I recently had the opportunity to meet Steve Forbes in Manhattan. He was promoting his latest book, which he co-authored with Nathan Lewis and Elizabeth Ames, titled Inflation: What It Is, Why It’s Bad, and How to Fix It. As a financial professional living in New York, I have always been a huge fan of Forbes’s editorials and was looking forward to hearing his views on the worst inflation cycle the US economy has seen in over 40 years.
As the evening progressed, we discussed his new book, the current state of the American economy, and Israel’s miracle as the Start-Up Nation.
Forbes is an American publishing executive and politician who is the editor-in-chief of Forbes, a business magazine. He is the son of longtime Forbes publisher Malcolm Forbes and grandson of that publication’s founder, B.C. Forbes. He is an adviser at the Forbes School of Business & Technology and was a candidate in the 1996 and 2000 Republican presidential primaries.
In his address at the book promotion, Forbes first thanked the audience for coming out to hear him speak on an evening of bad New York weather, something that he joked reflected “the state of the American economy.”
A straightforward, jargon-free book on the economy
His book is written in a straightforward, jargon-free way so that the average reader can understand it. In his words, “When people (no matter what profession they work in) try to take a concept as complex as inflation, they must make it as easy as possible to understand, especially as a journalist. To really understand and get our arms around the concept of inflation, they really need to understand that there are two types of inflation: non-monetary and monetary. Non-monetary (inflation) is when you have a drought or a storm that disrupts production and transportation (so prices temporarily go up).”
“When people (no matter what profession they work in) try to take a concept as complex as inflation, they must make it as easy as possible to understand, especially as a journalist. To really understand and get our arms around the concept of inflation, they really need to understand that there are two types of inflation: non-monetary and monetary. Non-monetary (inflation) is when you have a drought or a storm that disrupts production and transportation (so prices temporarily go up).”Steve Forbes
One example Forbes provided is a war, like the current one in Ukraine, which is affecting food prices and energy prices. Another example is the lockdowns we experienced during COVID, which severely disrupted supply chains. World leaders did not recognize or appreciate how expensive, widespread and intricate these arrangements were, he said. “You disrupt one part of it, you disrupt everything.” The airline industry during COVID pushed people out and forced them to retire. But when things came back, it was like ‘Oops, we made a mistake and have a shortage of personnel and pilots.’”
Forbes said such actions are disruptive and raise prices, but the thing about non-monetary inflation is that if one leaves the economy alone, it will begin to adjust and get back to normal. “After World War II, it took several years to go from a wartime economy to a peacetime economy, in which after the war we underwent price control and rationing,” he said. “So if prices go up and there are shortages, you don’t go from making tanks to refrigerators or automobiles. It takes time.
“Two and a half years after the war, all we heard about was the rising cost of living and disruption shortages, but then our government was able to get things back to normal. This time, we are making a few comebacks after the COVID lockdown, but the current US administration continues to throw sand in the gears (most notably in its war against fossil fuels). We need energy now more than ever. The idea that you are going to change one source of energy with another is preposterous. Every advance in civilization requires more energy and cheaper energy as well, and one of the biggest consumers of energy is hi-tech.”
The second type of inflation Forbes cited – monetary inflation – is the more dangerous kind, which has great social and economic consequences. As he stated, “The basic definition of that is lowering the value of a currency, usually by creating too much of it. Even before the COVID crisis, the Federal Reserve was undermining the value of the dollar, which you saw in commodity prices, and you saw it on the global price. Then to augment this, the COVID crisis comes along and we have lockdowns. Government creates these trillion-dollar spending bills. Even after the crisis is over, they continue to pass these humongous bills.
“The Fed starts buying bonds to help finance this. And how does the Fed create money? It’s rather miraculous! It’s better than manna from heaven. They call up a bond dealer like Goldman Sachs and say they want a billion dollars in government bonds. Goldman Sachs will say ‘Fine.’ And then how does the Fed pay for it? They credit a billion dollars to Goldman’s account.
“Where do the billion dollars come from? They create it! You don’t have to wait for something to fall down from heaven because they create it electronically. It’s the ultimate ATM, since they are in a position where they can create the money. Even after the crises in 2021, the Fed continued to print the money, and they continued to buy over $120 billion in bonds a month.”
The reason we don’t have an even worse state of inflation today, according to Forbes, is that the Fed resorted to “a gimmick.”
“What they did is they created the money (like buying bonds from Goldman), and they would borrow it back again. So it’s like pouring a bucket of water in one end of a pool, and then removing it from the other end. If you can look at the Federal Reserve balance sheet which comes out every Thursday afternoon, they have an item there called ‘reverse repurchase agreements,’ which is a fancy way of saying buying something short term. So they buy these long-term bonds and then borrow it back again overnight, which only a federal and central bank can get away with. So back in February of 2021, that item in the balance sheet was zero. Today it’s about $2.2 trillion by borrowing long and then borrowing it back again short. That’s why for the first time in American history, a central bank is now operating at a loss. Because it suppressed interest rates, the money that the Federal Reserve gets on its bond portfolio does not now cover what it pays to banks on their reserves and on those reverse repos (which are very popular with money market funds. You look at government money funds, and about half of them now are invested on reverse repos because they are so liquid and even almost better than Treasuries).”
Essentially, Forbes said, “the Fed is now having to pay 4 or 4.5 percent on that stuff, and what are they earning on these zero interest bonds? Zippo! So why are we in the mess that we are in today on the monetary side? After the crisis of 2008-2009, big mistakes were made, in which the Federal Reserve and central banks around the world felt that the way to recovery was to suppress interest rates (which is a form of rent control).
“They used to call this phenomenon of borrowing money comparable to renting the money or renting an apartment. We know that rent control is a form of distorting the marketplace, so for the first time in history you had interest rates that were the lowest in recorded history and sometimes even in the minus.
“That’s bizarre! This is the real world, and by lowering interest rates they did not get a recovery but they distorted the marketplace. Politicians love this because they could now spend and borrow, and the cost went down.”
According to Forbes, it is like having a mortgage – “you double it from 300K to 600K, and your monthly payment goes down – wonderful! So the government debt exploded not just in the US but in developing countries and developed countries. This is a primary example of monetary inflation and how we got to where we are today.
“When you ponder about these two different kinds of inflation, you understand the real price as the fabric of society gets worn away because of the lack of a stable currency. You then see the need to get focused on the Fed and make people of all backgrounds and levels of authority realize that making people poorer is not a way to fight inflation.
“In closing, when we had a recession in the early 1980s, what we did afterwards was revive the economy. We gave stability to the dollar and the US boomed, technology boomed, and we were in a much happier place than we were in the 1970s.”
What does Steve Forbes think about Israel and inflation?
As the evening came to a close, I had the opportunity to ask Forbes – a longtime friend of the nation of Israel – his thoughts as to how Israel – a modern miracle as a hi-tech center of the world – has tackled inflation. This was his reply:
“The history of Israel over the years was that it used to be one of the worst places regarding inflation back in the 1970s and the ’80s until they utilized resources like Milton Friedman (who tried to get them to stabilize their currency, and that’s how they brought in the shekel to try to get a more stable currency). The miracle of Israel is that it’s hard to believe that back in the 1960s, ’70’s and even the 80s, people felt that without massive support from the US, this thing would not last.
“Today Israel is one of the biggest hi-tech powers in the world and, amazingly, a country of over 8.5 million people, which is now a bigger factor in hi-tech than the European Union, which comprises Germany and France (which are powerhouses but are punching way below their weight, and Israel is punching above).
“How did this happen? We know that Benjamin Netanyahu is now prime minister again, and a lot of real work was done when he was finance minister as part of building the coalition between his first and second time as PM. In Israel, there is a joke that if you bring four people together, you get five opinions and six different parties. So Netanyahu did put in a lot of good reforms, in which I couldn’t persuade him to do the flat tax over the single rate system; but they did start to lower the crazy tax rates, and they did recognize early on the importance of hi-tech by bringing in companies like Intel. One of the nice things about hi-tech (which you also saw play out in India) is that it was new and was therefore not under the rules of being suffocated by the rest of the economy, and it gradually opened up.
“What Israel could do is formally tie the shekel to the dollar or something else but must not repeat past mistakes of the early years where it just was a disaster. They have some relative stability and a relatively decent tax code (although there is a lot more deregulation that needs to be done), but they have shown themselves to be a powerhouse, as you see how the country has thrived in hi-tech.
“Israel is a country that needed to survive from day one, but it wasn’t doing well until it opened up and allowed people to flourish there. You can see the results of it today from areas like NASDAQ and the number of Israeli companies that are far disproportionate to its population. Just like what we see what countries like Switzerland have done with their franc, Israel has done with hi-tech to be the powerhouse that it is today.” ■
The writer received his undergraduate degree in business (cum laude) from Yeshiva University and his MBA with double distinction from Long Island University. He is a financial adviser who resides in New York City and is involved in Israel-based and Jewish advocacy organizations.