Fed’s ‘cure’ for inflation is even worse: recession

Amazon founder Jeff Bezos and Tesla and SpaceX CEO Elon Musk blame government and Fed inflationIn Musk’s words, “The obvious cause of inflation is that the government prints hundreds of millions more than it does. It’s not very complicated.”

They and other celebrities subscribe to the inflation sophistry: “Too much money chasing too few commodities.”

Yes, thanks to a perfect storm of a pandemic – sluggish U.S. oil production and manufacturing output, severe supply chain disruptions and war-like labor shortages – we have “too little goods” – but it won’t last go down. This was exacerbated by the Russian invasion of Ukraine, which radically reduced global purchases of Russian oil, grain and fertilizers, and drastically reduced Ukrainian grain exports.

At the same time, our economy The rebound is much faster than expected (mainly due to dollar injections by governments and the Fed), a demand that cannot be easily met has been restored.

Indeed, when our economy is blinded by COVID, The government has borrowed trillions Send stimulus money to most Americans and – as it did after the financial crisis – the Fed electronically “prints money” to buy nearly $5 trillion Government debt and mortgage securities.

But according to a Washington Post analysismost of these dollars are unlikely to trigger inflation – because the Fed pays financial institutions Parked over $2 trillion In their accounts at the Fed, U.S. households saved most of their stimulus, About $3 trillion in banking. The Post quoted a former Treasury official saying: “The money supply has increased, but … they’re not spending it.” In fact, money is passing through our economy Slower than almost any time in 65 years.

Clearly, it is the unprecedented confluence of supply and demand due to the Ukrainian pandemic and war that is driving inflation, not “too much money”.

So Fed Chairman Jerome Powell is understandable recently said, “Now, we think more about supply and demand imbalances in the real economy than monetary aggregates” (our total money stock, or M2 for short, is the most important monetary aggregate). A refrigerator and pantry stuffed with food won’t make you fat unless you’re overfed; likewise, even an economy awash in dollars won’t inevitably trigger borrowing and spending.

President Biden – though Excellent growth and employment figures – unfairly slandered for causing inflation.

Historic currency indicators further undercut the Bezos/Musk fallacy. M2 from 2020 Expanded by about 50%; Overall inflation as measured by the Consumer Price Index (CPI) has been below 15%. From 2010 to 2020, the Fed is still providing our economy with huge profits to recover from the Great Depression, M2 almost doubled — but the CPI only increased by 19%. Annual inflation hovers below the Fed’s 2% target.

between M2 and CPI and Annual M2 Growth and CPI Growth 52 years. M2 is more than 22 times what it was in 1970, but the CPI is only 7 times higher – the ratio of M2 growth to inflation is 3:1.

This disconnect — and the fact that extra money in the economy is not automatically lent and spent — has to do with another little-known reality: increased dollars not only drive consumption, but consumption. invest – This stimulates increased production capacity, business formation and expansion, stimulates innovative research and development, and can attract more people to the labor market. These measures offset inflation by increasing output, lowering prices and curbing wage increases.

Amazon and Tesla are the epitome of how it works. Bezos and Musk built their behemoths when the Fed eased. Investors dump cash on startups. Amazon is now more able to contain inflation than any company in history. Tesla has lowered the cost of electric vehicles, making them affordable for most Americans. SpaceX has dramatically lowered the cost of space travel.

However, the Fed and many smart people Insist that Fed tightening is necessary to keep inflation in check — even if it leads to a recession.

In fact, with one exception, the Fed Every tightening cycle that lasts more than a year brings a recession – The longer and more pronounced the Fed funds rate hike, the longer and deeper the recession. The only exception was in the middle of the tech boom of the 1990s, when the Fed ended up killing the boom by more than doubling the federal funds rate from its 1994 trough.

Many people compare today’s inflation to the late 1970s – but this is due to the sudden rise of OPEC, as U.S. oil production is collapsing and President Nixon’s wage price controls, his cynical strategy to prevent Fed tightening and job losses during the 1972 campaign. Nixon’s plan caused terrible distortions in our economy, ultimately fueling an inflationary spiral. Unemployment eventually soared along with inflation, a disastrous combination never seen before.

Most economists mistakenly Praise Paul Walker, the bossy Carter-appointed Fed chairman to end inflation.scary 1982 Volcker recession caused endless suffering. Unemployment peaked at nearly 11%—nearly a percentage point higher than during the Great Recession.In fact, inflation is conquered by reagan Lower tax rates and substantial investment tax incentives, which greatly increased production capacity, he deregulated energy prices, boosted domestic production, and linked income tax rates to the CPI.

How do we know it wasn’t the Fed that “saved” us from inflation?Because it almost evaporated after Volker, in one of our greatest men prosperity in peacetimeand Fed rates dropReagan massive military buildup and a ballooning budget deficit – All are traditionally considered inflationary.Exceed next 37 years, CPI rises Only it just ended first 12 yearsDuring the tech boom of the 1990s, our longest period of peacetime expansion, inflation actually fell to its lowest level since the mid-1960s.

The Fed and arrogant pundits ignore that while price hikes are certainly painful, they are far better than the trauma of losing a job — and are at least partly offset by pay raises. Social Security is tied to the CPI, significantly isolating nearly 50 million retired seniors.

The Fed also tightens Inflating the value of our already overvalued dollarmaking U.S. exports more expensive and imports cheaper, another blow to our middle-class workers — completely counter to the key goal of Americanizing our supply chain.

The “conventional wisdom” that the Fed must kill the economy to curb inflation is an orthodoxy that should follow the age-old cure for bloodletting.

What’s more, these major monetary tightening decisions were made by an unelected seven-member member council, often pushed down by Fed chairs. If elites didn’t normalize it, a group smaller than the jury would have the power to dictate the availability of dollars for our entire $24 trillion economy, which would be considered un-American. This is similar to the government empowering a small, unelected committee to limit the food supply for our entire population to overcome obesity.

While the Fed has been ineffective in achieving a “soft landing,” it has proven quite adept at mitigating financial crises and deep recessions. The Fed prevented disaster after the 2008 financial crisis and when the pandemic began. Therefore, the Fed’s freedom to fight contraction should be unrestricted.

But the Fed’s unchecked power to tighten the money supply must be removed.

During and after a pandemic-level emergency, the federal funds rate should be permanently set at half GDP growth—or much lower as it is now. The Fed’s power to take other tightening actions should be severely limited. The current Fed tightening should be stopped.

Curiously, many free-market advocates dread the prospect of monetary privilege being handed over from the Fed’s star room to private lenders (under a system of sound practices). Obviously, lenders want to repay the loan even if their cost of capital is zero. They will maintain adequate lending discipline based on borrowers’ creditworthiness and business conditions, as closer to reality, they are more qualified to assess than the Fed.

Many of those who laud the Fed’s current tightening campaign — which, based on history, are likely to lead to a recession — are in comfortable financial positions. Perhaps if they were fired, their hours were reduced, or their tip income was lost, they wouldn’t be so frivolous in supporting such a destructive policy.

Lee Spieckerman is a political strategy and policy consultant and frequent network television and radio commentator. He served as an adviser to Newt Gingrich during the 2012 presidential campaign and to Texas Land Commissioner George P. Bush during his successful 2018 re-election campaign. Previously, he was a longtime media industry executive and consultant.follow him on twitter @Spikeman