Welcome to Stuff you Should Know, a production of I Heart Radio. Hey, and welcome to the podcast. I'm Josh Clark, and there's Charles W. Chuck Bryant seated directly across me, within almost arms reaches, Jerry Rowland seeded to my right, and I'm seated right here in my access in the center of my own being. And this is stuff you should know. Yeah, in person a dish, first time since uh, the the one time three D audio experience experiment. Well, I forgot about that. I marked it out of my head. That's the only time we've been in the same room to record since COVID was that that those two episode? I remember the second one. I remember the first one. It was the Ivy League hobbit thing. Yeah, because Ivy League and three D audio or just like it's such low hanging fruit, you know. Yeah. But we're back because uh, you know, I put it on my Instagram. The studio is going away. We're moving house. And surprisingly to me, at least, you said, hey, guys, I would really like to record in there together one more time. Why is that so surprised? I don't know. You don't seem overly sentimental about stuff like this, that's not true. I weep a lot, yeah, but not about studio rooms though. No, I mean I'll miss this particular room. Okay, me too. I mean this has been I mean, I think like seven of the most solid years we've ever had been right here. Pretty solid. Although the the corner office with moving blankets his sound bafflers was a pretty solid couple of years to the quaint early days. I drove by that building the other day too, and for the first time in forever, yeah, in Buckhead, and I was just like, do you remember there was like, for some reason, every time we recorded at like one thirty, when we had just started to get going, a fire truck with go right outside every day at the same time. It's like they knew, oh the memories. So that's enough fun for now. Because we're talking about interest rates, all right. I don't know why I picked this. I mean, I do know why, but I just I'm so not good at this stuff. So I can imagine an ap economics like teacher picking this for for their high school class. So I think that's kind of like a public service you've done here. Well, I picked it because you know, the FED just raised the rate by it was half of a point, right, Yeah, biggest hikes in nineteen uh no, two thou Yeah, So I saw that biggest hike and I was like, oh my gosh, what was it? It was a half a point, And I was like, I don't understand this, so I might as well learn enough to tell other people a little bit about it. Do you understand now, Yeah, like that half of a percent is actually a pretty big deal. It is, and I understand now more than ever. There's like nine people that just controlled the economy of the United States, right exactly. Yeah, it's true. Yeah, that half of a percentage point is you'll see by the time we're done with this, everybody is basically the FED goingh yeah, they're really kind of nervous right now. And what they're going for by raised in the interest rate is to cool off the economy. We have inflation rates that haven't been since not a good time for inflation, um, And I mean we're talking the Great Recession was in there too, right, Like, this is a big deal, the inflation that we're seeing right now. So the FED is saying, Okay, we have an economy that is overheating, like you want some inflation as we'll see. But this is way too much inflation. The prices of like everything is going through the roof. People are getting really mad. We better do something about it. But what they're trying to do by raising the interest rates is to create a soft landing so that prices come down, but they don't affect productivity and employment. That's the big thing. And Ben ber Nankee put it once back when he was still just affect governor rather than the chair. Um. He said basically that what they were doing was like driving a car and paraphrasing here, well, um, yes, probably, he said the FED. Basically, what the FED does is is like driving a car with fogged up windshield, a faulty spedometer, and a brake, pedal and accelerator that when you press it, the car has a very significant delay before it responds. Oh, I thought you were going to say, a break in an accelerator that just switched positions without letting you know, which is with gender's on fire and there's monkeys everywhere and they're angry. Yeah. The delay, sure, because none of these uh you know, none of these moves. It's an immediate impact and it's sort of a fingers crossed behind your back kind of move. Yeah, almost always. Yeah. And so most people who are watching this are saying the Fed waited too long because they kept the economy juiced for years and years and years. It just kept getting hotter and hotter, and everybody's very happy until prices started going on, right, So they waited too long. So most most I shouldn't say most. A lot of people who know what they're talking about, say there's a recession coming pretty soon. So battened down the hat key indicators, as they say. Right, So, what does all this have to do with interest rates? Chuck, let's wrap well, I mean this is we'll get to the Fed, but this is generally about interest rates. The good news is everything else about interest rates is pretty basic. Uh. We are a nation and and and and a lot of ways a world that operates on loans and interest in barring money, and then banks borrow money from each other, and then the Fed lends money to banks, and it's just it's a it's a weird thing. It's a weird world economy that has been created over the past several hundred years. In this country, there's a lot of shiny shoot suits. People break your arms. Yeah, it's basically what it's all based on, sure, But it's all based on the fact that if you want to buy something as a person, uh and you know we're focusing on the United States here, uh, and you don't have the money, it's no big deal because you can get credit cards. If you want to pay large interest rates, you can get home loan or a car loan, because not everyone can shell out, you know, twenty two fifty grand for a car over my ch house's costs now eight eight million dollars. And you know there's risk get involved anytime you lend money and depending all of it really comes down to the risk of the loan as according to what the interest rates gonna end up being. Right. So what we're talking about now our interest rates on the micro level, like the you and me level, Like you're saying, how buying car, buying credit cards, all that stuff, and it's it is it's really basic, like you were saying, where um with it? With interest rates. If you go to get a loan, say, they're gonna look at a few things like what are you gonna buy? I'm gonna buy a really cool vintage poison T shirt on eBay ok Okay, it's like fifteen grand easily, I want to borrow some money to get that T shirt, that's right. Um, So they're gonna look at my whoever I borrow from is going to look at my um my credit score. Um, especially if it's an unsecured debt, right Yeah. Unsecure debt is basically any kind of credit card debt because they can't come and take away anything. Basically, they're not going to take my poison shirt if I default on the loan. The way that they get you is they affect your credit, but I still get to keep the poison shirt. So who's the sucker here, right? As opposed to a secured UH debt, which is you've got like a home mortgage, because they can come and take that right. So getting back to interest rates, then that would mean that since the bank that lent you the money to buy your home can legally seize your home because it's a secured debt, they're going to charge you less because at the end of the day, if you default, they can take your house. The credit card is going to charge you a higher interest rate because at the end of the day, if you default, they can't take that poison shirt. So they're going to charge more. And the reason that there's a difference in charging more or less is because the entire point of interest is that's the price you're paying for somebody to loan you money in exchange for them taking a risk, because there's always a risk that you're going to not pay it back, even if you have great credit. Something could happen. Um, you could break bad or something like that. Who knows, but there's always a risk. And then that's what interest is. It's it's you're it's the money they make for loaning you that money and taking that risk. That's right. Uh, And it's a little it's not counterintuitive, but it kind of works both ways because if you had the collateral of like let's say a home mortgage and they can take that house, that's gonna be a much lower interest rate, like you said, than the credit card, but it's also gonna be higher in some ways because it's a long term loan. Uh. If it's you know, it's kind of a negative outlook. But I think that banks look at people and say, well, if you have a thirty year home mortgage, like, I don't know what you're gonna be doing in twenty seven years, Like you may be broke, maybe destitute, you may be in the hospital and have no money anymore, So that's gonna be a little higher. Which is why if you can, like people always I mean financial people, I'm not one of those, but they always recommend you, like refire your house and bring it down to a fifteen year loan because it's risky and it'll be a little bit less of an annual percentage rate. Right. And then one of the other reasons if you've ever looked at a house or gotten a a mortgage, um, there's a big difference between the rate your charge for a fifteen year and a thirty year not just because there's a longer chance for you to default on the loan, but also because over the course of thirty years, inflation is going to actually eat into the amount of money you pay that bank back because it's going to depress the value of the dollar over time. Right, So when that bank is getting your hundred what's left on your hundred grand years from now, it's not gonna be the same as the value of that dollar now. Right. So there's actually two types of interest that you pay on say like a thirty year mortgage, or even a fifteen year mortgage, and that is the nominal rate, which is the rate you agree to, say ten percent, which is astronomical. It don't ever take a homeland out with a ten percent mortgage interest on it, right, Okay, Um, that's just a that's just a tip from me. Um. But over time, as inflation grows, um, let's say over that that fifteen years, inflation grows a total like four percent, you're actually paying the bank bank back, or they're actually getting back the value equal to about six percent of what they lent you. And what's that called? That is the real interest rate? Right, that's right, okay, I remember wake up everybody. By the way, all right, and by the way, Jerry's eating over there, and that's there's just nothing more normal and relaxing than us sitting in a room and Jerry chomping down next to us. I just want to acknowledge that it's kind of nice. It is nice. She's not eating me, so though this time it's the only thing missing from this. You know, most people fall asleep to like white noise or the sound the ocean. I have wanted just Jerry chewing. Let's be right to bed. All right, So I guess that's like just the basic over view of how regular interest rates work. It's really easy. It's very basic. It's the price you pay to borrow money rather than saving up to spend. Yeah, but no one cares about that stuff because you you know, you try and get your credit card rates down, you try and have good credit, and you buy a house, you try and get the best rate you can, and then it's all kind of said and done. But what everyone sits up and takes attention is when the Federal Reserve. And by the way, if you ever want to just send me into traffic, we should just do a whole podcast on the FED. I don't understand why they talk the way they do, like they're purposefully obtuse. I think like it's probably hard, like you can just read their game in the whole system, so they just want everyone to be even nice and sleepy. I guess, so when they're talking, it's just nuts. So when the chairperson of the Federal Reserve sits up and says, all right, we think we're gonna raise some interest rates. Uh. And by the way, banks they try to know before they even make that announcement because they're always watching the chairperson of the Fed and like, what they have a breakfast this morning, right, how are they feeling today? Um. Then that's why the recent point five percent adjustment was just such a big deal because it can have a really immediate and long term effect, which is kind of weird because immediately like stocks are going to do all kinds of crazy things, and then it's got this long term effect that they hope is going to work out, but it doesn't always because it's not an exact science. Yeah, really good example. That goes back to um bank mortgages. Right, So banks, I'm sure they carry out their own research as well to predict what's going to happen in the future, because they want to set their mortgage rates, their thirty year mortgage rates today with this close a forecast of what's going to happen with inflation over the next thirty years as they possibly can, because they wanted to squeeze out every real penny that they can from you from your loan. Right. That's like crystal ball stuff though you know it is, but I mean it's I think they've gotten kind of good at it, but it's still the end of the day, just an educated guess one of the things they do is watch what the FEDS doing. Is the Fed raising interest rates? Are the raising interest rates? Does that mean that they think inflation is going up? And the inflation is going up, then we need to adjust our mortgage loans. Right, that's pretty simple. But it just keeps going from there. So if mortgage rates increase, home buying slows, housing prices drop, that means new houses are being built less frequently, which means there's fewer carpenters being put to work. That means there's fewer lumber mills creating lumber for those houses. So those people are out of work. Those people are out of work, they're starting to default on their um their rent or their mortgages, and foreclosures start to go up, which further depresses the housing value or the housing market because a flood of houses start to come on the market because of foreclosures because banks want to offload them. Just from the FED saying we might increase by a quarter of a percent our interest rate. Yeah, yeah, that's the kind that's what's at stake when they're speaking out in public or even like making moves, yeah, like with without speaking at all. Yeah, it's it's pretty scary and precarious. Um, the FED itself, and like I said, maybe we'll do if I guess we have to at some point on the FED. But just as a broad overview of the Federal Reserve is the central bank of the US. There twelve regional Federal Reserve banks and a seven member board I talked about. I don't know if I said seven people, but a seven member board of governors in d c UH. And it was created in nineteen thirteen too, you know, ideally stabilize and secure our economy because at the time it was sort of the wild West when it comes to banking. Yeah, there are a lot of bank panics actually, where people would no good make a run on a bank and the bank would be like, we don't have any more money, and they would go under and like people would lose their entire savings. Yeah, I mean, it was a pretty brilliant creation. Uh. And one of the things the FED does a lot, But one of the things the Federal Reserve does is it has a lot of cash and it helps supply the banks that you and I bank at with cash reserves. And um, maybe let's take a break. That's a good Cliffhanger, and we'll talk about the fact that banks, by law I have to keep certain amounts of money, and it gets even more boring. I can't believe that Cliffhanger. Okay, Chuck. Before we get into um the reserve requirements of banks, I have a pretty neat little story. Actually, we're talking about banking panics, and there was one in two or at least there was one bank that went under UM and they had a branch in Sacramento that a guy named Louis Remy I'm gonna say UM went to go get his twelve thousand dollars that he'd saved up. It's about like three hundred and fifty thousand dollars in today's money. It was like his nest dagg right. He went to go get it out and was told that the bank had failed and they didn't have his money. So you know what Louis or Louis Remy did. He got on a horse and he rode from Sacramento to Portland, Oregon, six hundred and sixty five miles in six days. He rode for a hundred and forty three hours. Ten of those was to stop to sleep. I thought I was going to say, to get a new horse, because he had to do that. He did that like in an instant, right, So for for six days he slept ten hours to ride to Portland's got there before the steamership that was carrying news of the bank collapsed Sacramento. So he was racing the steamer, got there an hour or two before the steamer got his twelve tho dollars out of the Portlands brand to the bank, and like within an hour or two of that bank collapsing, finding out that there was no more bank anymore. Isn't that amazing? I'm glad his flex capacitor was working. Basically, that's basically what he did. But the horse version of that man, yeah, he said, oh I should give myself an hour. That should be plenty of time. I never understand that in time travel movies. I don't either. It's like, go back the week before time. Just take it easy, maybe get like a snack. You have time, all right, So we promise the scintillating details of the fact that banks have to keep a certain amount of money in their reserves. And that is because you know, if every I mean it's not the eighteen hundreds, not everyone's gonna say I gotta go to that Chase bank and withdraw every penny all at the same time. But they got to be protected against that. Oh, it could happen, though, there's still sure. But the problem is once a panic starts, it spreads like wildfire, because that means, well, if these people are panninging, even though I'm not panninging, I better go to the bank anyway to get my money out before it collapses, before more of these idiots panic and take their money out. Right, So, whether you're panicked or not, it actually makes sense if there's a panic and a run going on in your bank to go withdraw, and it's just this chain reaction that starts. So the FED protects against that by by requiring that these banks have these reserves. Right, yes, so it's known as the reserve requirement. It's based on a percentage of all the deposits in that bank. It's very simple calculation. And then they they these banks have to have non intersparing accounts at the Federal Reserve to make sure the Federal Reserve can cover everything, right, to make sure that it's like, okay, you have to have this much, we're going to hang onto it. For you. That's right. So they're they're taking this average every day, but it's over it's an average over two weeks basically to determine whether or not it's meeting that reserve requirement. And here's the thing that I don't know. I guess it's sort of surprised me. Is banks, depending on what's going on on a day to day basis, are borrowing and lending money to each other well to cover themselves. Yes, so that sounds frightening, but it makes sense. But so they've got like a pile of money, and whatever money they have, they can make more money if they lend that money out, if they put it to work, right, Yeah, I mean that's what they want to do, is just to get more interest. So if on one day they're like, oh, we've len out more than we we have in reserve, we go to another bank that has an excess and borrow it from them and then we put it in our FED account and everything's fine. We're within the legal limits for those reserve requirements. Right. But if they run out of you know, banks to trade with basically at the end of the day, then they can go to the FED and say big Mama, we need a little money from you, actually, right, And the FED doesn't like that, so they actually charge banks more for the UM for to borrow money directly from the BED for overnight requirements. That's right, but it's ironically called the discount rate even though it's the larger of the two rates. The other rate, where a bank borrows from another bank overnight to satisfy the FED reserve requirements, that's called the UM Federal Funds rate. Right, I answered my own right, I thought you're waiting on me. Uh. And within that discount rate, there are a few different tiers, uh, kind of just like you would scale or a tier any loan. You've got your primary rate, which is the lowest one, and that's you know, if you're a great uh, if you're a great bank and good standing, you're gonna get that rate. You've got the secondary rate. Uh. And that's if I think this is by the way, is Dave Ruse but from house works dot com. Uh, And Dave said, slightly less sound institutions Galloping Gulch State Bank. Yeah. Probably. And then you've got your seasonal rate. And these are very small banks with that are based sort of around seasonal economies. Like tourism or agricultural something like that. Yeah, because like and when when it comes time to bring in the crops for harvest, all the farmers come and say, I need some money to get this stuff to market. I need loans, and those banks get strained at those times. Yeah. Or there's lots of great I feel old timey heist movies where uh, someone will you know, like during crop season, they'll know a bank will have just be flooded with cash on a certain afternoon. Yeah, there's a movie you're talking about, Raising Arizona that was definitely the case. Okay, was that it? But Wisdom, it's been in other movies. To Familio Estevez, is that a bank rubber? He was like a Robin Hood where he I think he robbed banks to get rid of the deeds so that the farmers could couldn't have their farms foreclosed. I never saw that. I know the movie you're talking about that, I saw it, Wisdom, I saw it. Hey, while we're talking about movies, I've been meaning to give a shout out to so our friend Toby his production company made a movie called The Green Night that slipped under the radar, not for me, buddy that's on the theater. Wasn't that an amazing movie? It is and one of the most like, uh, just sort of like in a in a day in time where everything is a Marvel movie or something, to to have something so original based on like an ancient tale. It was. It was great. It was so David Lowry is the director, and he's just a straight up a tier. Yeah, he's just making the movies that he wants to make. And their production companies called Sailor Bear. I think I'm so mad that that got snubbed at the Oscar. It's crazy. It's like cinematography and set design and costumes like it got nothing. It's crazy. It's wonderful. Yeah, and I think picked it up, which means their streak of like amazing movies, yes, flawless. It's a flawless streak they have. They haven't stumbled once in the entire the entire history of Come at me. If you've got a bad movie, it's not you know what I hear? Crickets? Is there a movie called Crickets? Maybe there's a movie out there called egg Egg from the sixties. Really yeah, I haven't seen it though, I just read about in Uncle John's Bathroom. Reader, I thought you were talking about the movie head the Monkeys, Monkeys right where they they tried to do the whole smile thing. Oh really, I think so they were there was kind of their answer to the beach Boys. Interesting. Alright, Uh, can we just keep talking about that stuff? All? Right? Here we go, Let's get back on this. The Fed funds rate. Is that what we're talking about. Yeah, we're talking about that's the rate that banks charge one another to borrow overnight to satisfy the reserve. Right, And this is the one that is just very simple supply and demand. If there are uh, there's a lot of cash and a lot of banks, then the rate is going to be lower. If there's demand for more money, then it's going to be higher. The Fed controls all of this in a roundabout way. Yeah, I mean they kind of control all of it in the roundabout way. And like also the economy like a Rube Goldberg mouse trap kind of way. Like it'd be so much easier if they were like, this is what you guys can charge one another as an interest rate. Yeah, but they don't do that. They let the market decide. They set a target and then let the market work and then they manipulate the market. That's right. So if the FED wants to lower that funds rate, it's going to buy securities from those banks. There's gonna be a more cash on hand all of a sudden. If they want to raise the funds rate, they're gonna sell government securities, which are I mean, anytime you start talking debt instruments, I just go a little crazy with excitement. But government securities are just debt instruments. They're used to fund government operations. Uh, it's basically so like the way I understood it was if Uh, like a lot of it. It's military spending and operations, and it just keeps them from having to like raise and lower taxes a lot because they want to keep taxes kind of stable. Right. So yeah, So with all that deficit spending, what they're doing is if if if the government could operate just on the taxes tax revenue it brings in, it would be it would be neutral, It wouldn't be operating at a depth that the wouldn't be any profit would be great. But it spends more money than it takes in, so it has to issue that debt, which is basically loans in the form of treasury bills. And that's what the FED is doing when they're out there buying or selling treasury bills, these debt securities. They're they're taking um debt in or out of the market. They're adding cash into or out of the market. And it's not like banks who trade with it's just a very select elite group of of what it's called primary dealers who buy and sell um these treasury bills with the Fed. They don't have a choice in this. If you want to be a primary dealer, you have to buy or sell depending on what the Fed wants to do at any given time. Right, And so by doing that, they say, all right, we want to buy a bunch of treasury bills because we want to inject cash into the market. UM. Here like sell those to us. Here's the cash. And by the way, we're not actually giving you this cash to go do anything with. This cash goes into your FED Federal Reserve account. Remember, and this is really important, Chuck, that account is non interest sparing. It makes zero sense in both sense of the word to um leave money in there when you, as a bank could make some money off of it loaning it to other banks. So the more money that the FED is put into those accounts, the more money there is to loan, meaning that interest rate drops. And this is also arcane. And again this is like a dozen people who deal with this on a day to day basis, But it has a ripple effect in that, um, when you when you lower the federal funds rate, those banks in turn end up lowering their rates to people like you and me. It has a cascading effect throughout the economy. Yeah, Like I think I used to look at the Federal eight and when they would move that and think that's the home mortgage loan rate. Essentially it translates into that. It does in a certain way for sure, but I thought the Fed sort of set that until last week. But the same but it's just you know, it's it's passed along on you know, like you said, both ways, either in better interest rates or worse interest rates for everything across the board for regular smells like us. Uh, there's also I mean, you can also buy you know, we'll talk about inflation in the stock market, which is where I get really confused. But um, remember how I was talking about, like the interest rates have to do with nothing but risk. Basically, if you want to buy if if you want to get out of the stock market and just say I'm only going to invest in like bonds and things like that in securities, then uh, you're not gonna make much money. The return on those is very very low because their government backed, which means the risk is very very low. People play the stock market because ideally you can get it like eight uh more money every year that you're doing it, whereas you're making like half of a percent. And that's the same way. Like you know, you you you make interest when you have money in the bank because the bank wants to use your money, so they're kind of taking a loan from you every day. You just don't realize it, but you get just a tiny less This why it doesn't payage to keep a ton of money in the bank, because you're making a tiny amount there too. Yeah, and so the federal funds rate UM has an effect on that as well. Right in the real world with the stock market. So if the federal if the Fed takes a bunch of money out of the out of the market um and floods the market with with like um treasury bills, right those treasury bills are easy peasy to come by, which means that they're worth less, which means that people are going to get less money from investing in them, which means they're going to turn to the style market because you're gonna make more money, right even though it's riskier. That juices the stock market when interest rates are low. When interest rates are high, meaning the Fed has soaked up a bunch of money, um, and they have sold a bunch of those those like treasury bills. Um. That means, yeah, I think I'm right, it's easy to get. That means that the interest rate has gone up, which means that you can get more money from those treasury bills, which makes the stock market less attractive to people who are investing in it, which usually signals a cooler economy. That's right. And I guess the final effect here before we break and then talk about inflation, which is so so fun, is if the FED lowers the funds rate, it's going to decrease the value of the dollar on the exchange market, on the foreign exchange market. And that is um, it's a little counterintuitive, but um, a little bit of a like a long term drop like the is not good you don't want the dollar to decrease and stay low. But on the short term, on the near term, um, it can be good for the American economy because if the dollar drops uh, then our money is not gonna be worth this much elsewhere. So buying things like products, are goods or services from overseas, it's gonna be more expensive. So they might turn to the home front to buy some of those goods and services, which can actually inject uh like kind of supercharge the local American economy on the near term, right, And so that actually can in turn lead to inflation accidentally. So if you have low interest rates, that means that money is abundant and cheap borrowing is cheap. A lot of people are out spending because interest rates are low. Um. So the dollar is actually deflating, which means that prices are going up. Right in some cases like this is actually good. The Fed wants to keep inflation at about two growth per year, So prices are going up. And the reason why the Fed would want to do that, as we'll see, is because there um, if you know that prices are going to generally continue going up, you're gonna buy something today rather than putting it off for later. They love you spending money. That's what they want is Americans buying things constantly, exactly. But you so you want prices to go up, but at a steady rate and a manageable rate. UM. The problem is is if you if if money becomes too abundant in the economy, UM, prices start to go up really quick because a lot of people have money, but there's not enough supply to satisfy that demand, which drives prices up even further, which is pretty much the situation that we find ourselves in now. So to deal with this, the FED has raised interest rates in the hope that it becomes more expensive to borrow money, people will spend less, and then it becomes more lucrative to save money because interest rates for like loans or for CDs for savings announce. All that stuff goes up, all right, and so you're spending less. Prices hopefully come down, but not so much that people start to get laid off because consumer demand has bottomed out. That's where we're at right now. This is the tight rope that we're watching. The FED kind of transverse right now. That's right, they're on a penny farthing on a tight rope with a little tiny umbrella that's comically small, comically small. All right, well, let's take our final break and we'll finish up with a little bit on inflation and how the interest rate continues to affect that right after this. So I have a feeling I'm trying to think of the stuff you should know, audience right now, all of our friends out there, and I feel that of them will not hear this part. Okay. Uh. The ones in that that that managed to stick this one out are probably like, I'm sort of learning this, guys, but it's really confusing. And then there's ten percent are economists and people that are sitting back and laughing and going, Nope, they got that part wrong. Wrong again. Alright, guys. Yeah, I feel like if you took all of the information in this episode and cut and paste it into a more coherent way that's Jerry's job, it would be it would be Yeah, it would be like we we got it. Yeah. I think we just explained it in a really confusing way. Probably, so we're a little all over the place. Um. All right, So we talked a little bit about inflation that they inflation is good in a slow and steady way. Would you say two percent a year? Yeah, that's what the FED shoots for. Shoots for two percent. Um. No inflation at all is is not good because that means you're looking at deflation. We talked about stag inflation in one of those a long time ago. What does stag inflation? Was that it? Yeah? Yeah, so stagflation is no good. I think that's when the rate is above like a certain percentage, and unemployments below a certain percentage, and there's one other indicator, uh, productivity I think maybe declines. Maybe, so prices remain high and keep going higher, but the wages are tumbling and people are getting laid off, and like the economy is starting to cool, but prices are staying high. Yeah, because ideally with inflation, wages are kind of going up in lockstep. Yeah, Like that's what you want. That's what you want ideally. I don't know the last time that that actually happened. You're probably right, so um, so you do want some inflation, but you don't want too much. Inflation is the upshot of it and a lot of um. We also did one on inflation two is um. I can't remember what the name of it. But it was just this past like June, I think, I look really yeah. Um, So there's a couple of explanations about how inflation works, and I don't know that one is necessarily right and the other is wrong. I think it just depends on the context, yeah, or the way you're looking at it, seems like. But they both seem really familiar. So I think we talked about them in the inflation episode we would have had to have. But one is called the demand pole theory, and that's kind of the explanation for what's going on right now that because of government stimulus, checks, because um of productivity being through the roof, because interest rates being really low, the economy has been a wash in easy money and people are buying, spending buying. A lot of people have a lot of money and are ready to spend it. Also, I think there was a lot of probably pent up demand from hanging around your house because of COVID. Now you're like, take my money, I want to do something, interest saying you know, I'm so bored. It's unprecedented stuff these past couple of years, and I don't think anyone really knew what the overall effect was going to be right. So the tight rope, if you look closely, is actually an ultra sharp razor blade that the FED is on thanks to this unprecedented event that we've just gone through. That's what they're trying to deal with. So, UM, the idea of a bunch of people having a bunch of money wanting everything all at once, from houses to cars to um, you know, game boys, maybe vintage game boys, um to poison t shirts um Like that means that we're all competing with one another for the finite supply of those things, which means that people selling them things to just supply and demand. Basically, you know capitalism and economics, Those prices rise, that's inflation. That's the demand pole theory, that's right. The other is cost push uh And this is basically kind of the opposite of that in some ways. It's the cost of doing business is going up. Uh. It is sort of separated from demand in that way. Uh. And they're they're all kinds of reasons this might happen. Dave mentioned a couple that like labor unions might have um like have to pay people a lot more money because they negotiated a new contract or something. Um. Exporting foreign goods shoots through the roof or something, or maybe there's a new administration all of a sudden, there's new taxes going on. But basically it's cost push because the rise in cost of doing that business, any business, is going to push the price of the products higher and higher and higher. Right. But it has nothing to do with demand necessarily. It's just no, it's become the cost of doing business has become more expensive. Right. And now this is where like I did pretty good with the stuff until interest rates affecting inflation because it seemed, I don't know, it just seems so uh rigged, and like I hate saying the word now, but that's the whole that's the whole thing. That's the entire point of what the Fed is doing. By raising that interest rate by half of a percent, they're trying to manipulate the economy and they're trying to do it in just the right way so that they can keep those inflation, keep inflation, slow it down, they can keep it in check. But at the same time, they don't want to bring prices down so much that businesses have less incentive to produce goods, right because right now, with prices really high, businesses are doing everything they can to get out as many widges as possible because they can sell them for historically high prices right now. If prices fall, eventually you get to a point where businesses are like, it's not really worth the investment. I I don't need this many people to make this many whiges anymore. People start laying people off, so unemployment starts to go up, and all of a sudden, you've overstepped. You've cooled the economy too much by adjusting, by targeting inflation, by adjusting the interest rate. That's the precarious position that they're in right now. They're trying to create that soft landing to get prices back down to a normal rate of inflation without cooling off the economy inadvertently. That's right. And uh, what I'm meant to look up to see is it always by quarters of a point? No? I mean they just did a half of a point No? No, no, But but that's too quote. Yeah, is there any an increment that's less than not that I've ever seen? Okay, so they go a quarter at a time, I feel like three quarters yeah, yeah, I think the most I saw was one point seven five or something like that, and that was back in two thousand, two thousand, I think, so the last time they had such a huge hike um as a as a half of a percent, it was actually like two and three quarters of a percent because I think of the dot com bubble, and they probably overstepped because there's a recession after that, right and in the housing uh situation. Yeah, that came later, right, but that was I'm sure all of that has affected all the tendrils effect one another. I'm sure. I think there was somebody who had a theory that every recession was connected to the last one somehow. Well, they say we're headed for one uh. Since the nineteen fifties. Um, there are economists that say every time we've exceeded four percent inflation unemployment was below five percent, then recession comes within two years of that moment, and that has happened here in April two, right, So they're they're saying, like recession is probably becoming historically speaking, Yeah, and so there's some tips if you want to prepare for recession. It's not necessarily the end of the world. Um. One thing is because job market is so hot right now. If you've been sitting there thinking like maybe I'll get a job. Go get a job now, so you don't have to like try to get a job during a recession and you can already have the job. Um, if you're thinking of selling your house, especially if you can downsize, this is a good time to sell because the housing market is really high right now, but you can expect it to come down if we go into a recession. Right, Set a little cash aside if you can sure. And then if you're an investor, if you have stocks sticks your plan, don't panic, don't worry, just stay the course. You can weather a recession in your stock prices will eventually go back up on the other side. Yeah, you know what, there was one thing I meant to mention before that's worth pointing out real quick. Is that remember we were talking about the Fed sets this rate that banks you know they lend each other money and stuff federal something federal funds. Right. Yeah, they don't actually say like you have to use this rate. Like banks still negotiate that with with each other, but they're they're saying, like that's the target rate, and then they do things to try and nudge these banks toward that, right, Right, And that's what they're doing when they're buying or selling bonds on the market, they're injecting or removing cash to make that the bank's actually charged closer to that target rate. They've said that's how they manipulate. But it's not like a bank says, well, we can only turn to this because the FED said, So that's what I'm saying. It'd be so much easier and so much more straightforward. The Fed said, this is what you can charge each other for the overnight rate and then adjust that rather than setting a target and then manipulating the markets. Yeah, but then that takes a negotiation out of the deal, and like it's just no fun. Yeah, it's probably it. Actually, you got anything else? I got nothing else? Well, that was a good first take. Let's start over and try it again. Well, since Chuck's made that sound, of course, that means it's time for a listener mate. I'm gonna call this uh new gin and tonic recipe I want to try. Yeah, it sounds good. That just came in. Hey guys, been listening for you years down end and was keen to learn about more about Champagne. As a fan of the Bubbly beverage but I got an extra treat when he went on a tangent about gin. Uh. This must have been a select champage. Yeah, Sampaigne one came out this past Saturday. Yeah, in real life, I r l so. Although I must say the best gin in the world now comes from Australia, arguably Tasmania. I'm also a big fan of the Saint George share war and chuck. It does not taste like feet. Maybe you should stop soaking your socks, your lime in your socks. So this is a cocktail recipe I'm going to try because it all sounds lovely. This is from Meg. Just get your basic London dry gin and tonic, but instead of just squirting a line in there, um, squeeze some orange in there and add a full rind and then uh, rub of fresh rosemary stick. Get that thing activated and then put that in there and stirred around. You sound like you're making this listener mail up. No, no no, no, and then uh and cracked pepper. So you basically got a gin and tonic with orange, rosemary and black pepper. Yeah, be careful with the pepper though I've had it before with even just not cracked, but whole peppercorns. You can act sidentally bring your throat pretty good, Yeah, because the gin like gets it ready and the black pepper finishes the job. Okay, well I'm gonna try it out. That's from Meg and Australia. Just remember a little goes a long way. A little goes a long way. Thanks a lot, Meg, we appreciate that. Um we love new gin recipes. Really, any kind of recipe. Yeah, if you want to get in touch with us like Meg did and give us a recipe or just say hi or whatever, you can send us an email to Stuff podcast at iHeart radio dot com. Stuff you Should Know is a production of iHeart Radio. For more podcasts my heart Radio, visit the i heart Radio app, Apple Podcasts, or wherever you listen to your favorite shows.