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--:-- Noelle King: Once upon a time, right on the edge of the forest, lived a golden-haired girl. This golden-yellow-haired girl's name was Goldilocks. Once upon a time, that time being 2019, the U.S. economy was doing something very strange and very good. And she came across the house of the Bayer family in between the trees. Two things were happening. Inflation was low, but not zero. There was growth. And unemployment was low, but there were still out-of-work people to fill new positions.
--:-- Noelle King: She dipped her spoon into the smallest one. Hmm, this porridge is neither cold nor too hot. It was just right. It's Today Explained. I'm Noelle King. Coming up, the bear market is getting closer. The Goldilocks economy has fled out a back window. What is coming next?
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--:-- Noelle King: You can find inspiration for your personal style every day at Saks Fifth Avenue. Support for the show comes from Charles Schwab. At Schwab, how you invest is your choice. not theirs. That's why when it comes to managing your wealth, Schwab gives you more choices. You can invest and trade on your own. Plus, get advice and more comprehensive wealth solutions to help meet your unique needs.
--:-- Noelle King: With award-winning service, low costs, and transparent advice, you can manage your wealth your way at Schwab. Visit schwab.com to learn more. It's Today Explained. I'm Noelle King. I have reunited with my old friend Jacob Goldstein. He's the host of What's Your Problem, which is a show about entrepreneurs and engineers and the problems that they're trying to solve.
--:-- Noelle King: But once upon a time, Jacob and I worked at NPR's Planet Money, where we covered the Volcker rule and the Phillips curve and moral hazard and all of these other economic terms and phenomenon. But I don't remember us covering the Goldilocks era, which was the period we were living in then.
--:-- Jacob Goldstein: The Goldilocks era I'm thinking of is the period leading up to the pandemic, right? The sort of late teens. In the U.S., in the late teens, there was this combination of things happening that you sort of shouldn't be allowed to get. There was super low inflation, which is a big deal, important, nice for the economy.
--:-- Jacob Goldstein: The government was running pretty big deficits, you know, keeping things going. And unemployment was really low. It was a good time to be a worker. There was demand for workers. Workers, even at the lower end of the income distribution, were getting raises. And so all of these things made for a really good, robust economy.
--:-- Jacob Goldstein: And you very often can't have all of them together. I assume people refer to it as the Goldilocks era because the story was, and you have two kids and I imagine you will know it better, but she's a tiny home invader. She goes into the house of the three bears, right? And she's like eating their food, sitting in their chairs, lying in their beds.
--:-- Jacob Goldstein: She tried lying down on the middle-sized bed, but it was too soft. And every time she finds one of them, that's perfect. That's right. Something's too big, something's too small, and then there's one that's just right.
--:-- Jacob Goldstein: She tried lying down on the wee little bed. It was just like her cozy bed at home. And so she went to sleep. And so this world we were living in, in lots of ways, was a total disaster, obviously. But just on this macroeconomic balance of having a lot of government spending and a great job market across the board and low inflation.
--:-- Jacob Goldstein: Like, you normally don't get all of those things together to the extent that it was like a mystery. Macroeconomists by the late teens were like, why is this happening? Why is inflation not going up?
--:-- Jacob Goldstein: I mean, if you go back a few years before that, in the, I guess it would have been early teens-ish, you know, there was this question, right? Because traditionally what happens is as the economy is recovering from a recession, unemployment falls and falls.
--:-- Jacob Goldstein: And then at some point, it falls low enough that the economy starts to heat up a lot. Workers are getting more and more raises. Demand is going up. Companies are investing a lot. So there's all this spending. And that starts to drive up inflation.
--:-- Jacob Goldstein: And people assumed in this country that like when we hit, oh, say 5% unemployment, that was a number for a long time, 5%. That's when inflation is going to start going up and, you know, we're going to need to worry about that again.
--:-- Jacob Goldstein: But then we hit 5%. It's like, no, you know what? Uninflation is still remarkably low. And then we hit 4.5%, still low. Hit 4%. You know what? Inflation is really low. Let's just keep going, right?
--:-- Jacob Goldstein: And so that was the essence of the Goldilocks period. Inflation just stayed low, sort of no matter what. Did anyone get to an answer? How was it that you could have something that was just right?
--:-- Jacob Goldstein: So there are different answers, which is to say there is no clear definitive answer, but there are ideas that make sense. So here are a few of those.
--:-- Jacob Goldstein: One is workers, even at low unemployment, in today's economy, have less bargaining power than they used to because of the decline of labor unions to a large extent, right?
--:-- Jacob Goldstein: So if you go back to the 1970s, which is sort of the, you know, they call it the great inflation. It's the big inflationary moment in the U.S. in the last many decades. Hard choices are necessary if we want to avoid consequences that are even worse.
--:-- Jacob Goldstein: I intend to make those hard choices. I have already vetoed bills that would undermine our fight against inflation.
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--:-- Jacob Goldstein: Jacob Goldstein, longtime economics reporter, host of the podcast, What's Your Problem? Is there a story that defines the moment we're in now?
--:-- Jacob Goldstein: You want a nursery rhyme? I mean, right now, like, we're in peril, right? There's people in peril all the time in fairy tales, right?
--:-- Jacob Goldstein: So this is kind of, I don't know, end of act one or middle of act two in the story, right? Like, because, you know, unemployment is still very low right now.
--:-- Jacob Goldstein: People are mostly focused on inflation, but like unemployment is still at historic lows. You know, there are two job openings for every unemployed worker.
--:-- Jacob Goldstein: Like, this is incredible. It's a good time to be a worker right now. People are less focused on that because they see prices going up and they're like, prices going up is bad.
--:-- Jacob Goldstein: But like the economy in a weird way right now, it's not fundamentally bad. It's just at great risk.
--:-- Jacob Goldstein: Okay, I googled it while you were talking. Peril in the woods, a folkling tale. Or pals in peril. Or penguin in peril. Apparently, peril is a really big part of children's story.
--:-- Jacob Goldstein: Isn't any story, it's like some child is in peril, right? That's the story. Are they going to be okay? And if it's like a 19th century story, they're going to die.
--:-- Jacob Goldstein: And if it's a 20th century story, they're going to be okay, right? So, yeah. Like, is it the grim version where, like, whatever, the little match girl dies?
--:-- Jacob Goldstein: I guess that's Hans Christian Andersen. Or is it, like, the Disney version where, like, the sisters love each other in the end?
--:-- Jacob Goldstein: Yeah. And we actually don't know right now. That's the thing. Like, we don't know. There's a very good chance that we could have a recession, right?
--:-- Jacob Goldstein: Just to be clear, like, inflation is quite high. The Fed is raising interest rates. And what the Fed wants to do is slow demand, slow hiring, frankly.
--:-- Jacob Goldstein: They don't want unemployment to be 0%. They want to keep it where it is now, enough so that inflation comes down. But they don't want to do it too much, right?
--:-- Jacob Goldstein: Because if they slow demand too much, then we'll have a recession. Now, to be clear, we've been sort of conditioned, I think now, to think of a recession as like 2008.
--:-- Jacob Goldstein: It wouldn't have to be that bad. Let's say we don't want to panic ourselves, but we worry we might be headed into a recession.
--:-- Jacob Goldstein: Are there two or three things that tell us, oh, we're definitely going down that road now? Well, GDP is one, right?
--:-- Jacob Goldstein: When we talk about the economy growing or shrinking, we're talking about GDP, gross domestic product, which is basically the value of everything everybody makes at work in America, essentially.
--:-- Jacob Goldstein: In fact, GDP did contract in the last reading. GDP is a nasty minus 1.4, minus 1.4. But everybody's like, no, don't pay attention to that one.
--:-- Jacob Goldstein: It was weird. It was like weird inventory things. So I'm taking everybody's word on that.
--:-- Jacob Goldstein: The one that I sort of care about more, that feels real to me, is jobs, right? We're still adding jobs.
--:-- Jacob Goldstein: If employment growth continues at this pace, the economy is set to recover all of the jobs lost during the coronavirus pandemic by summer.
--:-- Jacob Goldstein: People losing their jobs is bad, right? Like, we can all agree, whatever you think, like, it's good when people get jobs. It's bad when people lose jobs.
--:-- Jacob Goldstein: So, you know, the jobs numbers come out every month. They're a good, reliable data set. And so if we start to see months where people are losing jobs a few months in a row, like, we should worry.
--:-- Jacob Goldstein: You made the point just a second ago that if we go into a recession in 2022 or if we have a recession of 2022 or 2023 it has to look like the recession of 2008.
--:-- Jacob Goldstein: We been friends for a long time and I know that you don't like speculation but what might the recession of 2022 look like?
--:-- Jacob Goldstein: The recession of 2008 was not a normal recession. It was like a once every 50 or 70 years, I hope, financial crisis, right?
--:-- Jacob Goldstein: And so it has sort of is scarring, right? I mean, but it's not normal. And there were lots of recessions between the Great Depression and the financial crisis of 2008 that we have sort of forgotten because they weren't that big of a deal, right?
--:-- Jacob Goldstein: There was the dot-com bust around 2000. Now that you can get whatever you want at Pets.com, it's like Mardi Gras. Don't give up. Don't give up.
--:-- Jacob Goldstein: You don't want to be glib about it, right? People do lose their jobs. But, you know, it might last for a few months, right? It might last for six months, and then the economy comes back, and unemployment goes back down, and everything's okay.
--:-- Jacob Goldstein: That's quite normal, and I think more likely, certainly, than like a financial crisis. So it's bad, but it's not catastrophic.
--:-- Jacob Goldstein: You don't have the government intervening in the economy. It doesn't feel like what's going on. It just feels like, oh, this is bad, and I hope it ends soon.
--:-- Jacob Goldstein: Listen, I don't want to make fun of crypto, even though I also do want to make fun of crypto. But when we talk about the dot-com bubble 20 years ago, the deal was that everyone realized some things were happening that were very dumb.
--:-- Jacob Goldstein: Like the Pets.com fiasco. This company is worth tens of millions of dollars. Oh, it's not actually worth anything.
--:-- Jacob Goldstein: And while we've seen crypto crashing, I've been wondering, did everyone just realize something about cryptocurrency in the last couple of weeks?
--:-- Jacob Goldstein: If you go back several years, there was this idea about crypto that it would be what they call an uncorrelated asset, which is a thing you can own that doesn't go up and down with lots of other things, which is kind of nice, right?
--:-- Jacob Goldstein: Like most stocks, say, tend to go up and down together. And, you know, crypto was like this new different thing, kind of like gold.
--:-- Jacob Goldstein: People compared it to gold. It is a digital gold that has those safe haven qualities that we're all looking for.
--:-- Jacob Goldstein: But over time, and especially over the last couple of years in this great boom in speculative assets, fueled in part by really low interest rates and lots of money in people's pockets, crypto and in particular speculative tech stocks started to move together quite closely.
--:-- Jacob Goldstein: Even just the NASDAQ, you know, the index of big tech companies. And crypto, they basically moved up and down together.
--:-- Jacob Goldstein: So crypto just became another kind of speculative tech bet. And I think that's what we're seeing now with the move down.
--:-- Jacob Goldstein: I mean, tech stocks are also down a ton, right? And I think both crypto and tech stocks went up in this free money, low interest rate forever world, the Goldilocks world.
--:-- Jacob Goldstein: And this idea that the Goldilocks world is ending or is potentially ending, which is clear now, is driving both tech stocks and crypto down.
--:-- Jacob Goldstein: I know very little about cryptocurrency other than it turns out everybody I know under the age of 35 has been investing in it.
--:-- Jacob Goldstein: And one of the things I wonder is whether or not we are going to learn something from our interactions with this new kind of currency.
--:-- Jacob Goldstein: If it turns out that it's all been a bubble, what are the good lessons that we might learn?
--:-- Jacob Goldstein: Yeah, I mean, there's a big question that I still have about crypto, which is, is it going to be really useful for something other than gambling and speculating?
--:-- Jacob Goldstein: Yeah. And, you know, it very well may have been a bubble, right? The price has clearly come down a lot.
--:-- Jacob Goldstein: But if you look back over time, you see historically there are these bubbles that leave useful technologies in their wake, right?
--:-- Jacob Goldstein: There was a famous railroad bubble in England in the 19th century, and lots of people lost a lot of money. But England wound up with lots of railroads, which was good for England, right?
--:-- Jacob Goldstein: And similarly, in the dot-com bubble in this country around the turn of the 20th century, there was this huge little sub-bubble in fiber optics, right?
--:-- Jacob Goldstein: These companies that were laying fiber optic lines went to crazy valuations, and then the valuations plummeted. And so the investors who bought high lost a lot of money, but we got great fiber optic lines, which are great for sending data, right?
--:-- Jacob Goldstein: So a thing that's really interesting and at some level to me perplexing about crypto is, like, it hasn't really worked yet for all of the smart people and all of the experiments.
--:-- Jacob Goldstein: Like, there is no crypto thing that normal people who don't care about crypto use just because it's better, right? Like, lots of people send remittances and pay high fees.
--:-- Jacob Goldstein: Credit card fees are high. Like, there are lots of places where, like, new payment rails would be really useful. And I keep hoping crypto could be that.
--:-- Jacob Goldstein: So we were in optimistic times. The Goldilocks era went on for years.
--:-- Jacob Goldstein: You've talked a lot about how people's expectations determine what happens in the economy. Do you think that we get stuck in optimism mode?
--:-- Jacob Goldstein: And we should actually be always thinking about how precarious all of this is. I mean, nobody could have predicted the pandemic.
--:-- Jacob Goldstein: As you said, everyone said inflation was transitory. And now it's all in peril. What is the perhaps better way to respond to all of this?
--:-- Jacob Goldstein: So I want to separate inflation expectations from expectations about the world. Right, because we actually are, I think, all better off if everybody expects that inflation is going to be low, because that actually contributes to inflation being low.
--:-- Jacob Goldstein: That's a thing where if you believe the happy story, it actually makes you better off.
--:-- Noelle King: Jacob Goldstein, his new show is called What's Your Problem? Our show today was produced by Miles Bryan. It was edited by Matthew Collette and engineered by Paul Mounsey.
--:-- Noelle King: And it was fact-checked by Laura Bullard. I'm Noelle King. It's Today Explained.
