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On The Margin

Central Banks Fight Inflation, China Battles Deflation | Nick Glinsman

Wed Jul 12 2023
Economic OutlookMonetary PolicyFiscal SpendingUK EconomyHousing MarketReal Estate ChallengesChina's EconomyChinese Policy Challenges


The episode covers a range of topics including the economic outlook, quantitative tightening, challenges in monetary policy, fiscal spending concerns, the UK economy and housing market, real estate challenges, China's economy and global impact, and Chinese economy and policy challenges. The discussions highlight potential weakening in the economic outlook, the need for unemployment levels to rise to control inflation, the impact of quantitative tightening on the yield curve, challenges in monetary policy decision-making, concerns about fiscal spending and debt, housing supply and demand imbalances in the UK, challenges in the real estate market and global economic trends, China's shift towards domestic consumption and decoupling from the West, and policy challenges in China's economy.


Unemployment levels impact inflation

The Fed aims to bring down inflation by increasing unemployment levels.

Quantitative tightening affects yield curve

The Fed's quantitative tightening policy has accentuated the inversion of the yield curve.

Challenges in monetary policy decision-making

The Fed faces challenges in balancing financial conditions and controlling inflation.

Concerns about fiscal spending and debt

The current fiscal spend and future plans raise concerns about increasing debt levels.

Housing supply and demand imbalances in the UK

Restrictions on building and environmental protection areas contribute to housing supply shortages in the UK.

Real estate challenges and global economic trends

Fixed rate mortgages pose stress for UK homeowners as rates rise on guilt markets.

China's shift towards domestic consumption

China is shifting its focus from exports to domestic consumers and infrastructure.

Decoupling of China from the West

China is actively decoupling from the West, leading to changes in global trade dynamics.

Policy challenges in China's economy

Political ideology often takes precedence over economic pragmatism in China.

Potential impact of Chinese stimulus on Western assets

Injecting liquidity into the Chinese economy may have implications for Western assets and potentially lead to inflation.


  1. Unemployment and Economic Outlook
  2. Quantitative Tightening and Monetary Policy
  3. Challenges and Mistakes in Monetary Policy
  4. Fiscal Spending and Economic Concerns
  5. UK Economy and Housing Market
  6. Real Estate Challenges and Global Economic Trends
  7. China's Economy and Global Impact
  8. Chinese Economy and Policy Challenges

Unemployment and Economic Outlook

00:01 - 08:12

  • Recent shifts in the unemployment data suggest potential weakening in the economic outlook.
  • A down tick in temporary staff hiring could be a sign of an economy teetering.
  • The bond market is indicating that a recession may be approaching.
  • The Fed's objective is to bring inflation down to 2% and they need unemployment levels to go up to achieve this.
  • Core measures of inflation, such as services inflation excluding energy, are at a solid 6.5%.
  • To bring down inflation, the Fed needs unemployment levels to rise by about 4.5%.
  • The Fed may need to keep things tight and potentially do another two rate hikes.
  • Jay Powell has indicated that he's okay with a recession because it would lead to higher unemployment and impact various levels of inflation.
  • Unemployment has a strong correlation with financial conditions and economic growth.
  • Higher stock market performance is often associated with better economic performance due to financial conditions.
  • The Fed cannot engineer higher unemployment without tightening financial conditions or reducing stock market performance.
  • Quantitative tightening (QT) has been ongoing since the end of 2021 but was interrupted by the SVB and regional bank crisis.
  • Now that liquidity is being pulled out again through QT, there may be challenges for the Fed's policy decisions.

Quantitative Tightening and Monetary Policy

07:43 - 15:31

  • QUT has lowered Treasury Securities on the Fed balance sheet by 20.5% from the peak post-pandemic
  • The Fed's QT policy has accentuated the yield curve inversion
  • If unemployment remains low and rates go higher, there could be a bull market crash
  • A credit drought is expected due to diminishing liquidity and collapsing money supply
  • The Fed needs to actively sell some of its holdings to flatten the curve
  • The inversion of the yield curve indicates confusion in the market
  • Central banks' models failed to account for pandemic circumstances, leading to mistakes
  • Tightening financial conditions may be necessary to control inflation

Challenges and Mistakes in Monetary Policy

15:11 - 22:58

  • Inverted yield curve and increasing financialization of the US economy may put the Fed in a tough position
  • Asset liability mismatch caused stress in the banking system in March
  • Institutional asset classes funded with variable interest rates may be in trouble
  • Raising the short end of the curve to slow down growth may blow something up and require injecting liquidity back into the system
  • Regional banks suffered due to ability to instantaneously send deposits to other banks via cell phone
  • Mistakes by the Fed include being a year too late on raising rates, not paying interest on deposits, and lack of regulatory action
  • Lail Brainard's role in regulatory matters at the Fed and her promotion to the White House
  • Fed's models didn't take into account supply side constraints when considering inflation transitory
  • Lack of discussion between Powell and colleagues on fiscal spending contributing to inflation

Fiscal Spending and Economic Concerns

22:32 - 29:36

  • Janet Yellen is a labor economist focused on getting people to work, not a fiscal economist.
  • The current fiscal spend and future plans are concerning, especially with an upcoming election.
  • Sustaining $2 trillion in spending per year for the next 10 years will lead to $50 trillion in debt.
  • AI may impact labor but has potential benefits for the country.
  • There have been 400 years of deflationary forces according to a Bank of England paper.
  • AI is irrelevant and industry 4.0 may find ways to compensate for material shortages.
  • Inflation is elastic on the way up but inelastic on the way down, leading to price increases that don't decrease.
  • Shrinkflation is another factor affecting prices, where products reduce in size while maintaining the same price.
  • Anecdotal evidence suggests a decline in temp workers and disappointing summer tourism.

UK Economy and Housing Market

29:17 - 37:14

  • Inflation and core inflation in the UK are higher compared to the US.
  • UK debt has surpassed the size of the overall economy, and interest rates are expected to reach over 6.5% by 2024.
  • The performance of various guilt market segments shows an upward trend, with shorter-term rates surpassing longer-term rates.
  • The UK is a higher beta version of the US economically.
  • The UK has flexibility in government and can become more transactional, attracting tech companies despite inflation concerns.
  • The UK is officially still growing, but the Bank of England's handling of monetary policy has been criticized for being late.
  • Housing supply and demand imbalance is greater in the UK than in the US due to restrictions on building and environmental protection areas.
  • Getting a mortgage and entering the property market is tough for millennials in the UK.
  • London's housing market may not suffer significant downside, but there may be downside in home counties and further out from London.
  • To address housing issues, more real estate needs to be built in the UK.

Real Estate Challenges and Global Economic Trends

36:44 - 44:34

  • London has a solid demand for real estate, unlike the home counties and further out.
  • The UK has a larger demand-supply imbalance in real estate compared to the US.
  • Fixed rate mortgages are more common in the US post-2008, while the UK tends to have more variable rates.
  • Rising rates on guilt markets pose stress for UK homeowners with fixed rate mortgages.
  • After recovering from the GFC, people became complacent about zero interest rates, which could lead to problems when fixed rates change to variable rates.
  • Blockworks Research offers research and data on DeFi protocols with a discount code 'margin10'.
  • The US banking system is under stress due to risks associated with real estate ownership and insurance companies suffering on the residential side.
  • BlackRock and Blackstone have been acquiring residential real estate after the GFC, leading to supply-demand imbalances.
  • Shadow banking and private equity practices may face challenges as their practices come under scrutiny.
  • China is experiencing deflation while other central banks are fighting inflation due to demand-side factors.
  • China's focus shifted from exports to domestic consumers and infrastructure, but domestic consumers faced revenue loss during COVID lockdowns and the bursting of the real estate bubble.

China's Economy and Global Impact

44:05 - 53:05

  • The Chinese domestic consumer, particularly those in poverty, faced financial challenges during the zero-covid lockdowns.
  • The bursting of the real estate bubble in China has significantly impacted household balance sheets, with a 40 to 60% decrease in house values.
  • The lack of international travel due to COVID-19 has put pressure on the domestic consumer and affected the economy.
  • China is decoupling from the West and shifting away from its export-driven economic model.
  • The decline in Chinese industrial production is reflected in German manufacturing orders.
  • Due to restrictions and changes in espionage laws, foreign investment funds are pulling out of China.
  • There is a growing trend of reverse CFIUS, which reviews outward investments to unnamed countries like China.
  • The Biden administration is likely to implement reverse CFIUS due to bipartisan concerns about China's influence and security risks.
  • China's exports have decreased while Mexican exports to the US have increased, indicating an active decoupling by China.
  • Injecting liquidity into the Chinese economy may have an impact on Western assets and potentially lead to inflation.

Chinese Economy and Policy Challenges

52:41 - 58:18

  • Chinese stimulus may bring back inflation
  • Chinese government has a conservative growth target of 5.5%
  • Xi Jinping's power makes people hesitant to give him bad news
  • China's real estate market is falling despite supportive measures
  • Political ideology trumps economic pragmatism in China
  • Significant stimulus is unlikely under any circumstances
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