Ludicrous. The Fed Chair is clueless or lying. Stagflation, here we come.

This is what happens when the Fed Chair is clueless or lying:

It took only a 10-minute speech from Federal Reserve Chairman Jerome Powell on Friday to clarify that monetary policy would be relentlessly tightened in the months ahead. Investors dumped stocks, sending the S&P 500 Index down 3.4% following two days of gains.

And it all was based on two Big Lies that the federal government can run short of dollars, and that federal deficits cause inflation.

Both Big Lies are so obvious, so easily debunked, that it’s hard to believe they are accidental or based on ignorance. Lies that big and easily seen simply must be intentional.

Powell: Fed’s inflation fight could bring ‘pain,’ job losses
By CHRISTOPHER RUGABER
August 26, 2022

JACKSON HOLE, Wyoming (AP) — Federal Reserve Chair Jerome Powell delivered a stark warning Friday about the Fed’s determination to fight inflation with more sharp interest rate hikes:It will likely cause pain for Americans in the form of a weaker economy and job losses.

Powell believes the way to fight inflation is to cause a recession (aka a weaker economy and job losses).

But inflation is not the opposite of recession. The opposite of inflation is deflation. We can have inflation and recession at the same time. It’s called “stagflation,” a problem for which the Fed knows no cure (though there is one).

The message landed with a thud on Wall Street, sending the Dow Jones Industrial Average down more than 1,000 points for the day.

“These are the unfortunate costs of reducing inflation,” Powell said in a high-profile speech at the Fed’s annual economic symposium in Jackson Hole. “But a failure to restore price stability would mean far greater pain.”

The pain is wholly unnecessary. Inflation is not a problem. It is the symptom of a problem, the shortage of crucial goods and services.

Today’s inflation is caused by shortages of oil, food, shipping, lumber, paper, computer chips, many chemicals, labor and a long list of other goods and services. Most of those shortages resulted from COVID.

To cure a problem one must cure the causes. Low interest rates did not cause inflation, so raising interest rates will not cure inflation.

GRAPH I:

There is no relationship between low interest rates (red) and inflation (blue). Raising rates leads to recessions (vertical gray bars).

The U.S. had extremely low interest rates for more than a decade, beginning 2009, and inflation remained low. Clearly, low rates were no a cause of inflation, so raising rates will not cure inflation.

As the above graph shows, however, raising interest rates leads to recessions.

Further, there is no relationship between inflation and federal deficit spending, so increasing federal spending will not cause inflation:

GRAPH II:

There is no relationship between federal deficit spending (green) and inflation (blue). Reduced spending growth leads to recessions (vertical gray bars).

Therefore, the Fed is promoting two activities — raising interes rates and reduced federal deficit spending — neither of which willconomy, even as the unemployment rate has fallen to a half-century low of 3.5%.

It has also created political risks for President Joe Biden and congressional Democrats in this fall’s elections, with Republicans denouncing Biden’s $1.9 trillion financial support package, approved last year, as having fueled inflation.

The $1.9 trillion financial package did not fuel inflation, but it did help hold off a recession. For political purposes, the GOP wants to see inflation and recession come during the Biden administration, so they denounce federal deficit spending.

And here comes the ridiculous part:

Some on Wall Street expect the economy to fall into recession later this year or early next year, after which they expect the Fed to reverse itself and reduce rates.

Wall Street is correct. That is exactly what will happen. If the Fed continues it interest rate increases, and the federal government doesn’t increase its deficit spending, we will have a recession.

Then the Fed will cut interest rates, which again will accomplish nothing. But the Fed will picture itself as struggling mightily and bravely against inflation and recession.

Any failures will be “beyond their control,” and any successes will “result from their actions.” They can’t lose.

Powell reminds me of a child sitting in the back seat with a toy steering wheel. Whenever the car turns, he turns his wheel. He thinks he is driving the car but he is only going through motions.

A number of Fed officials, though, have pushed back against that notion. Powell’s remarks suggested that the Fed is aiming to raise its benchmark rate — to about 3.75% to 4% by next year — yet not so high as to tank the economy, in hopes of slowing growth long enough to conquer high inflation.

Graph I showed that interest rate increases lead to recessions. Graph III shows that raising interest rates will will have an adverse effect on real Gross Domestic Product growth. (GDP is shown as negative growth).

GRAPH III:

GDP (purple) is shown as negative growth which matches the peaks and valleys of interest rates (red).

After raising its key short-term rate by a steep three-quarters of a point at each of its past two meetings — part of the Fed’s fastest series of hikes since the early 1980s — Powell said the Fed might ease up on that pace “at some point,” suggesting that any such slowing isn’t near.

Powell said the size of the Fed’s rate increase at its next meeting in late September — whether one-half or three-quarters of a percentage point — will depend on inflation and jobs data.

An increase of either size, though, would exceed the Fed’s traditional quarter-point hike, a reflection of how severe inflation has become.

The Fed chair said that while lower inflation readings that have been reported for July have been “welcome,” he added that, “a single month’s improvement falls far short of what (Fed policymakers) will need to see before we are confident that inflation is moving down.”

Nothing the Fed has done, to date, has reduced inflation. Any inflation reductions have come from reduced shortages of oil and other commodities. The car turned, and Powell sitting in the back seat thinks he turned it.

“The historical record cautions strongly against prematurely” lowering interest rates, he said. “We must keep at it until the job is done.”

Yes, Chairman Powell, you keep turning your toy steering wheel, and after we go through a stagflation, which will end with increased federal deficit spending to cure shortages, you can claim credit.

(The Fed’s interest rate) hikes have led to higher costs for mortgages, car loans and other consumer and business borrowing.

Home sales have been plunging since the Fed first signaled it would raise borrowing costs.

Translation: The Fed already has begun to cause a painful recession while inflation continues.

Powell is betting that he can engineer a high-risk outcome: Slow the economy enough to ease inflation pressures yet not so much as to trigger a recession.

The little boy in the back seat furiously spins his steering wheel.

At last year’s Jackson Hole symposium, Powell listed five reasons why he thought inflation would be “transitory.” Yet instead it has persisted, and many economists have noted that those remarks haven’t aged well.

America asked the man who said inflation was “transitory,” now asks the same man to cure inflation. Powell neither has the know-how nor the tools.

He doesn’t understand was causes inflation (shortages) nor how to cure it (spend to cure the shortages). He is applying leeches to cure anemia, hoping that won’t make the anemia worse.

Stagflation, here we come. Ludicrous.

In summary:

  1. Raising interest rates does not cure the causes of inflation, which are shortages of key goods and services.
  2. Reducing federal deficit spending does not cure the causes of inflation, but does lead to recessions.
  3. Increasing interest rates does not cure the causes of inflation, but does lead to recessions.

Conclusion: The Fed actions will not cure inflation but will cause a recession. Increased federal deficit spending to cure shortages will prevent a recession, and will not cause inflation.

19 thoughts on “Ludicrous. The Fed Chair is clueless or lying. Stagflation, here we come.

  1. It’s very painful to watch all of these actions from unelected officials that will lead to the detriment of nearly all Americans.

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  2. Again Rodger, a 50% discount/rebate policy will implement macro-economic PRICE AND ASSET DEFLATION. It is a paradigm/pattern changing policy….all by itself. And with its other aligned policies and regulations it is the quick route toward cooperation in implementing the new paradigm on the part of the business constituency (other than finance of course) because it 1) it potentially doubles demand for their goods and services, 2) with a universal dividend it enables the ending of FICA taxes for them and every working person 3) Finally shuts the mouth of every pundit who insists fiscal austerity is the answer to inflation and 4) fiscally enables the funding of the kind of mega-projects necessary to confront climate change. That’s your agenda, my agenda, enterprise’s agenda and survival’s agenda.

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  3. You’ve used the Deficit/Inflation graph many times and I keep noticing that for a whole lot of the period covered, inflation and the deficit are moving in opposite directions, with opposing peaks and valleys. I wonder what the correlation coefficient is. It looks to be significantly negative, but I’m not a statistician.

    I haven’t worked out what the correlation actually means other than higher deficits don’t lead to higher inflation as you’ve said, but it may be meaningful in other ways.

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    1. That’s a reasonable question, John. It might be worth the effort. But, I actually am a bit reluctant to follow up on it, because the correlation implies more exactitude than I feel comfortable with.

      For instance, if we found that the historical inverse correlation were, say, 70%, what would we know about today? Times change; cases change, factors change, and the correlation surely has changed over time. Each decade has been different.

      I feel more comfortable saying there has been no historical correlation, or even possibly an inverse correlation, than saying there currently is an “X” correlation.

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      1. Agreed. Precision might be distracting as the correlation most certainly does change over time.

        I just think it’s interesting that there are apparently negative correlations in so many segments of the graph.

        Liked by 1 person

      2. Steve Keen with his Minsky software has shown that there is a very, very high correlation between recessions and lack of a fiscal deficit wisdomicsblog.com Systems were made for Man, not Man for Systems.

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      1. 1. The federal government has infinite funds
        2. Federal deficits are private sector surpluses.
        3. Scarcity makes prices rise.

        It’s so obvious that one must assume the economists, politicians, and media writers who don’t understand it either are stupid by accident or stupid by intent.

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  4. Excellent article, Rodger. I do remember that up until a couple years ago or so, you used to think that, contrary to MMT, raising interest rates was a good thing on balance, and a good way to fight inflation. What changed your mind since then? And what, in your opinion now, is the ideal interest rate as a rule? Is it zero or near-zero like the MMT folks claim, or does it vary depending on the circumstances?

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    1. There is some economic value to higher interest rates, namely that the government pays more interest into the economy. And, of course, higher rates increase the demand for dollars to purchase T-securities, which is anti-inflationary.

      But facts trump hypotheses. The facts are that all the inflations I’ve investigated have been caused by shortages and have been cured by curing the shortages. So yes, there are some opposing forces in play, but the shortages dominate.

      I’m not sure MMT says zero is ideal. The last time I looked, they said zero is “natural.” Personally, I think zero seldom is ideal or natural.

      I suspect the best rate is not zero but in the neighborhood of five points below the average return on investment in the S&P — enough to pump federal dollars into the economy and to give the dollar strong value, but not enough to stifle R&D and other investments.

      That, in essence, is what MMT also believes is the “natural” rate

      All of the above is my suspicion for which I have no data.

      And never, never, never go below zero. Did I mention, NEVER?

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      1. Thank you for clarifying, Rodger. Interest rates are indeed, as I like to say, a razor-sharp, double-edged sword. And inflations are far more likely to very caused by shortages, which raising interest rates cannot cure. It is literally the wrong medicine for the job.

        That said, using interest rates to control inflation is probably a shade less bad than the quintessential MMT way of trying to use taxes to do so. (Unless of course it is something like the Universal Exchange Tax, a tiny little tax of 0.1% or less on all electronic transactions.)

        Negative interest rates, also known euphemistically as “demurrage”, may very well have a place in local complementary and alternative community currencies. That small town in Austria long ago comes to mind, for example. But otherwise, for a national currency, especially one that is supposed to be trustworthy the world over? Absolutely NEVER indeed. It is absolutely silly at best.

        Your thesis on what constitutes an ideal interest rate is probably spot-on. Of course, zero would be ideal by definition for a steady-state or no-growth economy, as without economic growth there can be no interest payments (at least not for the private sector).

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        1. That small town in Austria long ago: https://en.wikipedia.org/wiki/W%C3%B6rgl#The_W%C3%B6rgl_Experiment That is more a situation of juicing the rate of transactions in an area by having a currency the value of which decays over time. An interesting idea but not likely to ever work over a broad area. Can follow its implications down this rabbit hole: https://en.wikipedia.org/wiki/Margrit_Kennedy#Theory short booklet with diagrams here in English: https://issuu.com/margritkennedy/docs/bue_eng_interest/2

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  5. Speaking the language of Jerome Powell and Larry Summers: 04/2013 “Nobody in Europe” sees a “contradiction” between austerity and growth

    ““Nobody in Europe sees this contradiction between fiscal policy consolidation and growth,” said Mr. Schäuble. “We have a growth-friendly process of consolidation.”

    Wolfgang Schäuble is Germany’s finance minister. “Fiscal consolidation” is his euphemism for austerity. “Austerity” is an infamous word to tens of millions of Europeans. “Growth-friendly” is his euphemism for causing the über-Depression.

    https://neweconomicperspectives.org/2013/04/nobody-in-europe-sees-a-contradiction-between-austerity-and-growth.html

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    1. The euro nations are like our states. They are monetarily non-sovereign. They cannot control their money supply, and so, they cannot control their growth.

      The EU is like our federal government. It is Monetarily Sovereign. It has infinite control over the supply of euros and thus can foster the growth of the euro nations.

      Monetarily non-sovereign entities rely on income, much of which is in the form of taxes, exports, and visitors. Their primary source of growth is those exports and visitors. The same is true of the US states.

      In Europe, it’s rather difficult for everyone to be a net exporter. So unless the EU runs deficits, the euro nations will perpetually struggle.

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      1. “The EU is like our federal government. It is Monetarily Sovereign. ”

        So why is it so stingy refusing to spend like a sovereign? If part of the same union than surely people in Romania and Bulgaria deserve to have a similar quality of life and opportunity for success as those in France and Germany.

        The ECB might as well rebrand as the Reichsbank.

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        1. The Monetarily Sovereign EU offers the same false premises as the Monetarily Sovereign U.S. government, which warns us that Social Security and Medicare will be unable to afford benefits.

          It’s the Big Lie in economics on both sides of the Atlantic.

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