I & I Editorial BoardAlong with President Joe Biden and Congress, the Federal Reserve has a responsibility to manage inflation, a job it was established to do. And just like Biden and Congress, the Fed has failed at its job.
At the Fed’s own website, it states clearly what its primary job is, by law: “Conducting the nation’s monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices.”
Well, today, we have neither “full employment” nor “stable prices.” On Tuesday, the government reported that wholesale prices, that is prices just a step before retail, surged 10% in February.
As bad as that number was, it didn’t include the huge jump in energy prices following Russia’s invasion of Ukraine. Consumer prices rose “only” 7.9% in February. So expect them to go even higher next month.
This inflation came thanks mostly to absurd policies – paying people to stay home while spending trillions of dollars of “stimulus” on federal programs not related to COVID – pursued by the Democrats who control both Congress and the White House.
Even some Biden political supporters say it’s the Democrats’ fault, not “Putin’s price hikes” or “COVID,” or “corporate greed.”
Indeed, former Obama administration economists Larry Summers and Steven Ratner have both said that, contrary to all the finger-pointing, Biden and Congress are to blame for the current inflation.
“This is a consequence, fundamentally, of an overheated economy,” Summers said Friday, after more bad news on inflation.
Massive government spending, totaling $6 trillion at last count, plus another $1.5 trillion planned this year. Enormous debt, $30 trillion-plus. An avoidable supply-chain collapse. Cancellation of the Keystone XL pipeline and the re-regulation of the oil industry. Not to mention, reckless money printing.
These are all the causes of the inflation. They’re what is called in soccer an “own goal.” We did it to ourselves.
While the Biden administration and its Democratic allies may have caused this inflation with fiscal policy, that doesn’t excuse the Fed’s monetary policy under Chairman Jerome Powell. The Fed’s job always is to ensure that inflation doesn’t become entrenched.
For much of last year, we heard that rising inflation was “transient.” In fact, it’s here and getting worse, eroding Americans’ buying power and standard of living. One recent estimate put basic consumer costs for the average family up at least $5,293 since 2020.
Yet, the Fed stood back and watched as inflation caught fire, confident that more than a decade of near-zero interest rates would have little impact on inflation. Now it has a full-scale conflagration on its hands.
We’ve quoted Milton Friedman’s dictum here before that “inflation is always and everywhere a monetary phenomenon.” It’s not just a slogan; it’s a fact.
If you haven’t seen it before, give the chart above a good look. It’s not a misprint. As you can see, more than 80% of all the money in circulation has been created since the start of 2020. That’s an astounding, and frightening, fact. This was when inflation’s seeds were sown.
It happened because the Fed jacked up money supply while keeping interest rates near their all-time lows, despite our “recession” being entirely imposed on us by an act of Congress. When the COVID pandemic hit, the Democrats decided to take the economy off-line and spend money like there was no tomorrow.
The Fed should have stepped in, raising rates and pulling back on its purchases of trillions of dollars in government bonds to rein in the insane monetary growth. It didn’t.
Now we’re paying the price. A Fed interest rate hike of a quarter point or even half a point will hurt consumers. Every interest bearing loan they have, from credit cards to mortgages and everything in between, will be more expensive.
With inflation already at 8% and going higher, Fed interest rates below 1% will do little. It’s like shooting a charging elephant with a Daisy BB gun.
We’re now seeing headlines such as this one in the Wall Street Journal, which suggests the Federal Reserve knows it missed the boat: “Fed Wrestles With the Challenge of How Quickly to Raise Interest Rates.”
Yes, there’s a lively debate within the central bank about whether a quarter point is enough, given the speedy onset of inflation. Why not a half-point? And how many increases, and how fast?
These are all legitimate questions. But they also show that the Fed didn’t move fast enough when it should have to head off inflation’s big jump.
No doubt, during this politically divided time, monetary policymakers don’t have the stomach for a prolonged political battle over interest rates. The Fed’s job isn’t to do politicians’ bidding, but to do the right thing. And because it didn’t do so earlier, Americans today are suffering the pangs of soaring inflation.
That’s bad news for the Biden Democrats in November’s election, who now look headed for an epic defeat. If so, it’s equally bad news for the Fed, which will no doubt face hostile hearings from a new Republican Congress next year. The time to act is now.
— Written by the I&I Editorial Board
Using these vague “policy violations,” Google is now threatening to demonetize us. It’s part of Big Tech’s effort to silence conservative voices.
Expecting the same Federal Reserve unable to recognize inflation to solve inflation is part of the problem. The Federal Reserve is like the Soviet Politburo, a central planning organization. Staffed by PhD’s with little real world economic experience, whose incompetence is now in plain sight. Not that the High Priests of Money are frauds or anything like that, but interest rates are a remedy of the past whose mojo will no longer produce the desired result because the current problem is being misdiagnosed. When actual demand for money determines interest rates, as was the case before the UK abolished bills of trade as part of its 20th-century trade wars against Germany, market forces (the real demand for money) determined real interest rates. Modern monetary economics as practiced by the Fed bureaucracy is too detached from historical reality to know this (it is not taught in modern economics courses).
Supply-chain issues and shortages of goods are part of this inflation, which is not what money supply theory teaches. Too few goods are available to absorb all the dollars printed. Raising interest rates too high and shrinking the money supply too much will worsen the supply shortages by making it harder to obtain capital to remedy the supply problems (artificially created this time around). Before the idiotic Democrat policies of 2020, we had deflation along with low interest rates and abundant money supply. The problem was paying people bonuses to stay home in 2020. If the money printing was accompanied by people producing goods, all the money printing would have been absorbed by the goods being created.
The Democrats of 2020 did the same thing as Germany’s Wiemar Republic did in the 1920s to cause hyper-inflation –namely paying people (striking workers in Wiemar Germany) full wages plus bonuses not to work. Before that Germany was booming economically and printing lots of money. So, it is not money printing per se, it is money printing in the absence of sufficient real goods production. Incorrect diagnosis often leads to incorrect remedies. The good news is that this is sinking the Democrats, which is why a war with Russia was needed ahead of the November midterm elections to distract voters from the many domestic Democrat messes (inflation, crime, borders, etc).
This should not come as a surprise to anyone. The Fed has one tool in their bag to address all financial crisis…. INFLATION. It is all they do. They create bubbles, when bubbles start to collapse they print money to re-inflate them, never mind that it only makes the situation worse. Then when the bubbles eventually do collapse, they shrug their shoulders, hit their foreheads with their palms, claim they never saw it coming (even though dozens of industry leading analysts raised red flags for months, if not years), then put the money printing apparatus into overdrive to print more money to bail out the banks that created the problem and benefited the most from it. Then the cost of the entire debacle is piled onto the backs of the American taxpayer through borrowing and yes, INFLATION. And just like shampoo state, the final step is “Repeat”.
The fact that we had over a decade of money printing (2009-2020) with low interest rates and price deflation shows that money printing and interest rates cannot be the full explanation for what is happening in 2022. The money supply only became excessive when Pelosi and the Democrats shutdown the real economy ahead of the 2020 election. Pelosi herself has said that stopping Trump was a prime motivation for shutting down the economy in 2020. Today’s price inflation is being made worse by Biden shutting down USA energy production (e.g. stopping pipelines). When you make goods (e.g. energy) scarce by curtailing production, the price gets bid up. That is the reason OPEC was founded. Flood the market with USA energy supplies, and price inflation will collapse (e.g. 2016-2020). Higher interest rates will slow energy and goods production investments, making price inflation worse, and are not the answer to this bout of politician-induced inflation.
“the Federal Reserve has a responsibility to manage inflation, a job it was established to do…the Fed has failed at its job.” That means promotions and infinite job security for all involved!
It’s not just a slogan; it’s a fact.
It’s a tautology.