Posted on 12/06/2022 6:05:27 AM PST by Diana in Wisconsin
The US Federal Reserve continues to grapple with inflation, which at 7.7% (October CPI) is more than triple the Fed’s 2% target, without causing a recession by lifting interest rates too high.
The Fed has two options when it comes to interest rate increases designed to tackle the highest US inflation since the early 1980s. The first is it continues to hike rates, beyond what the economy can handle, causing a recession, usually defined as two consecutive quarters of negative economic growth. This is the “Volcker Fed” playbook.
In 1979, then US Federal Reserve Chair Paul Volcker faced a serious challenge: how to quell inflation which had been wracking the economy for most of the decade. The prices of goods and services had averaged 3.2% annually since World War II, but after the 1973 oil shock, they more than doubled, to an annual 7.7%. Inflation reached 9.1% in 1975, the highest since 1947. Although prices declined the following year, by 1979 inflation had reached a startling 11.3% (led by the 1979 energy crisis) and in 1980 it soared to 13.5%.
Not only was inflation going through the roof, but economic growth had stalled and unemployment was high, rising from 5.1% in January 1974 to 9% in May 1975. In this low-growth, hyperinflationary environment we had “stagflation”.
(Excerpt) Read more at aheadoftheherd.com ...
Because the Fed DOES NOT HAVE THE TOOLS to fix the stupid policies of the Biden Administration!!!!!!
Food for thought
Communists back in the sixties felt the surest way to take American into the communist world was by debasing the currency and bankrupting the country.
It’s in the Alinsky playbook.
Ask Hillary and the obamanites.
At the risk of oversimplifying things, rising costs of necessities means less disposable income. This essentially means fewer people purchasing discretionary goods.
With credit cards at all time highs how much longer can people keep buying non-essential stuff?
At some point a weakened consumer demand is going to slow down the economy and the Fed will be forced to pause, thereby allowing inflation to revive. JMHO
i remember the 13% inflation number
the prime went to 21%
people were taking out negative amortization mortgages
the payment didnt cover the interest
so they owed more on the house each month
based on 8% inflation
prime would have to go to 13%
Yeah. The 20% stated is far lower than experienced.
Doubling is pretty widespread.
Fedgov debt was less than a trillion in 1980
“I guess the government could ease import restrictions and incentivize companies to be more productive.”
**************
You touch on an interesting point. There’s too much focus on the demand side.
It seems that there’s a lot more that could be done to incentivize more production and supply to help bring down inflation. But that doesn’t make the banksters as much money as lowering interest rates does.
and a 2.5 trillion economy
now we have 31T debt and a 22T economy
26 months ago none of this was happening then Biden and chaos crew showed up.
Nothing is going to get better for the next two years seat belts required.
With inflation, there are only two methods that can work as far as I can see. First way is you slow the velocity of money (raise interest rates to get people to save money instead of spending it), which doesn’t shrink the whole money supply but can take enough out of circulation to make a dent in inflation. But as the article notes, this will also slow economic growth and put us in a recession.
The other way is to grow your way out of the inflation. If you lower taxes, cut regulations, etc, to boost economic activity, then it may actually increase inflation a bit as it is going to spur spending at first, but in the long term it will increase production, and that increased production is the only way to stop inflation without causing a recession.
“All I know is that Paul Krugman says the Fed Reserve is doing everything perfectly right...which means we are about to explode...”
Really, I wish Krugman would tell us all his football picks, then we could all bet on the opposite team and get rich.
That did not work well in the 30’s. And even if you could figure out a way to overcome those issues, the start up times would lag into a couple of years.
I am all for bringing back manufacturing. And we are doing that with chips and other stuff.
I think the point a lot of people are missing is that economic cycles are...cyclical. By the time we do anything to impact the supply side, we would probably be swinging back up again.
Sometimes we just need to crawl through the bottom in order to get on the other side of it.
Government spending is the huge issue. But the economy is so tied to government spending that any significant change would crush the economy. There is no way the Congress would ever do that. They would be happier with external forces driving us into the dirt so they can blame anyone else.
Blaming the GD on Smoot Hawley is like blaming the Titanic disaster on improper placement of the deck chairs.
Oh...so it had no impact?
Your world is so black and white. Its kind of scary.
The reason for monetary inflation is government creating more dollars and putting them into circulation. The way to lessen inflation is for government to stop making money out of thin air and giving it away.
My authority on this is Milton Friedman.
Raising interest rates, per se, doesn’t reduce the rate of inflation.
Yes. It is complicated deep down but too many dollars chasing too few goods is the simple reason for this inflation. M1 and M2 easily indicate that the consumer coffers are flush with stimulus money leading to more money than good sense. On top of flush cash is shortage of goods and productivity and the panic mass migration motivated by loaf from home and the changing workforce led by various demographic factors.
The 70s were different but the effect was the same. It was not too many dollars chasing too few goods; it was energy costs imposed by retaliatory actions of the arabs. What I saw then that had to be crushed was a fever of greed and fear that suppliers would be left behind and miss out on higher prices. It was an upward death spiral. I was a new engineer in the oilfield then. We used inflation factors for our budget for wells that would be drilled only months after the estimates were done, the inflation corrected estimates were always too low and a line was added to our after action reports for inflation related cost increases.
We saw prices increase but not so much for daily goods as we do now. We did not see appliances double or food go up as it does now. They did in fact go up but not by shocking amounts such as eggs and butter are now. 8 bucks for a carton of 18 eggs when they were around $3 or less?
I have to consider that my impression of cost was motivated by my perception of normal as a much younger man. My view of costs was relative to not much and in the light of ever increasing income from promotion. That is a lot of what we are seeing in the youngsters now.
At the end of the day, considering it now, I’m not so sure that Volker’s tough tactic is all that, or even most of what, led us out of inflation but instead the crash in oil prices in ‘82 from oversupply both domestic and arab. The latter was orchestrated by Reagan to crush the Soviets but it also had the effect of beating inflation. It was devastating to the oilfield but good for the nation at the time. I laid down 18 rigs in just about two months in late ‘82, some before finishing the well. Oil and gas were a difficult business for just about two decades after that as one hammer or another continued to fall in regular succession.
Relatively cheap energy has an uplifting effect on Americans like in no other country.
Based on my experience from the late 1970s and early 1980s, look for double digit interest rates…I bought my first home in 1979 with a 11.5% 30 year fixed mortgage. By early 1980 mortgage interest rates were topping 16%. Gasoline prices in the early 1980s were approaching $3…well over $5 in today’s dollars and we stood in lines for our odd even daily ration of gas. Unemployment was headed to the double digits and Jimmy Carter told us the country had economic “malaise”.
We are in for a bumpy ride with two more years of Biden economics and add to the inflation and interest woes will be an energy crunch that will give us fuel
shortages and widespread blackouts. My parents talked about the living in the Great Depression and I guess I will see much the same.
I assume you're referring to the “Cabbage Patch Kid” that got off the turnip truck to give press briefings..../s
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