The Federal Reserve Board released the minutes of their last meeting (November 1-2) on Wednesday, November 23 and the stock market shrugged, Apparently the minutes hinted the while rate hikes will continue they will soon increase at a lower rate – perhaps 50 basis points instead of 75 basis points. Most analyst and investors would be buoyed by such a move and the popular wisdom is that the stock market would surge – not to previous highs but rather significantly off the lows generated by the disastrous deficit spending by the administration of President Joe Biden (D) coupled with his executive orders significantly reducing carbon-based energy and all of the products that flow from it. It’s important to keep both of those elements in mind for purposes of this discussion.
The significant deficit spending by Mr. Biden followed previous deficit spending by then President Donald Trump. They were all labeled as “stimulus” moves in the aftermath of the COVID pandemic. The problem here was that the first “stimulus”
by Mr. Trump was absolutely necessary and restarted an economy shut down by order and advisories from the Department of Health and Human Services, primarily the Center for Disease Control. The second stimulus under Mr. Trump was probably too large but, by itself, could be absorbed by the economy with only a small interruption in the inflation indices. However, the massive additional spending engineered by Mr. Biden and the Democrat controlled Congress tipped over the wagon and as sure as every economic predictor the resulting flood of the market with new dollars issued to pay for the Biden “stimulus” plans caused the roaring inflation.
But the sudden excess of money caused by Mr. Biden’s deficit spending* was not the only cause of roaring inflation. Mr. Biden attacked the carbon fuel industry and the nation went from energy independence back to the days of his mentor President Barack Obama (D) and we became wholly reliant on the production and pricing of the OPEC nations. Production was reduced, prices soared and access became problematic. The result was significant increases in the prices of fuel AND the prices of all things dependent on fuel for production or for manufacturing – everything from plastics to medicine. A double whammy.
Mr. Biden stated that none of this was his fault and he washed his hands of any responsibility for fixing the problems. He deferred instead to the Federal Reserve Board. The Federal Reserve Board only has limited authority on what it can do – in this case raise the interest rates which it has done dramatically at the rate of 0.75 percent each time it has acted. They do so with the certain knowledge that when the rate gets high enough businesses will reduce spending – including for wages and benefits – with a resulting effect of tipping the economy into a recession. It is not a matter of whether there will be a recession (technically there already is) it is how deep of a recession will it be.
The actions of the Federal Reserve Board have finally begun to result in a slowing of the inflation rate – from 8.2 percent to 7.7 percent at the last publication of rates. (The next calculation of the inflation rate is scheduled for December 13, 2022.) That is still a far distance from the target rate of 2.0 percent annually. Because the inflation rate is so high and because it has resisted any changes through the first three rate increases the Federal Reserve Board has consistently made the point that increases will have to continue until the inflation rate recedes. I noted in a previous column that the Federal Reserves “cure” through interest rate increases will effect working men and women the most because a slowdown in the economy will result in a rise in unemployment – unemployment of working men and women and not executives or government union members.
But there is something peculiar about this inflationary period. Employment levels remain high with vastly more job opening than there are people seeking employment. Unemployment levels remain relatively low. (Unemployment levels are an inaccurate device for determining real unemployment because it only counts those who are seeking employment – a requirement for receiving unemployment benefits.) Real unemployment is measured by the Labor Force Participation Rate which remains at historic lows at 62.2 percent. The Labor Force Participation Rate is the ratio between persons eligible to work and those actually working or seeking employment. (Those eligible to work do not include those in the military service, those disabled and those serving as primary care givers in a household.) What this sadly means is that nearly thirty-eight percent of those eligible to work do not work. So hold that thought for a minute.
While the most common means of confronting inflation when left solely to the Federal Reserve Board is raising the interest rates, there are other means available which Mr. Biden and the Democrats refuse to consider: remove the barriers to energy production and eliminate deficit spending. And there is a third means that to the best of my knowledge has never been tried: grow the economy to the point where the Gross Domestic Product at least equals equals the current annual deficit spending. In all probability it has not been tried because the mindset of politicians is that stimulation requires spending by the government and nothing, in fact, could be farther from the truth. If you assume that, additional spending in a period where we are already overburdened by massive deficits, would simply acerbate a bad situation and prolong the inflationary cycle.
But you can grow the economy by removing the government imposed restrictions on growth. President Ronald Reagan (R) proved that when he took over from the disastrous years of President Jimmy Carter (D) and Mr. Trump (R) proved it again when he took over from President Barack Obama (D) and his stifling regulations of business.
In both instances we saw the resilience of the American economy if the government would just stop fiddling with it, stifling it and trying to pick the winners and losers. They cannot do it. If they were that smart they would be out serving as leaders of business and industry instead of being coddled by the taxpayers, protected by the bureaucracy and immunized from responsibility for their mistakes.
Look there are plenty of workers available to fill the empty job openings (see above). However, the current welfare state puts itself in direct competition with business for potential employees. Remove the government incentive to rely on welfare rather than work and the reservoir of unemployed will rapidly fill the current job openings. Two things will happen: welfare rolls will be reduced AND tax rolls will be increased. Both will contribute significantly to a reduction in deficit spending. There are a multitude of studies demonstrating that working for a living (as opposed to welfare) produces significant benefits to the psychological and physical health and well being of those who partake. (e.g. Pennsylvania Education Department, Jobscan, American Psychological Association.) Among those benefits are a regular paycheck, a sense of identity, intellectual challenge, new skills and a better work/life balance.
And finally, consumer demand remains robust which means that consumers will absorb the increased availability of products and services. And with additional products and services available to meet current demand the balance between supply and demand prices will come down which will aid in reducing the inflationary cycle.
But the most efficient way to attack this massive inflationary cycle is to use all of the above. (Just like dealing with the energy crises – use all of the above: oil, gas, coals hydroelectric power, nuclear power, solar power, wind generators, and thermal power.) Continue the rate increases, remove the barriers to energy production, eliminate deficit spending and remove the bureaucratic restrictions to economic growth.
And while that path is preferable and will result in a faster return to sustainable inflationary levels, Mr. Biden has made it clear that he prefers a welfare state to a robust economy, a crushing of the energy industry before alternative energy is available to meet current needs, and government control over economic freedom. Good luck on convincing the Congress to push through the reforms necessary over Mr. Biden’s vetoes.
But you have to try. You have to try something concrete instead of simply using Mr. Biden’s failures as a campaign tactic. And those are reintroduce economic growth, eliminate deficit spending and restore energy independence. (Maybe House Republican Leader Kevin McCarthy should have used those as his goals and objectives.)
* Deficit spending requires raising the revenue through bond sales which the Federal Reserve purchases with added printed money to pay for them. The result is more dollars chasing the same level of goods and services – inflation.