Fiddling with the Rate of Inflation

When I sit down and hear yet another report from Chairman Jerome Powell of the Federal Reserve System regarding the progress on taming President Joe Biden’s runaway inflation, it’s like fingernail on a chalkboard. Mr. Powell and the other members of the Federal Reserve Board met last week to review the status of inflation, review the choices they have regarding interest rates, pontificate about the recent job reports and the strength of the American economy and then did nothing – no rate increases, no rate decreases, no date for changing the rates either way – and announced they will take up the issues again in June. Along the way they manipulated inflation data to suppress the reality that the average American is experiencing.

First, they only use year over year inflation data which does not give a true impression of the degree to which we have experienced inflation since Mr. Biden took office. As I noted in my column last month that figure is close to eighteen percent – and that is for just the “core inflation.”. Mr. Biden, Mr. Powell and the Federal Reserve Board prefer to use what is described as the “core” or “supercore” rate which excludes the three highest categories of household expenditures – housing, food and fuel. The fact of the matter that what is measure by the government in the “core/supercore” rates are items that can either be avoided or postponed. In other words, they measure non-essential items primarily. They do this so that they can say that the inflation rate is dropping – it is not. That rate of inflation of just the core elements has declined but the overall rate and the cumulative rate of actual inflation continues to persistently increase.

And second, in describing the health of the labor market, they use unemployment rates as charted by the Department of Labor’s Bureau of Labor Statistics which do not measure employment – nor frankly unemployment – rather it measures the number of people receiving unemployment benefits (a form of taxpayer subsidized welfare). They try to avoid any reference to the Labor Participation Rate which does, in fact, provide the number of people actually working or actively seeking work. That rate is yet to recover to the pre-COVID rate. And they measure the number of able bodied Americans capable of working. The difference is, in fact, the number of unemployed. They do that so they can brag about reducing unemployment when they have only really reduced the number of people eligible for unemployment payments. And they avoided acknowledging the total number of actually unemployed Americans.

So the first question is why do they do that? Why would you deliberately use data that does not reflect reality. I don’t know why, but I’m a bit forgiving of Mr. Powell – maybe because I recognize that he exists in a bureaucratic/academic cocoon where the purity of the data is more important than the actual effect on people – by removing housing, food and fuel, you remove elements are susceptible to seasonal and external changes. Leaving that data in plays hell on economic modeling even though it is more accurate. That kind of nonsense is one of the reasons we shouldn’t listen too much to academics divorced from reality.

But when it comes to Mr. Biden we know that he just lies – anything, any lie – that has the result of making him look better. Like most politicians he recognizes that people elect them to fix things and for most, including Mr. Biden, appearance is more important than reality. So just remember, there are lies, damn lies and statistics. But the sad thing about all of that baloney is that it ignores the real cause of inflation and thus the real means of bringing it under control. We know Mr. Biden is never going to tell us the truth because he lies at the center of the problem. And we know that Mr. Powell isn’t going to tell us the truth because he would have to admit his complicity and thereafter hold Mr. Biden and Congress accountable for the solution. But I’ll tell you the truth.

The truth is that inflation is caused by the government ignoring the first and immutable principle of economics – the balance between supply and demand. It is caused by routine, and increasing government spending in excess of available revenue – deficit spending. In reality we have had deficit spending for decades but it was former President Barack Obama that tied a rocket to the process as he spent recklessly in the aftermath of the Bush/Obama recession of 2008-09. It continued under former President Donald Trump mostly as a result of the unnecessary shut down of America’s economy during COVID and attempt to restart it through government spending. And it continued to increase dramatically under Mr. Biden even after COVID had dissipated and we learned the lies of the government – the origins of COVID, the resilience of children, the difference between reasonable caution and the virtual shutdown, and finally the real limitation of the so-called immunization process.

In essence the deficit spending caused the federal government to create treasury bonds in order to borrow the needed cash for the deficit spending. Because there was insufficient demand for those bonds, the Federal Reserve System purchased those bonds by issuing additional money. The result is that Mr. Trump and Mr. Biden flooded the economy with more cash than there were goods to purchase. When supply exceeds demand the value of it – including the value of cash declines. Because availability of goods didn’t keep pace with available cash, the price of those goods increased – when demand exceeds supply, the price goes up. And that is precisely what happened. The politicians flooded the market with cash which lost value because of an overabundance, while the available goods either remained static or declined, inflating the prices.

The solution, in its simplest terms is to reduce available cash and increase available goods. Mr. Powell and the other members of the Federal Reserve have done their part by increasing the cost of borrowing, thus reducing the total amount of money available. And the great American economy has done its part by increasing goods available. But neither of those by themselves can cure the problem because the deficit spending proposed by Mr. Biden and approved by Congress continues unabated. The $34 Trillion national debt will increase in the first year between $1.5 and $2.0 Trillion as a result of Mr. Biden’s budget request. The work of the Federal Reserve System and the American economy simply cannot turn the tide so long as Mr. Biden and the Congress continues its massive deficient spending spree. It is like trying to drain a swimming pool by putting a pump on one end to drain and a larger pump on the other end to fill it.

Here is a simple process for reducing the national debt and returning to economic sanity.

1. The President and Congress set a ten year budget requirement of reducing the national debt from current levels to a level that is equal to fifty percent of the Gross Domestic Product. Each year of reduction makes the ensuing year easier to accomplish

2. Reductions should first occur by eliminating spending on illegal immigrants – except for apprehension and deportation. Welfare programs should be consolidated and a uniform method of means testing used. Earmarks to favor congressional members should be eliminated and subsidies to private businesses, including petroleum production and green energy should be terminated.

3. Each piece of legislation should include a cost estimate for its implementation and continuation and once that figure has been reached the program is suspended.

There are more and you can think of ten in the time the Congress wrings its hands in hard choices. In the end this has to be done. The mounting debt is steering American into a third economy. Left unaddressed, American will lose its play to China as the primary economic power and its ability to manage the world currency.