J Scott Explains Inflation, Interest Rates & the Economy

BiggerPockets Money

In this episode of the BiggerPockets Money Podcast, hosts Mindy Jensen and Scott Trench welcome back economist J Scott to dissect the current macroeconomic landscape, focusing on persistent inflation, Federal Reserve policy, energy markets, and geopolitical supply shocks. They

Key takeaways

• J Scott describes the Federal Reserve as a reactionary 'backseat driver' that raises interest rates to induce demand destruction rather than directly controlling energy prices or supply chains.
• Scott Trench notes real median wages have grown roughly 5% since 2022, but this growth is outpaced by historical rental inflation averages of 2-3% annually, limiting rent growth potential.

Main topics

• Inflation dynamics & CPI components
• Federal Reserve monetary policy & interest rates

Notable quotes

"The analogy that I've used in the past is if you imagine those really long fire engines where there's a guy in front driving the fire engine, but the really long ones have the guy in the back... And that's the Fed."

Conclusion

The episode provides a grounded framework for understanding how geopolitical events, fiscal

Transcript preview

Speaker 1 (0:00) Today, we are bringing on Jay Scott to get an update on high inflation and the overall health of the economy and what this means for you as an investor. Speaker 1 (0:14) Hello, hello, hello, and welcome to the BiggerPocketsMoney podcast. My name is Mindy Jensen, and with me as always is my stays current co-host, Scott Trench. Speaker 2 (0:21) Thanks, Mindy. I am so excited to track my macros today here with Jay Scott. We're welcoming him back for what, like the fifth or sixth time here on the BiggerPocketsMoney podcast, this time to talk about the macro picture and the news cycle. So Jay, welcome to the BiggerPocketsMoney podcast. Speaker 3 (0:35) Thanks for having me back. I think it's been a little while, but thrilled to be back. Speaker 2 (0:39) Yeah, it's probably been like almost two years, I think, at this point. You know, I just think it's wonderful. how I think you're financially independent. You would describe yourself as financially independent. Is that right, Jay? Speaker 3 (0:47) I would describe myself as I could be financially independent if, yes, yes. I guess yes is the right answer. I don't think I will ever give up working or trying to achieve more. I'm a very competitive person. And so I think of money very much. For me, it's a game that I love playing and I like winning, not just to accumulate more money, but just to be able to give back. Speaker 1 (1:10) But you don't have to work in order to eat. That is correct. So you are financially independent. You're just not retired early. Speaker 3 (1:16) Although if you've been to restaurants recently, that's starting to change. I might have to work the rest of my life to eat if I want to eat out these days. Speaker 1 (1:24) Pauper J. Scott, welcome to the Baja Podcast. Speaker 2 (1:28) What I think is interesting is that, you know, people... choose to do all these different things with their early financial freedom, work optional lifestyle, whatever you want to call it here. And what it seems like you like to do is you like to pick fights with strangers on the internet via Facebook posts. And I think it's wonderful the way you do it because the other day you got accused in the same thread of being a leftist. and a MAGA cult member. So that's why I'm so excited to talk to you today, because you will anger everyone with what you attempted as an objective analysis of all of our biases here. But I think that's hilarious, and I love that. I had some choice words for the people who thought that you were either one of those things in that particular. thread. Is that right though? Is that right? Is that your goal is to pick straight fights with strangers on the internet these days? Speaker 3 (2:10) It's not my goal, but for some reason we do what we're good at and that's what I'm good at. And to be honest, if you were to dig into my politics, you would find that in a lot of ways, I'm very left. And in a lot of ways, especially fiscally speaking, I'm very right. My issue isn't so much that people have left and right. ideologies. It's that people are inflexible and they align themselves with one side and ignore the other. And I think it's important that we have to recognize that there are good ideas on both sides and there's nothing wrong with being a blend. Speaker 2 (2:42) Love it. I think that's the right lens to bring to a lot of politics. I wish more people did that in this country and had their own views on things rather than parroting MAGA or parroting woke. you know, whatever it is. But I think you have a great blend of this. And that's why I'm so excited to talk to you today. Your Facebook feed, everyone listening to this should go and follow Jay Scott on Facebook, by the way, I do. And I love to chime in there. And I love watching the real dolts respond to his posts on there. You know, one day it's energy prices, one day it's inflation, one day it's the treasury, one day it's this policy in Iran, these types of things. Is there an underlying framework that drives your analysis or what you discuss on? macro news? What do you think are the important variables in understanding the macro economy in today's world? Speaker 3 (3:27) Yeah, I'm a big believer that if you want to be successful as an investor, if you want to be successful as a business owner, if you just want to be successful in general with your money, it's important to understand macro conditions, macro context, understand how things in the fiscal world relate to each other. And so my goal whether it's my Facebook posts or whether it's my newsletter where I write about economics. It's essentially to try and put together or connect the pieces. I talk a lot about interest rates. I talk a lot about monetary policy. I talk a lot about these days, energy supply chains, energy constraints, inflation, basically all the things that are kind of interplaying together that impact us as, again, investors, business owners, and just regular people that need to invest our 401k or invest our savings. I love the saying, time. in the market beats timing of the market. And I don't like the idea of trying to figure out the best investment at any given point and moving your money around too often. Another saying I'm a big fan of is money is like soap. The more you handle it, the less of it you have. We pay a lot of money in transaction costs. So I don't ever want people to say, okay, Jay's saying the economy's changing. I need to move my investments from X to Y. But instead, I want people to understand that there are long-term implications of what's going on in the economy today. Things that are happening today are going to impact us over the next 5, 10, 15 years. And we need to be thinking about our investments. We need to be thinking about our portfolios on that larger scale. When Speaker 2 (5:06) I think about the variables, again, that drive the economy, I think there's employment, there's inflation, there's interest rates, there's the value of the broad market index, there's corporate profit. There's all these different variables. And the way I think about it, and this is kind of a novice or amateur look at it, and I'd love your feedback, but as long as these variables are within some semblance of a normal range, they're kind of watch-em variables. But when they move far out of those ranges, one of those can become the dominant driver of the news or economic outcomes for the country at any given time. a reasonable way to interpret it? Or how would you correct that? Speaker 3 (5:45) No, I think that's reasonable. And I would be even a little bit more specific. I mean, a hundred and some years ago, 110 years ago, 13 years ago, Congress basically created the Fed, the Federal Reserve. And then in the 1970s, we made it very clear what the charter was for the Federal Reserve, what its purpose of existence was. And we basically said the Federal Reserve exists for two reasons. One, price stability, basically making sure that inflation did didn't go too high or too low. And two, maximum employment, basically ensuring that the growth rate of the economy was nice and smooth and on an upwards trajectory. And so I like to think that the reason that the Fed exists is because those are the two things that are most important when it comes to the economy, when it comes to Americans, when it comes to basically us as a nation economically continuing to grow. And so The lens that I like to look at things when I'm looking at the economy is that lens. Where is growth headed and where is inflation headed? Because again, if that's the most important thing for the Fed to make sure this country stays on track, it should also be the most important thing for us as individual investors and business owners. Speaker 2 (6:52) So is that where you like to start is with what the Fed's doing? What is the Fed doing? Can you give us an update on what's been going on and how that's been impacting things? Speaker 3 (6:59) Yeah, and I'm happy to talk about that, but I like to think of it just... Kind of the opposite. I think of the Fed as being the reactionary piece. The analogy that I've used in the past is if you imagine those really long fire engines where there's a guy in front driving the fire engine, but the really long ones have the guy in the back. And he's kind of controlling the back wheels to make sure that the engine doesn't go off the road from the back. And that's the Fed. The economy is flying ahead. Fed is kind of sitting in the back, kind of steering to make sure we don't go off the rails. They're the ones that are reactionary. And so the Fed doesn't necessarily control the economy. They have some influence over the economy, but more so they are reacting to what the economy is doing. And so if you look at what the Fed's doing today, we've seen quite a bit of a... I don't want to say a 180 over the last few months, but certainly maybe a 90 or 120 degree turn. They're definitely turning. Basically, they went from, hey, interest rates should be lower. We need to basically stimulate the economy more because inflation was coming under control as of a year and a half, two years ago. But since, I guess we could say February, March, when the war in Iran started, we've started to see some... disturbing trends with inflation and also with economic growth. And I think the Fed is getting a little bit concerned that their first mandate or one of their two mandates, which is price stability, basically ensuring that prices don't go up too fast, is a threat to this country. And we've all seen it. We've seen energy prices go up and energy prices impact prices of most other things. And so what the Fed has done to try and counteract that inflation is they've raised interest rates. And we can talk about why that is and whether that's the optimal strategy. But long story short, the Fed has had to raise interest rates to try and get inflation under control. And they did it last week. They did it in September. And they've indicated that there's a reasonable chance that they're going to do it two or three more times over the next year. And so, again, us as investors, as business owners, interest rates are important because ultimately that... impacts our borrowing costs. When interest rates go up, it costs more to buy a car, it costs more to get a business loan, it costs more to get a mortgage on a house or an investment property. And so what we're seeing from the Fed is the Fed is starting to get a little concerned about inflation, which is very interesting given that the Fed has done a really good job over the last year or two to try and settle our fears and tell us, hey, don't worry, inflation's under control. We might be doing just the opposite. We might be lowering interest rates, but I think they're now admitting that things are somewhat it out of their control and running away. Speaker 1 (9:30) When you're ready to start your business, Northwest Registered Agent helps you do more than just file paperwork. You get all the tools to build a real business identity from day one. A business address, website, phone number, operating agreement, free guides, and more at no extra cost. 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Speaker 1 (11:57) Is the rate hike really going to have much of an effect on the inflationary period that we're in right now? As I understand it, inflation is being caused by rising fuel costs, which is coming directly from the war in Iran. And that's not going to change until the war in Iran ends. or we get some sort of peace deal that actually sticks. Speaker 3 (12:19) Yeah. And it's a really good point, and it's a great question to ask. The Fed doesn't control, obviously, oil prices. So raising interest rates isn't going to lower oil prices. But here's the problem. I mentioned earlier that the Fed has two mandates, two things they try and do. They care about price stability, making sure prices don't go up too high, and economic growth. They want the nation to keep growing. Higher energy costs. impact both of those things. Higher energy costs are a risk to both of those mandates by the Fed. And so even though the Fed can't directly fix the problem, again, high energy costs, there are things that the Fed can do to mitigate that problem. Basically, there are things they can do that are not an optimal solution, but it's better than just sitting around and not doing anything. And specifically, that's raising interest rates. And the reason why raising interest rates can have an effect is because when interest rates are higher, people tend to spend less money. If you know that buying a house, you're going to have to get a mortgage at 7.5 % versus 6%. If you know that buying a car, you're going to have to get a car loan at 6 % versus 4%. Or your credit card, if you're not paying off your credit card every month, if your credit card is 18 % versus 12%, you're going to spend less money. And when people spend less money, they use less energy. And when they use less energy, there's less demand for energy and energy prices come down. And so what the Fed is hoping to do, again, they can't bring energy prices down directly, but what they're hoping to do is to create what's called demand destruction. They're hoping to slow down spending by American consumers and less spending means less need for energy. Less need for energy means less demand. Less demand means lower prices. And so again, it's not an optimal solution by the Fed, but it's really the only thing they can do right now to try and get. inflation under control. Speaker 1 (14:04) So maybe regular people aren't consuming as much energy or won't be consuming as much energy in the future, but there's still the cost of the energy to get the goods to the stores that you're going to get to anyway. I'm thinking grocery stores. People aren't going to stop eating because groceries are too expensive. They're going to buy the lower priced groceries, but it still costs diesel gas to get that truck to the grocery store. Speaker 3 (14:30) Yeah. And that's where we have to kind of differentiate between commodities, necessities, things people are going to buy, whether prices are high or low. People are going to go to the grocery store and they're going to buy food regardless of whether food has gone up 10 % this month or this year or not. But then there are plenty of other things that are more discretionary. People aren't necessarily going to fly as much when jet fuel prices are super high in airline. costs are high. People are just going to sit back and say, okay, instead of flying to Europe for my trip, we're just going to go get a hotel down the street and the kids can play in the pool at the hotel. Or other things, buying automobiles, buying luxury goods. Those are all the sorts of things that Americans don't need to spend money on. And if it gets more expensive to buy those things, they're going to cut back. They're going to save a little bit more. And if interest rates go up, the other... part about interest rates going up, not only does borrowing costs go up, but if interest rates go up, savings rates tend to go up. You get a little bit more money from your bank if you keep money in savings. And so there's more of this incentive not to spend money on the discretionary things. But again, as you pointed out, people are still going to buy. gas to get to work. They're still