♪♪♪ Scott: A year ago, most economic predictions were quite negative, with many economists predicting a recession.

To help us understand what happened and where things might be headed, joining us today is Sanjay Varshney.

Chief economist for the Sacramento Business Review.

Sanjay, let's start with the big question on everybody's mind.

What happened to the recession that almost everyone was convinced was so imminent a year ago?

Sanjay: So, Scott, we went from an imminent recession to a soft landing to a no landing to possibly maybe a soft landing again.

So, you know, there's a saying that goes don't bet against the U.S. economy and don't bet against a U.S. dollar.

And they both have proven true in this past year, where most economists were predicting that we would see a severe recession did not turn out to be true.

And actually, 2023 shaped up to be a great year and 24, as well, is shaping up to be a pretty good year.

Scott: Well, what's interesting about this is that when all of these negative bets were happening, there was also some thoughts that maybe some of our, um, nations that we tend to be competitive with, such as China and others, would blast right past us, And... and as a matter of fact, actually, it appears that the reverse has happened.

What has been so right with the U.S. economy as compared to its trading partners and frankly, it's... its economic adversaries.

Sanjay: So, Scott, great question.

Um, one of the things I remind people is that the United States of America love it or hate it, we are still the most capitalistic society.

There are good things about capitalism, there are bad things about capitalism.

But we still remain the anchor economy for the world, and we are still one of the most trusted markets for the world, were the most transparent, we are probably better regulated compared to other markets in the world.

If you look at the United States Treasury market, which time and again people have basically placed bets against saying, “oh by the way, China being the largest holder, for example, of United States treasuries.

What if they just walk away from us?

” Right?

Um, Time and again, I think those bets have proven to be wrong.

So one of the things your question about how come some of these countries that were supposed to, you know, really grow when the United States was not, I think some of the, um -- there was some misunderstanding warning about how the social fabric might evolve, for these societies.

For example, take China, I think today, if you look at the current generation, they have nobody to call brother or sister because of the one child policy.

They have nobody to call uncle or aunt because their parents were single children of their families.

There are no nephews, there are no nieces.

Suddenly, with an aging population, China's growth trajectory has come to a very difficult picture compared to what the United States is still experiencing right now.

So clearly, we do have an aging population here.

We do have an aging population in Europe.

We have an aging population in China.

But the social fabric of China is really resulting in an economic collapse within China.

So those projections that were being made, for example, that China is going to blow past the United States in terms of growth are certainly are far from true.

Scott: Well, interesting that you say that because there have been predictions that include things like, that, um, the Chinese currency was going to replace the dollar as the... the global standard, um, that things are traded in and things like that and that, you know, nations like China and Russia were working together on that to dethrone the United States in that area.

That hasn't happened yet.

And with all the focus in... in China... or on China.

Um, one of the things I'd like to get your reaction to is actually the nation that we don't focus on, that we have a much better relationship with, but that is rising quickly but doesn't get enough attention is actually India.

Is there a story to be told with regards to India that most of us in the U.S. are missing?

Sanjay: Absolutely.

And, you know, many folks in the United States do not understand India very well because they don't have boots on the ground.

They have not visited that part of the world.

But India has been rising not just in the last one or two years, but for the last probably seven, eight years plus.

There's a lot of really exciting things happening there.

One of the things that's happening in India, which makes it very different from the rest of the world, is that they have the vast majority of the population that's under age 30.

So last year, India made headlines where they became the most populous city -- uh, country in the world surpassed China at 1.4 billion people.

But the good thing about those numbers is that they have a very young labor force.

So if you talk about growth in the next decade or two decades, when the rest of the world is aging, like I said, and you see a decline in demand, a decline in growth, India is actually rising very quickly.

And what India is doing, that's also very fascinating is that you see many elements of capitalism that made the United States very successful and the superpower of the last century, plus.

The same elements are being used today to make India more competitive.

And you can see with the supply chain issues that, you know, for example, of course, COVID, you know, we really realized that China had an upper hand when it came to the supply chain for us.

Even Tylenol, for example, was coming from China.

I think we have seen many U.S. corporations and ya know, businesses trying to move away from China with the supply chains.

And if there's one country that the beneficiary, including, for example, of manufacturing, are Apple iPhones, it's India.

Now, just to go back to one of the comments you made, uh, Scott, about the U.S. dollar being replaced by the Chinese renminbi.

So, you know, it's... um, it's something that people miss unless you do a deep dive on it.

Even today, 80% of global trade happens in the U.S. dollar, 100% of oil trades in the U.S. dollar.

And I know in the last couple of years since the Russian war broke out, there were many efforts by Saudi Arabia, China, Russia and other countries to try and basically trade oil on the secondary market in a denomination other than the U.S. currency.

Hasn't happened so far.

So my point is, there's a reason why there's a lot of faith and trust that the rest of the world puts in the U.S. dollar and in the United States Treasuries market, because we still have a high level of confidence that the rest of the world someti -- somehow cannot match.

Scott: Interesting.

You know, coming back stateside and looking at some of the things that keep many of us up late at night, it has been interest rates and, uh, what's happened with, uh, inflation.

And the Fed's been aggressively hiking rates to rein in inflation.

And it seems like we get news that is different every single month.

We see in indicators where things are going down and inflation is easing.

Then we get other reports subsequently that things are going up.

Directionally, where is the Fed headed and how is that going to affect all of us in our pocketbooks, both positively and negatively?

Sanjay: I'm very optimistic about the future, uh, you know, going into 2024 and 25 for the reason that I think the Federal Reserve is now ready to ease on the interest rates.

So what we have seen, post-COVID is something that the current generation has never seen in a lifetime.

We have not seen the rates go up as fast as they did.

And you know, inflation hit an all time high in the last 40 years.

This is something, like I said, the younger generation cannot relate to, because what we saw in the last 20 years in a way was abnormal.

So, you know, what I find kind of amusing is that today we are hanging our hats on a 2% inflation number.

So I'm sure you know, you've seen that the Federal Reserve has an inflation target of 2%.

Now, I'm not sure why people are so hung up on the 2% number, because if I look at the historical last one century, the average inflation in this country has been closer to about 3.2%.

But it's only the last 20 years because of the very eased, uh, you know, in the... in the financial markets in terms of monetary policy, you know, where the rates were close to 0% post the dot com bubble burst.

Post the housing crisis, you know, that we saw in 2008, 2009.

Because of very easy money that has been put on the table these last two decades, we saw inflation to be pretty low because the rates were close to basically 0%.

But actually where we are right now is not something to be panicking about.

So I'm going to...

I'm going to basically break up the numbers for you.

Directionally, the inflation numbers have come down in the last one year and they've come down significantly.

And this is something you and I chatted about the last time, and I was very confident that given the aging population issues, we will see inflation come down.

But the core inflation is down as well as the headline number is down.

Now, if we strip out the housing component, right now, the headline inflation number is actually lower than 2%.

So we are under we actually lower than 2% right now.

If I strip out the housing component.

So if you ask technically, are we back to where we used to be pre-COVID, not counting the housing market, which has been very stubbornly high because of the inventory issues, inflation has come down to very reasonable levels.

Scott: Well, let's go a little bit further on that one, because uh, you know, unfortunately, I remember the last time interest rates were high.

And when that-- when that they had to be tamed, they were at like, people were paying over 20% in some cases for consumer credit, for things like housing and... and other durable goods like that.

And we were pining for the days of John F Kennedy in the sixties of 6%, um, interest rates.

And that's about where we're at right now, six, 7%, somewhere around there for mortgages and things like that.

How does psychology enter in as a factor as to how people are interacting with the economy?

Because looking at it, taking the long view as you are, um, things aren't that bad right now, but because of the fact that we've lived through this abnormal time, as you describe it, it seems that we're waiting for something that was, you know, a once in a, you know, century event or maybe a little bit less than that.

Um, Tell us where we've got to kind of get real with ourselves and do a reset in terms of our own views on what's reasonable and what's not.

Sanjay: We got spoiled, Scott.

And, you know, I'm as guilty as anybody else.

My first house that I bought, I paid 10% on the 30 year fixed rate mortgage rate.

And actually I was pretty happy at that time that I was getting a 10% rate.

And then the last time I refinanced, when I was getting two and a half percent, I was kind of miserable that, you know, I'm not getting something better than two and a half percent, you know, on the lower side.

So we got spoiled in the last 20 years with an abnormal cycle where we put so much free money on the table.

Like I said, the young generation has no idea that what normalization means.

So in a way, what we are seeing right now is very fascinating for me because we are normalizing back to normal levels, which are very reasonable.

A 6% mortgage rate is very reasonable on a 30 year fixed.

Um, a three and a half percent, uh, rate on the ten year Treasury is very reasonable.

But what happened was for the longest time, for example, the ten year Treasury was trading well under 1%.

Right?

The mortgage rates were as low as maybe two, two and a half percent.

So I think what's happened with COVID and what's happened with inflation going up as high as it did and the federal Reserve raising the rates as high as they did, in a way, I think what we're seeing now is actually pretty positive, in my opinion.

Sanjay: Normalizing -- Scott: So, lets... let's talk about that for a second.

So, um, for all of us out here who don't study the markets as closely as you do, who are some of the winners from the -- what we think of as higher inflation?

Who are some of the winners and what should all of us be thinking about in terms of how it is that we're thinking about our own savings and investments and and, uh, shaping our lives?

Sanjay: So I'm going to give you both the winners and the losers in the whole process.

Before inflation went up as high as it did in the last couple of years.

We were struggling to get the inflation to be at 2% at that point in time.

If you just go back maybe five, seven years ago, you're going to find that the producers of goods and services were constantly complaining about the fact they could not charge higher prices for what they were doing because inflation was very low.

So the... the... the pricing power was not there in the business community.

Similarly, the savers, especially the retirees, were constantly complaining that they couldn't get a decent return on their investment because if you left your money in a CD or if you left your money in a fixed income kind of investment, those rates were very low compared to historical norms.

So in that process, both the businesses and the retirees were losers.

Right?

Although the consumer was a big winner because the consumer was able to consume a lot more, given that the automobile loan rates were very low, the credit card rates were very low, you know, people were able to find a lot of things cheaper, especially with the help of technology.

Every time we turn around, you know, you find that Amazon could actually match the price and give you a better price online.

So the consumer was a huge winner of this free money on monetary policy, the loose monetary policy that was on the table.

Scott: So... So- Sanjay: Now you see the reverse.

Right now what you're seeing is the savers actually are getting a decent return on their investment because if you put your money into the fixed income market or even if you leave your money in CDs, similarly the producers of goods and services actually are happier because they're able to have pricing power.

But now the consumer is a huge loser because the consumer is facing abnormally high prices.

Doesn't matter whether you go to the grocery store, whether you go and get -- pump gas at the gas station, whether you basically go on a vacation.

The inflation, which is a change in the year over year of the prices has come down.

But the absolute levels of prices are still very high.

So in this whole process, the consumer's a loser.

So Scott: So, staying on the theme of winners and losers, one of the things that has captivated the media and has been just the huge focus of attention is AI and I wanted to ask you a question.

What is it that we should all be anticipating in terms of AIs ripple effects through the economy, not just in the coming year, but even going out into the future?

Sanjay: I think this is something that we are seeing as a round two, in my lifetime.

Round one was in the 1990s, for example, when we saw the Internet becoming commercialized and we saw the World Wide Web change everything we did in our lives.

Similarly, right now with artificial intelligence, we are seeing technology accelerate every aspect of our lives, not just our interaction with technology itself, but the way we live our lives, the way we run our lives, the way we do health care, the way we do our arts and the opera, the way we do our audio and the video of literally every aspect of life is now going to be changed by artificial intelligence.

Which reminds me, like I said, of the way that we went through in the late nineties, and there was a lot of fear, by the way, at that time that, hey, by the way, will we lose a lot of jobs?

Because all the new technology - Scott: That is what... that is what we're hearing about right now.

There's a lot of fear that there's going to be a lot of destruction in the economy in terms of jobs as the way that they've always, um, been situated.

And people are concerned about what's next.

What do you think?

Sanjay: Yeah.

You know, I am reminded of the book written by Tom Friedman called The World is Flat, in which he makes a very valid point that every time you see radical change in technology or the way we live our lives, in the short term, you will see a displacement of labor.

But that displacement of labor will result in the labor finding a better and higher use for itself.

So we are going to see the same challenge now, yes, in the short run, some people will lose their jobs, but in the long run you will see new kinds of jobs that will come into existence.

And AI is something which I think is a very positive because one of the challenges we have as a world today is that we have an aging population on the planet, and there's going to be a cooling off in the demand cycle, which is going to impact growth negatively.

With artificial intelligence, we have the promise of raising productivity levels so that we can actually improve our GDP growth.

Using that angle.

And that promise to me is much stronger than the worry of losing our jobs in the short run.

Scott: So, let's take one little aspect of this that tends to be underreported.

There's also a creative economy, and there's creativity just for the sake of the pleasure of interacting with things like the arts.

One of the startling things about A.I.

is that A.I., it has been seen to be programable to actually engage in creative pursuits that heretofore have always been the sole ownership of human beings.

What impact do you think that AI might have on creative expression, both artistically and in creative economies?

Sanjay: Um, their both positive and some negative.

I'm actually a little fearful of the downside impacts of artificial intelligence that we right now at the current time do not understand.

So I think the media has spent a lot of time on the positive aspects of artificial intelligence in how it can fully impact lives, how it can improve our lifestyles in many ways, can improve productivity, it can improve, you know, the way we live our lives, how we do health care, for example, with robotics, you know, robotic surgery and everything else.

But on the flip side, I'm a little fearful because what you don't know is what you don't know.

So at this point in time, I'm not sure, for example, if artificial intelligence can be used to effectively clone somebody like me.

Right?

And have -- that has my voice, that has my my appearance, that actually is then used for some negative purpose.

Right?

Or it is used, for example, to shame and embarrass people in the wrong way using social platforms, uh, you know, because that's already happening.

For example, in some other countries where the regulation is not there.

And you can see, for example, that there are some strange things happening using AI which are not good for people.

Scott: Well, do you think that... that art like -- or, uh, you know, as expressed by, you know, Beethoven, Picasso, Miro, others, do you think that one day we'll be acknowledging -- we'll be hanging AI portraits in museums and listening to AI symphonies in... in concert halls?

Sanjay: Quite possible, Scott.

But I think what's more dangerous for me is I might not be able to tell the difference between something that's AI generated and something thats original and I might be -- and there might be some issues going on with that.

Scott: Right.

Let's... let's bring in a bit closer to home.

You just completed and released your annual economic review.

Tell us what's in store for this region and what we should be looking for.

Well, the highlights and lowlights.

Sanjay: So the highlights is that the region has been very resilient and the region has done exceptionally well, post-COVID in its recovery.

You know, our jobs came back pretty strong because of the fact that we had a large percentage of our labor force in the government sector.

That was actually a very big positive for us because the government actually was very stable and they had the ability to spend money when the private sector was not able to.

But in general, I think one of the challenges that we're going to see going forward is that the commercial real estate sector is still unstable.

So in Sacramento, for example, we have an unusually high exposure by regional banks to commercial real estate because we are known as a real estate town.

Right?

So, and the regional banks have come under pressure.

You can see that happening nationally.

You can see that happening in many other states.

Last year, we had four major bank failures.

You know, this year, New York Community Bank came under pressure.

So there is the likelihood that we will see more pressure in our own region given that office real estate is still unstable, especially given that state employees have not been asked to go back to work and they will not be asked to go back to work.

So that's one angle that I'm watching very closely to see how it unfolds.

The second angle is the state budget itself.

We went from a $95 billion surplus to a current projection of over $70 billion deficit right now in the state budget.

That's not something that's gonna basically be easy to digest, especially given the size of the deficit.

And given how, you know, we have been basically unprepared to deal with it because we were actually celebrating these last couple of years with the budget surpluses.

So will that take a toll on the state employees in our region?

Likely so, because the last time we had some massive deficits.

I just want to remind ourselves, you know, we had furloughs.

You know, we had many people displaced and laid off in their jobs.

So the state sector actually took a big hit the last round.

So that's another negative that I see going forward.

But nothing to panic about, Scott.

I think, like I said, the momentum is pretty strong.

We will probably get to 24, uh, pretty easily.

And this is an election year.

And election years tend to be pretty, you know, stable in general and pretty positive in general.

Come 25, we might see a few more challenges show up on the table.

Scott: All right.

And I think that we will leave it there.

Thank you so much, Sanjay, for sharing your insights with us today.

Sanjay: My pleasure, Scott.

Scott: All right.

And that's our show.

Thanks to our guests and thanks to you for watching Studio Sacramento.

I'm Scott Syphax, see you next time right here on KVIE.

♪♪♪ All episodes of Studio Sacramento Along with other KVIE programs are available to watch online at KVIE.ORG/VIDEO