central bank decisions. He also mentions the high probability of a recession in the US as predicted by professional forecasters, largely due to the Fed's efforts to fight inflation.
π China's Economic Outlook and Global Impact
Caballero concludes the lecture by discussing China's economic situation and its potential impact on the global economy. He notes that China's strict COVID policies have slowed down its economy, but recent changes in policy are expected to lead to a significant economic boom. This boom could have both positive and negative effects on the global economy. While increased activity in China could boost global growth, it could also exacerbate inflation concerns in countries that are trying to reduce inflation. Caballero highlights the interconnectedness of the global economy and the importance of understanding how changes in one major economy, like China, can affect others. The lecture ends with a preview of the course content, which will involve simple models to explain complex macroeconomic phenomena.
Mindmap
Keywords
π‘Macroeconomics
π‘Microeconomics
π‘Inflation
π‘Unemployment
π‘Wage Growth
π‘Interest Rate
π‘Monetary Policy
π‘Equity
π‘Recession
π‘China's Economic Policy
π‘Aggregate Demand
Highlights
Introduction to Macroeconomics course overview and objectives.
Macroeconomics focuses on the economy as a whole, unlike Microeconomics which studies individual components.
Macroeconomics involves studying inflation, unemployment rates, and exchange rates at a macro level.
The course aims to simplify complex macroeconomic concepts and avoid overly complicated mathematics.
Students are encouraged to read and understand economic publications like the World Economic Outlook and financial news critically.
The course will cover current events and their macroeconomic implications, starting with basic tools and definitions.
A correlation between wage growth and inflation is highlighted, indicating a current economic concern.
Unemployment rates and their historical trends are discussed, showing a recent spike and recovery.
The current low unemployment rate and high wage growth are presented as paradoxically problematic for macroeconomic stability.
Inflation rates are discussed, with the current high levels being a significant concern for economies globally.
The role of central banks in managing inflation through interest rate adjustments is explained.
The impact of monetary policy on financial markets, particularly equity values, is discussed.
The anticipation of central bank actions by financial markets and its effect on equity is illustrated with recent examples.
The expectation of a recession in the US due to the Fed's efforts to combat inflation is mentioned.
China's unique economic situation and its potential impact on global markets following changes in COVID policy are discussed.
The importance of China's economic growth for global commodity markets, particularly for Latin America, is highlighted.
The course will use simple models to explain complex macroeconomic phenomena and help students critically analyze economic data.
Transcripts
[SQUEAKING]
[RUSTLING]
[CLICKING]
RICARDO J. CABALLERO: OK.
Let's start.
So hello, everyone.
Welcome to 1402, Introduction to Macroeconomics.
And I won't teach today.
So that's a good news.
I will start on Wednesday.
So what I want to do today is essentially tell you
what macro is about, macroeconomics
is about, and also the rules of the game.
So what a difference a single letter makes.
Many of you must have taken 1401.
In fact, some of you may be taking it concurrently,
a lecture right before mine.
And that's Microeconomics, 1401.
This is macroeconomics.
And it doesn't take a lot of imagination
to realize that this course is about big things.
We don't look at small things.
That's what micro is about.
Micro looks at a household, at a firm, at an industry.
In macro we don't do that.
We look at the whole economy.
We think about the US.
We think about China.
We don't think about an individual price.
We think about inflation, so the rate of change of all prices.
We don't think about whether a particular worker
is employed or unemployed.
We think of whether the rate of unemployment
is very high or low, things of that kind.
When we look at two countries, we
look at the exchange rate, which is the relative price of two
currencies, not to individual goods in two
different countries, but the whole currency and so on.
So that's what macro is about.
Now, you could think that macro is nothing else
than the sum of lots of micros.
After all, that's what an economy is made of.
A population, a whole population is
made of lots of individuals that can
be analyzed with the tools of 1401
and the sequence that follows 1401.
But that doesn't work.
And there are parallels in physics about this and so on.
The way you want to study sort of big bodies
is different from the way you want
to understand the movements of small elements.
And that's the case in macro.
In macro there's a big line of research
that has to do with the micro foundations of macro economics.
But even in that case, which is very close to micro,
most of the action ended up happening in the non-micro part,
in the interactions, in the equilibrium
aspects of the system.
So it's a much more complicated object.
And if you were to build it from the micro,
it would be an incredibly complicated object.
So one of the things we need to do in macroeconomics
is take some shortcuts.
That's what makes macro a lot of an art.
It's not a science, per se.
It's some sort of a science.
It has the tools of a science.
But it's a lot about shortcuts and tricks
and so on to capture the essence of a problem that
is very complex if you were to model it
in all the gory details.
And in this course, we're going to exaggerate on that sense.
We're not going to do anything complicated, I promise you that.
Some occasionally conceptually things will be complicated.
But the math will not be complicated.
So we're going to keep things very, very simple.
I want to communicate the essence
of the big macroeconomic relationships.
This is not a PhD course.
If you were to take a PhD course in macro,
it would be a very mathy type course.
In fact, most of the people that do apply in micro in our PhD
program complain against macro because they find it too
mathy and so on.
But that's not going to be the case here.
That's not what this course is about.
My goal-- so if this is a successful course,
it's not that you come out being a researcher in macro
out of this.
Hopefully you'll have a career eventually
and do all the next steps that you need to do that.
But I want you to be able to do is
to read something like this-- this is a World Economic
Outlook.
It's a publication that the IMF puts out
every six months in which it tells you how it sees the world
and where we're heading and so on.
No equations there.
Lots of tables and stuff like that.
I'd like you to be able to read that kind of document
very clearly.
I would like you to be able to read something in say, the Wall
Street Journal and read even critically,
sometimes disagreeing with what is in there--
Financial Times, The Economist.
That's a goal of this course.
It's not a lot more than that.
It's just that.
If you do a summer internship in Wall Street
and you work in a macro hedge fund or whatever,
this is going to be a good course for that.
I mean, this is what traders really know.
They don't know a lot more than that.
Many traders should know that.
They don't.
But this does a level of knowledge.
If it gets to be very complicated, I'm failing.
That's not what I want to do here.
The typical lecture-- again, this is not a lecture.
The first lecture will be on Wednesday.
The typical lecture-- and not in the first part
of the course because you're not going
to have the tools, the definitions and so on to do it.
What I want to do is spend 5 to 10 minutes early on.
Again, the first part of the course,
we can do that because you don't have the knowledge to do that.
But as you start building tools, I
want to be able to talk about current events, something that
is happening out there that I find interesting
or something I received that morning, the morning
of the lecture, which I find interesting.
And if I think you already have the tools to begin to understand
it, I'm going to be repetitive.
I'm going to come back two, three, four times
to the same topic.
Hopefully you'll be more advanced in your knowledge
in the later stages and you'll be
able to understand it more and more.
The typical lecture will have 5 to 10 minutes
in which we'll talk about some facts, something
that is going on.
For example, a picture like this.
This I received this morning.
I think this came from Goldman, I think, Goldman Sachs.
Yes.
And what you have in that picture-- again,
don't worry about details today--
is you have two lines.
One of them is a measure of wages, wage growth, compensation
to workers.
And another one is a measure of inflation.
Again, all those definitions will
come in the next lecture on inflation.
So it's the rate at which--
you must have heard about inflation.
It's something, prices are rising.
And what that picture shows you is that these two series
are very highly correlated.
So when wage growth is high, inflation tends to be high.
And that's a big issue on these days.
There's a lot of concern about this stuff.
So let me try to explain a little bit what
is a concern on these days.
Again, if you don't understand anything, doesn't matter.
If you don't understand anything I'm
saying right now in the last lecture, then it matters.
But now it doesn't matter.
I'm just trying to give you a flavor of the kind of things
we'll be talking about.
That picture there, again, a variable
that will define in the next lecture, not now,
shows you the unemployment rate.
You don't need any specific definition
to know that to feel, at least get a sense,
that, well, if unemployment is high, workers aren't very happy.
It's not a good thing to have lots of unemployment.
And what that series shows you the shaded areas
are recessions in the US.
What that series shows you is that typically in recessions,
unemployment goes up.
So that's one of the features.
One of the main features of a recession
is that unemployment is high.
This episode here, it's called the Great Recession--
as a parallel for the Great Depression.
The US had the Great Depression in the '30s.
This is the Great Recession, the biggest sort
of recession outside of the Great Depression in the US.
And it's also known as the Global Financial Crisis
because this was a recession all around the world.
And what you can see is that unemployment went very high.
That's a very feature, a telltale sign
of a big recession.
And then it took a long time.
This was in recovering.
COVID was a massive shock to the labor market
So not surprisingly, unemployment, the unemployment
rate spike there.
But then it also recover, a lot faster
than it recovered from that.
And today we have unemployment rates that
are at historically low levels.
And that's a big issue.
The rate of unemployment in the US
is at historically low levels--
way below what is normal.
Forget recessions, obviously way below what is it
happens in recessions, but even way below what is normal,
what happens during normal times.
Closely related to that is wage growth.
I have just one measure of wages there, is a series of wage that
is particularly--
what I'm about to say is particularly sharp,
which is the wages of in the accommodation and food service
sectors.
So wages have been rising very steadily and very fast recently
everywhere, particularly in sectors
like this, where we have some problems which
we call labor supply.
But I'll get back to that.
So those are two facts.
We have unemployment at extremely low levels
and we have wage growth at a very fast pace.
Now, that sounds wonderful, no?
I mean, what else do you want, an economy which is few people
unemployed and wages are growing a lot.
I mean, if this was micro, this would be fantastic.
OK, look the guy is employed and he's getting a high wage.
This is great.
Well, not so fast for macro.
Not so fast because I already showed you in the first picture
that I showed you, [INAUDIBLE] there
is a connection between wage growth and inflation.
And that's what we're experiencing.
The normal level of inflation for an economy like the US
is around 2%.
That's normal.
That's what central banks target in an economy like the US
in the Euro area.
Japan has been dreaming with 2%, but hasn't been able for decades
to get it.
Although now they are.
But they weren't, for a couple of decades, to get to 2%.
But that's about-- and we will discuss later in the course
why 2% is about right for economies of the size of the US
and so on.
Obviously in recessions, these things can go low.
And that's why in the COVID recessions
inflation went to zero, essentially.
But then it began to pick up.
And it's now at levels, which are unheard of in the US since
the '80s.
So depending on the particular measure you use of inflation,
it's around 6.5% to 8%.
That's a level of inflation we have,
which is way, way above what is considered
a normal or reasonable target for the central banks
for inflation.
So that's a problem.
We have had some good news recently in that inflation
clearly peaked already--
again, definition of inflation, formal definition of inflation
happens in the next lecture.
But it already peaked.
And it's declining.
But it's still a very, very high levels.
And that's a problem.
That's a big macroeconomic problem.
And one of the things we want to understand in this course
is, well, what to do about it.
How do you deal with that?
What do central banks need to do in order to deal with that?
Now, I've been talking about the US.
But this is not specific to the US.
This episode this recovery from COVID
is incredibly common across different regions of the world.
I mean, you see it everywhere with a few exceptions.
And I'm going to talk about one major exception in a minute.
But it's widespread.
It's a widespread phenomenon that we had high unemployment.
Then we had sort of very high--
well, I haven't told you that part yet.
But then we had sort of low inflation.
Then inflation picked up enormously.
And now we're all worried about these very high levels
of inflation.
In fact, if you look at what happened
between the Great Recession and the COVID recession,
it was pretty normal to have 70% to 80%
of the economies in the world having inflation
levels at or below 2%.
So that's a norm.
If they throw you into a country,
they drop you into a country, the normal thing would be well,
it's about 2%.
That's a level of inflation.
Obviously, if I dropped you in Argentina,
you're going to find a much bigger number, you know,
10,000%.
But the bulk of the countries were around 2% or so.
Today you don't find any country with inflation below 2%.
Not even Japan, for years we're in deflation and trying
to get sort of above zero.
That's all they wanted.
Not even in Japan you have inflation below 2% today.
So this thing I showed you.
And for more or less the same reasons,
it's happening everywhere.
Not exactly the same factors.
It's the same episode, for example,
with differences depending on the structure of the economy
or in additional shocks.
In Europe, for example they had very high inflation.
But the problem is not--
the origin of the problem, the bulk of the problem
is the same as in the US.
But at the margin they are different.
In Europe, the big driver of inflation,
the big recent driver of inflation,
is unlike the US, which is aggregate demand, a concept
you'll understand later.
It's essentially the war in Ukraine.
That has increased the price of energy and the price of energy
has led to lots of inflation.
So there are different reasons.
But all of them are sort of different reasons
that you add on top of what is a common story, which
is that we overheated coming out of the COVID episode
and now we're struggling with that.
Now, the main tool-- and we're going
to talk a lot about in this course--
the main tool that central banks have to deal with inflation
is the interest rate.
So for reasons you'll understand later,
although you may have intuition about some of those now,
obviously when the central bank lowers the interest rates,
then that helps the economy to expand.
And when it increases interest rate, then it does the opposite.
Rising Interest rate makes mortgages more expensive,
make everything more expensive so people tend to consume less.
Firms tend to invest less and so on
because it's more expensive to invest, to borrow, to do
something.
And there you see it.
I mean, this was the level of the interest rate in the US
before COVID.
When COVID came, boom.
They brought it all the way down.
It happens that you can not bring the interest
rate a lot lower than zero.
That's the reason it stayed close to zero.
We're going to talk about that later on.
But then eventually they realized
that we're behind the curve.
Inflation had picked up a lot and the central banks
were behind the curve.
So they began to hike rates in a hurry.
And that's what we have been experiencing for the last year
or so, very fast increase in the interest rate.
Now, this is, of course, about macroeconomics.
But I happen to do a lot of research
between macro and finance.
So I'm going to put a little bit more of a component of finance
into--
I think I'm going to do most of that
in the last third of the course.
But monetary policy has lots of implications for finance,
for equity, values, for the stock market,
and stuff like that.
So what you see here, this line here, is the SPX 500.
It's the main index of equity in the US of shares.
There are several indices--
NASDAQ, S&P, Dow, and so on.
This is the main index, the most comprehensive,
the one that takes the largest companies,
and so on and so forth.
And what you can see what happens here
is that when COVID happened, the surprise that we had,
really a pandemia, then the stock market crash,
declined like 30% or something like that at the time.
That's interesting facets.
I mean, that's one characteristic of equity
that I like a lot.
Other risky assets, as well, but they anticipate what happens.
What happened there is the stock market,
the shareholders, realized that something big
was-- negative and big-- was happening in front of us.
So it was time to sell.
And so the equity market collapsed.
What happens next is even more interesting
for a macro economist, which is this big boom here.
There's an enormous boom.
The economy here still was at levels of activity
below what it had before COVID.
But the stock market, the value in the stock market
had way exceeded the level we had before the pandemic.
And the main driver of that, I've shown that in some papers,
the main driver of that is not--
I mean people tell lots of stories of Amazon
and so on, Tesla, bla, blah, blah.
If you look at the aggregate, the main reason for that rise
was monetary policy.
You can explain all that increase in the equity value
in the US of the index-- not the individual shares,
of the index--
by the effect of interest rates.
So monetary policy plays a big role.
If you care about finance, well, it
plays a huge role in the value of assets.
When monetary policy is very loose,
that tends to increase the value of assets.
And that's one of the mechanisms the central banks
use to expand aggregate demand when they want
to expand aggregate demand.
They want people to feel-- you are in a recession,
you want people to feel richer so they spend more and so on
and so forth.
What happened here?
This decline, you can also explain it fully
with the hike in interest rate.
Remember, I showed you that the interest rate began
to rise very rapidly here.
Well, last year the equity market in the US
and most major equity markets around the world
declined by 20% or more.
You can explain all that decline simply
by increasing the interest rate.
So that's another thing we need to understand
is why is it that the interest-- why is the interest rate
matter so much for something like equity?
So when a value assets, and when I see what
is the effect of the interest rate,
and then we're going to think about, well,
why would the central bank worry or not worry about these things,
and so on and so forth.
But the truth is that financial markets and the central banks
interact all the time.
I mean, if you are into Wall Street type thing,
you are going to be watching every day, every time
that the monetary minutes.
The minutes of the central banks are released,
you're going to be watching because it has a big implication
for the value of your equity.
Actually, something very interesting of this nature
happened last week.
On Friday, last Friday, there was
a release of payroll numbers.
So it's an employment index, employment numbers.
And people expected the payroll to increase,
so to add nonfarm payroll--
we'll talk about these things later--
by about 190,000 workers.
At 8:30-- well and this, you're seeing here,
is the behavior of the same index I showed you before,
but the futures, so things you can trade before the market
actually opens.
The market in the US opens at 9:30 AM.
But you can trade futures since Asia times.
Anyway, so this is the path.
It's all very quiet, tranquil.
Everyone is waiting the release of this news at 8:30 AM.
At 8:30 AM, great news for the labor market.
The actual change in the payroll was not 190k.
It was over a 500,000k.
So enormous addition of jobs to the economy.
And look what happens to the equity market.
Boom.
It imploded immediately.
So this is wonderful news now for the economy-- lots of jobs.
The equity market imploded as a result of that.
Why do you think that happened?
I've already given you a little bit
of the ingredients for why, for an answer
in the previous slides?
The reason I'm showing you this is because in 15 minutes,
it summarizes all that I was talking about in the previous 30
minutes.
Why do you think that happened?
This is wonderful news.
Why the stock market should crash like 2% from top
to bottom as a result of that?
AUDIENCE: There's a lot more labor
because that gives a lot more supply of that thing,
and thus, it decreases price because of high supply.
RICARDO J. CABALLERO: No, but--
OK, that's an interesting explanation.
It's not the one I have in mind.
The explanation says, look, that means firms hire lots of people.
So the price, that means they're going
to be lots of supply of whatever goods they're producing.
The price of those goods is going to decline.
And that's going to be bad for profits.
That's a story you had in mind.
Maybe there's some of that.
But I'm willing to bet that it's not the main thing.
So the only clue I give you is that I already
talk about these things five minutes ago.
AUDIENCE: Employment is very closely related
to inflation rates.
[INAUDIBLE] up to 0.81.
So this could be a result of expectations
of continued high inflation rates.
RICARDO J. CABALLERO: OK, you're very close.
One step more.
Yes.
That means that--
AUDIENCE: [INAUDIBLE]
RICARDO J. CABALLERO: OK, there you are.
So what happens?
The shareholders wouldn't have done anything
if they thought that the Fed would not
be able to see this data.
But they know that the Fed also sees this data
and say, whoa, these guys are going
to be worried because the economy is
going to keep overheating.
They're going to have to hike interest
rates even more in order to cool down this economy.
I already showed you that what happens in the labor market
is very connected to what happens with inflation.
The central bank knows that.
And now we get this big surprise that means they're not really
being able to-- they're not being successful
at really slowing down one of the main drivers of inflation.
And so financial markets are very forward looking.
They say, whoa, this is coming.
This only means that financial markets
were betting that the Fed was going
to begin to cut interest rates in four months more or so.
And if you look at what the forwards did there,
what the market--
you can extract what the market thinks.
Right after this, it got immediately pushed out
to the end of the year.
So it's precise.
It's the anticipation that the central bank
will have to do something.
And so I thought it was very interesting
for that point of view.
Recessions-- well, look.
And these are all very good news.
But everyone knows that the Fed needs to cool off the economy.
So despite the fact that we're getting good news now,
people expect, the majority of people
expect a recession in the US for this year.
I'm not going to explain this bar graph here.
But these are forecasts.
These are professional forecasters.
And more than half of them--
so the median of them thinks that there is a 65% probability
that there is a recession in the US this year.
And we're going to talk a lot about this
and probably we're going to be getting news about this
while we're taking the course.
So this is going to be a picture that we're
going to discuss extensively.
And the reason for the recession is nothing else than--
The reason you ask this forecast, why do you
think we may have a recession?
Well, because the Fed is trying to fight inflation.
It's going to keep hiking interest rates.
And at some point, it may break something.
And that's the reason.
But all these things you are going
to be able to understand very clearly through models.
The last thing I want to say before telling you
a little bit the rules of the game
is that I said before that the story I told you about the US
is more or less what is happening all around.
I was in Chile a month ago.
I'm Chilean.
And they have the same story.
They start hiking interest rates a little earlier because they
had more inflation than the US.
But they're going through the same cycle.
There's one big economy, the second largest economy
in the world, that has not been part of this, which is China.
China was very aggressive in the COVID policy,
so zero COVID policy.
So they really slowed down their economy.
That's a consequence.
They didn't want to do that.
But as a result of a very strict COVID policy,
they essentially shut down big parts of the economy
for a long time.
That, by the way, had big impact in the rest of the world,
through the network of production,
the chains of production and stuff like that.
That was inflationary in itself.
That part is dissipating.
But for their own economy, for the domestic economy,
that really slowed down China, an economy that grew typically
at 5 and 1/2 to 6%, a lot higher 15 years ago.
We're going to try to understand why later on.
But last year, I don't know, it was 3% or less.
Numbers in China were difficult to figure it out.
They're not equally transparent to other numbers.
But in any event, it's very clear
that China slowed down a lot.
And that policy recently changed.
The zero-COVID policy changed.
And so there is great expectation
that now there is going to be a big boom in China
because they are lagging behind.
I mean, in the US when COVID began to dissipate,
we got a huge boost to growth.
And that's part of the reason we got all this inflation is
because we had lots of growth coming out of the recession that
happened in COVID.
And more or less the same is expected in China.
And one of the big reasons behind those big bounce backs
is when people are desperate.
They want to spend on something.
They want to go to restaurants and cinemas and stuff like that.
And the other one is they have the means to do it
because they couldn't spend on anything for a while.
And so they can travel and stuff like that.
So people expect-- and this is a very large economy
that suddenly sort of wakes up.
No, that's a big thing for China.
But it's also a big thing for the world.
What happens in China doesn't stay in China.
It's a big giant.
So it moves.
And for some countries it's very, very important.
And this picture here shows you what
is the impact on different regions
of the world on the growth rate and different regions
of the world of an increase by 1% in the rate of growth
of China.
Obviously all the neighbors benefit a lot.
But Latin America benefits even more.
Why is that?
Well, because Latin America produces
lots of commodities and China consumes
lots of commodities when it's building and stuff like that.
And so that's the reason big impact on Latin America.
So this is a piece of good news for the world in the sense
that activity will go up.
But it's good news on average.
But it may be too much of a good thing, as well.
Why?
Because many economists are going through what
we described before.
They're trying to bring down inflation.
They don't want more demand.
They want less for now because we're
going to understand that connection later on how
demand connects to inflation.
But you want less.
And now you're going to get this impulse from China, which is
going to fuel more inflation.
It's OK for China because they don't have an inflation problem.
But it may be a problem for many of the countries
that are trying to undo the inflationary consequences
of the previous expansion, the expansion that followed COVID.
OK, anyways.
But this is the kind of things we're going to be talking about.
I said the course is not going to be mathy,
but it's going to be all about models.
The next lecture is the most boring lecture
of the course I tell you in advance because it's
definitions.
I need to go through the definitions.
At least I get bored.
But the rest, there's always little models
but it's simple models.
OK, but the models are going to try
to explain the kind of things I discussed today.
So that's what this course is about.
Ideally, if we're successful, you're
going to be able to read something
like the World Economic Outlook, which will have
lots of pictures like this.
And you're going to be able to write a little equation very
simple on the side to try to understand
what is going on there, and to catch the mistakes, as well.
OK, WEO has less mistakes than the Wall Street Journal,
but you will catch mistakes, you'll see,
you'll be proud of those.
Browse More Related Video
Lecture 2: Basic Macroeconomic Concepts
The Ultimate Fundamental Trading Course for Beginners (In Under 26 Minutes...)
L'INIZIO del CROLLO dei Mercati: Γ¨ il Colpo di Grazia (FED+Blackout) ?
Trade the NEWS like a Forex PRO! (Forex Fundamental Analysis)
Business Live | Brand new luxury British and European cars are entering Russia despite being banned
Inflation: could covid-19 cause prices to rise?
5.0 / 5 (0 votes)