The Fed’s Inflation Objective Will Fail
We all know the inflation the country is experiencing is painful. It’s a losing proposition for the vast majority of US workers, families and the population in general.
In addition to the difficulties people are facing putting gas in the car, it’s more challenging to put food on the table.
Inflation is an insidious tax.
The last 10-15 years the Federal Reserve Bank has participated in unprecedented government spending and the increase in our national debt – by printing the money to cover it. At the same time, it kept interest rates artificially low by something it called Quantitative Easing. Translated, that means buying the debt itself rather than the Treasury Dept. putting it on the market. The market would have increased interest rates all by itself because the market knows as liability increases so does risk, and the interest on treasuries would have increased to offset the increase in debt on the market. But the Fed kept it off the market.
Many of us were warning the government and the Fed it was painting itself into a corner and getting out was going to be messy.
Then comes the COVID shutdown and the 1st COVID relief/stimulus bill in March 2020 – $2.2T. Change administrations in 2021 and we get the totally unnecessary 2nd relief bill – $1.9T in March 2021 – while continuing painting the corner space smaller and smaller. Add the $1T infrastructure bill and then the three quarters of another trillion Inflation Reduction bill. Now, we get a monster student debt forgiveness by the President of maybe as much as anther trillion – nobody knows the amount for sure.
I guess we thank Allah that President Biden’s original agenda called for an additional $6T and Congress has only appropriated $3T – so far.
But the government wasn’t done corner painting.
His 1st day in office President Biden began the ‘attack’ on fossil fuels – cancelling the in progress $9B construction of the Keystone Pipeline from Canada. In addition, he removed federal land from additional leasing for exploration and production of oil, and shale generated natural gas. He has continued that ‘attack’ with more removal of land and sea since then.
In doing so, out of the chute of this administration, oil prices skyrocketed from $47/barrel to $75 in July that year and moved up to over $100/barrel shortly after – more than doubling. Natural gas prices followed a similar course.
Gasoline (and diesel) prices at the pump obviously followed the oil price, going from an average of $2.23 to almost $5/gallon.
While cutting off access to oil and natural gas supply – and the future expectations for same – those commodities became less and less available for US and world consumption. In a short time, the US again became energy dependent on foreign sources to meet our energy needs.
Our vehicles and electric grid are dependent on fossil fuels – meaning our transportation system – cars, trucks, trains – and electricity generation. Cut the supply of fossil fuels and everything that’s transported (and farmed) and the electricity we depend on naturally goes up in price.
So, we add together the government flooding the supply of money and decreasing the supply of oil and natural gas and we end up with too much money chasing shrinking supplies. That’s called inflation.
What does and Federal Reserve do about inflation under this set of circumstances? It has an annual target of no more than 2% inflation. It’s dealing with 4 to 5 times that target currently.
Under normal circumstances the Fed raises interest rates to cool off an overheating economy. But the economy is not overheated – that’s not what’s causing our inflation. In fact, we’re on the edge of, if not in, recession. Normally the Fed would be lowering interest rates to provide some stimulus to a shrinking economy – as the GDP has done the last 2 quarters.
So, there’s the dilemma.
We have excessive inflation caused by excessive government spending and the government’s reduction of the supply of oil and gas.
At the same time the GDP has gone negative.
Raising the interest rates now will have minimal effect on inflation because it’s not caused by the free, capitalistic market at all. The effect will be to make it more expensive to do business at a time when normally the Fed would want business – the economy – to expand by lowering the interest rate.
The government and the Fed have painted themselves into the proverbial corner and there’s no good way out.
The President recently took a “victory lap” over getting so much of his spending agenda done, capped by the Inflation Reduction Act – which only exacerbates current high inflation.
As the Fed raises interest rates, and that’s what it has apparently decided to do, the economy will slow down even more making supplies of everything even less at a time when it would normally want supplies/production to increase.
So, the Fed is raising interest rates to tamp down inflation. But doing so now invites a deep recession. Damned if they do, damned if they don’t. Inflation will come down a little since fewer people will have money to buy anything, including a house. But the Fed will be using a solution designed for solving a very different problem. It’s a cure worse than the disease.
It’s like the math teacher telling the student add 2 plus 2 using multiplication. That student will never get the answer and the teacher will have failed.
Since the prospect of the government to stop spending more and loosening the stranglehold it has put on oil and gas supplies, it can’t implement a real solution to either problem – inflation or recession. The outcome of raising interest rates at this time will simply deepen the recession and make the country poorer.
That’s the price of misguided ideology and ignorance of basic economics that we’ll all pay.
But that’s the current price for the goals of more government spending and zero fossil fuel emissions in the United States.
Dumb, dumb. Blind.
No, comatose.
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Have a great and prosperous week.
Hug somebody.
References:
SPIDER Bites
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