Posted on 11/12/2021 9:28:36 AM PST by Kaslin
The October Consumer Price Index number was a stunning .9%. That means prices have increased 6.2% in the last twelve months. The behavior of the Federal Reserve (Fed), Congress and the Biden Administration is shockingly irresponsible. Action must be taken immediately. Failure to do so could lead to runaway inflation.
Four decades ago, the Fed realized that the growth in the money supply has a direct effect on the inflation rate. Since then, Fed policy of controlling the money supply growth has generally kept inflation under 3%. Now the Fed has stopped that policy. Instead they say that based on experiences coming out of the 2008/2009 recession, inflation is not related to money supply growth. This is true, they say, when the economy is operating at less than full capacity.
This Modern Monetary Theory is simply not correct. In 2010, portions of the Dodd Frank bill put severe restrictions on bank lending. That significantly lowered the multiplying effect of initial increases in the money supply which, in turn, relieved the inflationary pressure.
The portions of the Dodd Frank bill that affect bank lending, were repealed in 2018. That means the experience from 2010 was an anomaly and will not be repeated.
In March, the Fed should have begun the bond tapering program. The current plan will take eight month to eliminate the entire $120 billion dollar per month bond buying program. Had they begun the tapering in March, the bond purchasing would have ended by now.
They should also have gradually raised interest rates starting in March. Those actions would have taken enough demand out of the economy to reduce inflation, but not enough to slow economic growth.
Growth did slow in the third quarter to 2% annual rate. That was mostly due to the flair up in Covid cases. Thanks mostly to government handouts, consumers have plenty of cash to spend and are doing so as the economy fully re-opens which should lead to a higher growth rate in the fourth quarter.
Last March, the unemployment rate had been falling. Many economists forecast that the rate would fall to a full-employment level under 5% before year end. That meant no more expansionary monetary policy was needed.
Yet for the past eight months, the Fed has been electronically printing $120 billion monthly as they continue to purchase government bonds. They also have, shockingly, kept interest rates near zero. That creates a lot of excess demand. That leads to higher inflation.
No more fiscal stimulation is needed.
In the last two fiscal years, the federal government has spent nearly $6 trillion more than they received in tax revenue. On a $22 trillion economy that creates pure excess demand. That leads to higher inflation.
Congress must stop spending anymore new money. Passing more spending bills will lead to more excess demand and more inflation.
Additionally, the Biden Administration must take action to increase the supply of domestically produced energy. Because Biden wants the Americans to stop using fossil fuels and use renewables instead, he has declared war on fossil fuels.
Biden believes that the reason Americans are not using renewable energy now is because fossil fuels are much less expensive. So he restricts the supply of fossil fuels by cancelling the Keystone XL pipeline, halting drilling on federal lands and stopping the drilling off of the Alaska coast. The result of restricted supply when demand is increasing due to the recovering economy, results in skyrocket prices.
Right now, government policy is causing the inflation we are experiencing today. The Fed should immediately end their expansionary policy. Congress must stop spending any more money. Biden must reverse his energy policy and he must stop encouraging workers to stay unemployed.
Failure to do so immediately will lead to much higher future inflation.
1980's here we come again, with 12% mortgages...
“That means prices have increased 6.2% in the last twelve months. The behavior of the Federal Reserve (Fed), Congress and the Biden Administration is shockingly irresponsible. Action must be taken immediately”
The FED thinks the inflation will subside as the supply chain recovers. Concentrating on that would be the best thing to do.
6.2% in the last 12 months? I remember 14.4% annual in the late 70’s-early 80’s.
The FED can’t do much, the Bond Market calls the shots, not the FED. The Bond Market action says Bond investors (much bigger than the FED) don’t believe the current inflation will last and/or get worse.
So what would congress do? Biden should simply reverse his stupid energy errors and things would improve greatly.
He won’t because that’s not the plan. The plan is what you are experiencing. OPEC+ and Russia could help but why should they? This is playing right into their hands.
It will be worse this time because so much of our government budget goes to service our deficit.
Higher prices across the board for consumers and less money for government programs.
What a shit show, but at least we do not have mean tweets.
People keep talking about how terrible this is, and the government has to do something to fix it.
They don’t want to fix it. This is all intentional.
They have acted. They have caused this. They don’t want to undo it.
Not to worry. The Fed has promised to tapper its increase of bond purchases. It’s a bit like an obese person promising to reduce their intake of donuts from 4 dozen per day to 3 dozen per day.
I bought a new house in 1980 with a 13% interest on the mortgage. My next door neighbor had an 18% mortgage.
“They don’t want to fix it. This is all intentional.”
Yep.
5.56mm
We bought our mortgage with an adjustable rate, and I recall it got up to 14% or something like that before we made a mad dash to re-mortgage with a fixed rate.
Crazy.
Seven percent?! Just bought roofing tin. Up 100 percent. So, wage and price controls, because they worked so well last time. “Jimmy? Jimmy Carter? Is that you?”
Kind of hard to supply and produce when people feel so rich they can’t be bothered to work:
“A record 4.4 million workers quit in September as U.S. suffers its worst labor shortage in decades”
-Marketwatch
Good post as usual.
I use a resource called newspapers.com to study Anglo-American history through old newspapers.
Lets take a look at inflation vs deflation in 3 different decades, the 1920’s, 1930’s, & 1970’s.
In the 1920’s articles about inflation were 205,843 to 133,450 about deflation.
Here are the actual inflation numbers for the 1920’s:
1920 15.6
1921 -10.5
1922 -6.5
1923 1.8
1924 0
1925 2.3
1926 1.1
1927 -1.7
1928 -1.7
1929 0
Here are the numbers for the 1930’s. 652,960 articles about inflation to 148,024 on deflation.
The actual inflation rate:
1930 -2.3
1931 -9.0
1932 -9.9
1933 -5.1
1934 3.1
1935 2.2
1936 1.5
1937 3.6
1938 -2.1
1939 -1.4
In the 1970’s there were 4,584,931 articles on inflation to 29,710 on deflation.
1970’s inflation rate:
1970 5.7
1971 4.4
1972 3.2
1973 6.2
1974 11.0
1975 9.1
1976 5.8
1977 6.5
1978 7.6
1979 11.3
Take inflation and deflation talk from the American Establishment with a “grain of salt.” They missed badly on the 1920’s & 1930’s deflationary environment, but got the 1970’s correct.
On a side note there are some slight discrepancies in the inflation rate between different economists, but its basically “splitting hairs.”
“I bought a new house in 1980 with a 13% interest on the mortgage. My next door neighbor had an 18% mortgage.”
Those were the great days for buying real estate. I bought a little industrial lot for $700 and sold it two years later for $13,200. Bought a residential lot for $3,500 and sold it two year later for $8,500. Got my start in real estate investing.
I had saved the money being on the road earning and not spending for a year and a half. Paid cash, didn’t care what interest rates were.
Thanks for those stats. The only answer to inflation is to outrun it with our investing. There are plenty of things that inflate faster than the inflation rate.
Land has served me well for over 40 years.
Good, raise the interest rates so us old folk can make some interest on out CD’s.
The Feds and Biden ARE acting. Right now...
THAT IS WHY IT IS GETTING WORSE.
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