A satanic list of inflationary factors

Episode Summary

Executive Summary: In this episode of Unhedged, Katie Martin and Rob Armstrong are joined by Adam Posen, president of the Peterson Institute for International Economics, to discuss the state of the dollar, inflation risks, and financial stability under the Trump administration. Posen argues that the dollar's role is 'decentering' and that inflation will rise significantly by 2026 due to tariffs, fiscal stimulus, and anti-migration policies. He warns that financial stability is at risk from deregulation and crypto exposure, but sees AI productivity gains as a potential offset. The episode also features a lighter segment on 'Long Short' picks.

Main Topics: Dollar Decentering and Global Trust (Priority: 5/5): Posen argues the dollar is becoming less central and stable, with investors hedging dollar exposure and China moving assets into gold, though a full crisis hasn't occurred yet. Inflation Outlook and Tariff Impact (Priority: 5/5): Posen predicts inflation will be significantly higher than forecasts by Q3 2026, driven by tariffs, fiscal stimulus, a weaker dollar, and anti-migration policies, despite current stable inflation expectations. Federal Reserve Leadership and Policy (Priority: 4/5): Discussion on the upcoming Fed chair transition (likely Kevin Hassett) and the limited impact on rate policy, but significant risks from financial stability decisions by the Board of Governors. Financial Stability and Crypto Risks (Priority: 4/5): Posen warns that deregulation and political connections to crypto firms could create 'too big to fail' entities, increasing systemic risk, especially if crypto markets crash. AI as a Productivity Offset (Priority: 3/5): Posen highlights AI as a potential source of sustained productivity growth that could offset inflation and other economic challenges, though it may not directly reduce prices. Political Dynamics and Lame-Duck Period (Priority: 3/5): Rob Armstrong questions whether the Trump administration's waning power makes it less dangerous; Posen notes pragmatic voters as stabilizing but warns of continued radicalism.

Key Arguments: The dollar is 'decentering'—less central and stable—but a crisis hasn't occurred yet; it's like a tether that has snapped but hasn't drifted apart. Tariffs will take time to affect the economy due to uncertainty and supply chain adjustments, but inflation will rise significantly by Q3 2026. Inflation expectations surveys are not reliable predictors; past inflation experience makes expectations more sensitive to shocks. The Fed will eventually raise rates if inflation becomes obvious (above 4.5%), but being behind the curve will make disinflation more costly. Financial stability risks are high due to deregulation and crypto firms being perceived as too big to fail, especially with political connections. AI productivity gains could offset inflation and boost growth, but the Trump administration's policies may hinder future innovation. Voters' pragmatic economic concerns may limit the administration's radicalism, but the lame-duck period could still be dangerous.

Data Points: China's gold purchases: trillion plus out of dollars into gold - Posen mentions China has moved a huge amount of assets into gold, indicating dollar hedging. Inflation threshold for Fed action: above 4.5% for a few months - Posen says if inflation runs above 4.5% for several months, the Fed will raise rates. Time for tariff impact: about a year - Posen cites Peterson Institute models from September 2024 showing tariffs take about a year to affect the economy. AI productivity timeline: one to five years - Posen expects real productivity gains from AI to appear within one to five years.

Pivotal Quotes: "I think it has. I think it just hasn't fallen apart yet. I think there's a difference. So imagine you've got two things tethered together and they've been settling into the mud for years. Right. And the tethers snap. And so they start slowly easing away. But until something comes that really pushes them apart, you don't see it." — Adam Posen: Posen explains the gradual decentering of the dollar, using the tether analogy to describe how the dollar's role is eroding without a visible crisis. "I believe inflation is going to be significantly higher than the current forecasts by a year from now, by probably by the third quarter of 2026. Because of tariffs plus other factors." — Adam Posen: Posen makes a bold inflation prediction, citing tariffs, fiscal stimulus, dollar weakness, and anti-migration policies. "I view against the generic background. Of much too much light touch regulation, much too little supervision and transparency into large parts of the financial system as a matter of ideology, as a matter of loyalty to the administration. Then, specifically, you have these favored or perceived as favored crypto firms." — Adam Posen: Posen warns about financial stability risks from deregulation and politically connected crypto firms that could be seen as too big to fail.

Implications: Listeners should prepare for higher inflation and potential financial instability in the next 1-2 years. The dollar's role may continue to erode, and crypto markets pose systemic risks. AI productivity gains could offer a silver lining, but policy uncertainty remains high.