Stopping Inflation by Stopping Deficit Spending

The May 2024 jobs report dropped on Friday about an hour before the stock markets opened in New York. The “financial wizards” predicted there would an increase of about 180,000 – too high for the Federal Reserve Board who is counting on lower employment numbers to signal a “cooling” of the economy. Instead, the Bureau of Labor Statistics reported an increase of about 272,000 jobs were created* – fifty percent higher than the “financial wizards” predicted. The stock markets promptly dropped with a mild recovery later in the day that left all of the indexes down.

You may be wondering how an increase in employment signifying economic growth can result in a drop in the overall economic outlook. And you would be right in wondering. But this is the result of government interference in the free market – good news is really bad news and bad news is good news. Increased employment – bad news; increased unemployment – good news. Only a government run by pinheads could conjure up this bassackward result. But let me explain to you how it happens.

In its simplest terms, the current inflationary cycle is due solely and only to overspending by the federal government – deficit spending, massive deficit spending, continuing deficit spending. If you and I overspend our income we will wind up broke – and usually in short order.

However, this is the federal government we are talking about and when they run low on money they just print more. Here’s how it works. The President(s) – in this instance, Presidents Barack Obama, Donald Trump and Joe Biden – requested (and Congress approved) spending in excess of revenues on a continuous basis for nearly sixteen years. That is called deficit spending and in this instance the amount of the deficit has increased annually. During President Barack Obama (D) the national debt increased from $11.9 Trillion in 2009 to $20.245 Trillion in 2017; under former President Donald Trump (R) in increase from $20.245 Trillion in 2017 to $27.748 Trillions, and under current President Joe Biden (D), it has increased from $27.748 Trillion to $31.42 Trillion in just the first two years of President Joe Biden. That is in increase of $19.52 Trillion over the last fourteen years – a near tripling of the national debt.

To fund that spending the United States Treasury Department issues bonds (Treasury Bonds) to cover the difference between then-current revenues and the amount actually authorized for spending. The Treasury Department then sells those bonds. There is insufficient  public interest in these treasury bonds to raise the cash necessary to fund the deficit. And because of that insufficient interest, the Federal Reserve System steps in and purchases the vast majority of those bonds. But the Federal Reserve lacks the resources to purchase those amounts of bonds and it is required to print additional money to pay for the purchases. The end result is that there are now more dollars chasing the same amount of goods and services. The result is the classic imbalance between supply (money) and demand (available goods) – inflation. Currently, the government (Mr. Biden and the Congress) has done nothing to reduce the amount of deficit spending, increasing the debt and forcing the increase in the money supply.

The traditional response by the Federal Reserve to dampen inflation is to increase the interest rates which dampens the enthusiasm for capital investment and thus economic expansion. In this instance the Federal Reserve waited over a year before doing anything. In essence they bought into the Biden Administration’s baloney about inflation being “transitory” – a lie from the moment it poured out of Treasury Secretary Janet Yellen’s mouth. It was a lie designed to protect Mr. Biden and escape the blame for rising prices due to his massive deficit spending. And like most of Mr. Biden’s lies, it became obvious over time. When it became obvious that the inflation was not transitory, Federal Reserve Chairman Jerome Powell dutifully began to raise rates – rapidly raise rates – which in turn increased the cost of borrowing for business and consumers alike (mortgage rates, credit card rates, etc.). And while it had some effect driving the inflation rate down from its high of nine percent, it did not have the full effect of driving the inflation rate down to two percent**. And there is a simple reason. While Mr. Powell was doing his best to make the cost of borrowing more costly, Mr. Biden was just as busy pushing for even greater deficient spending – and the Congress was accommodating. To put it in simple terms, while Mr. Powell was busy to trying to drain the pool, Mr. Biden was at the other end pumping water in as fast as he could. Mr. Biden joins that well known economic genius Rep. Alexandria Ocasio Cortez (BA-Economics – Boston University-2011) in believing the government doesn’t need to worry about running out of money because it can just print more).

While for the Federal Reserve printing more money has proven not to be the solution nor is raising the interest rates, it is, in fact, the Federal Reserve System that can resolve the problem in short order despite Mr. Biden and the Congress inability to control spending. It’s pretty simple. Mr. Powell can pen a letter to Mr. Biden, Treasury Secretary Janet Yellen and the leaders of Congress which states that the Federal Reserve System will no longer purchase Treasury bonds. And in fact it will no longer roll over existing bonds and will require payment of existing bonds including interest as they mature. And that will continue until Mr. Biden and the Congress demonstrate significant progress on eliminating deficit spending and reducing the national debt. The net result is that Mr. Biden and the Congress can authorize all the spending they want but there will not be any money available unless they can sell the Treasury bonds to the general public – which they cannot – or some hostile government such as China, Iran, etc. -which it should not. The Treasury Department can issue all the bonds it wants, but those bonds are worthless.

Now you are thinking that it cannot be that simple or someone would have done it already. But it is that simple, it just requires courage and there is an absence of that in the federal government.

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* The real job growth is markedly smaller than that because a substantial body of those new jobs are working for the government and thus an additional drain on government spending. With the exception of public safety officers (police and fire protection) and teachers (excluding the excessive number of non-teaching personnel) which are all drains on government spending. According to a February 24, 2024 report in Yahoo Finance:

“In 2023, the U.S. job market experienced a trend where nearly 25% of all job gains were attributed to government positions, underscoring a significant reliance on public sector employment to sustain economic growth.

* * *

“Three industries account for 83% of the job growth. Along with government jobs, healthcare and the hospitality industry make up the majority of new jobs. Hospitality jobs are often plagued with low pay and unsustainable positions.

“The trend toward increased government employment comes at a time when the private sector, particularly in technology and finance, faces a wave of layoffs, indicating a shift in the labor market dynamics.”

** A part of the explanation for the failure to have the full effect intended by the Federal Reserve is because there was an accumulation of investment capital that was not invested during the COVID pandemic but now made available without addit0onal borrowing after the COVID scare dissipated. Similarly there was an accumulation of savings unspent during the same period that led to increased consumer spending – at least thus far.