MONITOR ENERGY SHOCKS

“One of the things that connected dollar dominance was this idea of well, the US Navy is what police the highest and made global trade flow and stuff like that. If that is under question of whether the US actually can keep ships going and the way they were, how does that change the equation?”

“Historically, in order to reduce core inflation by multiple percentage points, you need a deep recession. I believe there are some very prominent economists who said to get inflation down to the 2s, you’re going to need 6% unemployment. And of course, through the end of 2024, that had not happened. Inflation had fallen, I think it bottomed at 2.4%.”

“We’re kind of in this weird world where the physical interruption is bigger the price reaction is smaller. That could change if you look at it in terms of physical interruption of the flow of oils... it’s noted, yeah, we’re similar, maybe even worse.”

“I attribute most of that to higher-term premium that bond markets require to hold sovereign bonds. During my time at the Treasury, even before the pandemic, when the Pal FED was hiking rates, I think 10-year Treasury yields peaked at around 3 percent, and they're now running, of course, in the mid-4s, and indeed, they've been averaging, I think, four and a quarter for the last several years.”

“And then, of course, in 2026, we have a sharp increase in global energy, oil and natural gas prices due to the hostilities in the Middle East and the closure of the Strait of Hormuz. And so certainly that is a non-monetary policy shock this year.”

“And so yes, we've had this really big oil shock, and in addition, we might have some sort of shift in the global balance power, particularly if Aron is a tool keeper, it's a way with. What if it happens to be the case that to go from one place to another you need to pay in Chinese un instead of dollars.”

“The seventies oil shocks, you know, seventy three was a function of the om Kumbor War Israel, the Arab nations reactions to that the second oil shock in nineteen seventy nine was a function of the Iranian revolution. Same geographic region, different in the sense that the US and Israel are the instigators, and different in the fact that so far, at least the magnitude of the shock is not at all comparable.”

“If you're paying for oil in un does that mean that you're going to save that money in yon dollar reserve assets or are you just going to put it like right back into treasuries? There are a lot of questions that we have about this current moment. Obviously everything's still highly uncertain.”

“So I think the story in the US in 2025, to some extent, was tariffs pushing up the price of goods. And that was offset by a decline in services inflation. And then, of course, in 2026, we have a sharp increase in global energy, oil and natural gas prices due to the hostilities in the Middle East and the closure of the Strait of Hormuz.”

“You're absolutely correct that the fiscal deficits seem to be stuck at between 5 and 6 percent of GDP. You and I early in our career spent time at Treasury, and in our day, that would have been a real eye-popping number in an economic expansion. Basically, anything over two or three is something you would get focused on.”