It’s a real question. If you had to choose between #1. Inflation or #2. Sickness, A Recession, A Depression, Poverty, Illiteracy, Starvation, Homelessness, Crime and some other bad stuff I could mention, would you chose #1 or #2?
It may sound like a no-brainer, and perhaps it is in the literal sense of “no brain,” because the vast majority of Americans claim they would rather experience #2 rather than #1.
Do you agree that you would prefer to experience sickness, a recession, a depression, poverty, illiteracy, Starvation, Homelessness, Crime, etc. than to experience inflation?
Let’s begin with the generally uncontested fact that the federal government created the laws that created the U.S. dollar. Because the federal government can create any laws it wishes, it can create as many dollars as it wishes, and cannot unintentionally run short of dollars.
The experts agree:
Former Fed Chairman, Alan Greenspan:“The United States can pay any debt it has because we can always print the money to do that.”Former Fed Chairman, Ben Bernanke:“The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”
We could add to the discussion the fact that federal deficit spending does not cause inflation, which we have proved here and here and dozens of other places on this blog.
We could insist that shortages cause inflations, and those shortages can be cured by federal deficit spending. Thus, we can show that rather than causing inflations, federal deficit spending can cure inflations.
But, wait. Why struggle against a tide of misinformation?
Let’s assume, for the sake of argument, that federal deficit spending does indeed, cause inflation. It’s what most Americans believe.
Because the federal government can’t run short of its own sovereign currency, it could risk inflation by using that currency to pay for:
Comprehensive, generous Medicare insurance for every man, woman, and child in America
Generous Social Security benefits for every man, woman, and child in America, regardless of age, income, or wealth
All costs of education from K-12 and beyond, including advanced degrees from top universities
Rent and other housing subsidies, for all.
A healthful diet for all Americans
Subsidies for all states, counties, cities, and villages, so that none of them would have to levy taxes.
Ending the FICA deduction from salaries
Expanded research in all the sciences: Mathematics, Biology, Botany, Social Sciences, Philosophy, Geology, Physics, Chemistry, Astronomy, and all the other sciences not mentioned.
The purpose of such spending would be to improve and extend the lives of humans and the other living creatures with whom we share the earth.
The government has the ability to fund all of #1 through #8. But many people wrongly object, “But that would cause inflation.”
If those people were correct, and that spending would cause inflation, it only would mean they have chosen a lesser life rather than experience inflation.
They have chosen sickness rather than health, poverty instead of affluence, taxation rather than being tax-free, homelessness rather than sheltered, stagnancy rather than advancement, and ignorance rather than knowledge, all for the fear of inflation.
Would you rather suffer from incurable, painful disease than suffer from inflation?
Would you rather risk being impoverished and homeless than to risk inflation?
Would you prefer that your children be unable to attend the best colleges having the best resources money can buy, just so you don’t see prices rise?
Would you rather the type of research that amazed you with the Internet, cell phones, artificial intelligence, moon landings, etc. be discontinued for lack of funds, just so inflation can be avoided?
Would you prefer that America default on its debts by enforcing a debt ceiling?
Would you rather that the federal government cease to improve our military?
Would you rather see the government do nothing to prevent or cure recessions and depressions, just because the cure – federal deficit spending – might cause inflation?
In summary, even if we admit the belief, just for the sake of argument, that federal spending causes inflation, we are left with very unsavory alternatives.
Think about it. Do you really believe that the possibility, or even the false probability, that federal deficit spending could cause inflation is more important than all of the things federal money could buy?
Rodger Malcolm Mitchell
Monetary SovereigntyTwitter: @rodgermitchellSearch #monetarysovereigntyFacebook: Rodger Malcolm Mitchell
The Sole Purpose of Government Is to Improve and Protect the Lives of the People.
It is the high season for being mad at the Federal Reserve.
Critics accuse them of being feckless as inflation pressures built last year, and as a result, the United States is facing prolonged high inflation, a painful recession to rein it in — or both.
Why it matters: In reality, the Fed didn’t create the current inflationary surge by itself— but it was too complacent as prices spiked last year.
Fact: Not only did the Fed not create the current inflationary surge by itself, but as we shall see, the Fed wasn’t at all responsible for today’s inflation.
Now the economic future depends on its ability to make up for lost time, and navigate a tightrope-thin path to bringing inflation down without tanking the economy.
Fact: It is not up to the Fed to bring inflation down. It doesn’t have the tools.
The Fed always takes heat for its decisions. That is to be expected when a handful of technocrats make decisions, behind closed doors, that shape a $24 trillion economy.
As you will see, the fault for inflation lies not with the Fed, but with a bunch of politicians — Congress and the President — and circumstances.
What is notable is how the most mainstream of economic commentators are piling on. The Economist’s recent cover called it “The Fed that Failed.”
Bloomberg published an essay headlined “The Fed Has Made a U.S. Recession Inevitable” — written by the former president of the New York Fed.
Blaming the Fed for inflation is like blaming the phone company for 911 calls. There is no cause/effect between the problem and a tangentially related agency.
Flashback: Last year, even as inflation started to surge, the Fed kept its aggressive monetary stimulus — interest rates near zero and buying billions of dollars in bonds — in place, only ending it last month.
This infers the commonly believed myth that low interest rates and increased money supply cause inflation.
In reviewing the above two graphs, it is difficult to infer that high interest rates prevent inflation and low interest rates cause inflation.
In fact, one more easily could infer that inflation causes high rates simply because the Fed believes in raising rates when inflation threatens.
We have what amounts to a self-fulfilling prophecy by the Fed.
From the above graph, one would have difficulty inferring that “excessive” money creation causes inflation.
So if low interest rates and “excessive” federal money creation don’t cause inflation, what does?
Insiders at the central bank don’t really dispute that they should have begun withdrawing that stimulus earlier.
The Fed was lulled by the fact that the initial surge of inflation last spring was concentrated in a handful of categories, then by a temporary softening in inflation last summer.
Those “insiders” should dispute the notion that should have begun withdrawing stimulus (taking dollars from the economy) earlier.
Had they done what they now believe they should have done, we would be in the midst of a recession, or more likely, a depression.
“We don’t have the luxury of 20/20 hindsight in actually implementing real-time decisions in the world,” Chair Jerome Powell said at a news conference last month.
Had they known how persistent inflation would be, Powell added, “then in hindsight, yes, it would have been appropriate to move earlier.”
Wrong. They do have the benefit of 20/20 hindsight, because this hindsight now shows no cause/effect relationship between interest rate increases and inflation decreases, nor does it reveal a cause/effect between money creation and inflation.
At the same time, it’s not clear that inflation right now would be radically different in an alternate universe where they had moved to tighten money earlier.
Right. It’s “not clear” because tightening money would not have reduced inflation, but would have destroyed the economy.
To control inflation, one must control the true cause of inflation, and the true cause of inflation is not low interest or high money supply.
“It is unlikely that the Fed could have lowered the inflation rate in 2021 because the fiscal support was so massive and its tools work with a lag,” Jason Furman, the Harvard economist and former White House economist, tells Axios.
Wrong., “Fiscal support” and “lag” are not the issues.
But by not acting sooner, the Fed has increased the risk that inflation will remain high through 2022, and beyond, he said: “If it had been more aggressive last year, we would be seeing the effects more this year.”
If the Fed had been more aggressive last year (in cutting the money supply while raising interest rates), we would have seen the effects last year: Recession and or depression.
Consider this admission from the article’s author, Neil Irwin:
Countries with central banks that did tighten faster are also experiencing high inflation. (In New Zealand, which raised rates back in October, it’s 6.9%.)
If countries that did tighten faster also are experiencing high inflation, why doesn’t that give the Fed, Congress, the President, the economists, the media, and Mr. Irwin a clue?
Moreover, there is a risk that if they had moved more aggressively last year, it would have slowed the rapid recovery without improving the inflation results very much, given the unusual mix of factors around the supply chain disruptions that are driving higher prices.
Right. There is a mix of factors driving higher prices, and those factors all can be summarized in one word: Shortages.
And there you have it. Inflations — all inflations — are caused by shortages of key goods and services.
Not by too much money, not by too-low interest rates: All inflations are caused by shortages, and all inflations are cured by curing the shortages.
And often, these shortages can be cured by additional, not by less, money creation.
Today’s inflation is caused by shortages of food, energy (mostly oil but also other forms of energy), shipping, computer chips, labor, and all the thousands of related products.
Food prices have risen because food is in short supply. Food is in short supply, not because the government added dollars to the economy, and not because people suddenly are eating more, but because of COVID and weather, and related shortages of labor, equipment, fertilizer, and other farming needs.
One does not cure a food shortage by starving the populace. One cures a food shortage by growing more food.
Energy is in short supply because the energy suppliers can’t obtain sufficient materials and labor to extract the oil, gas, and coal we need. This is related to COVID and lately, the Russia/Ukraine war.
One does not cure an energy shortage by forcing the nation to use less energy. One cures an energy shortage by creating more oil, gas, wind, geothermal, and solar energy.
Everything in our economy is inter-related. We are now short of homes, not because more people suddenly want homes, but because builders, who are short of labor and materials, can’t build fast enough. So home prices are soaring.
The cure for a shortage of homes: Fund the building of homes via appropriate tax cuts for all the home-building-related industries.
The list goes on and on, with the main culprits always being the same: Shortages, due not to increased demand but to decreased supply. The cure for a shortage: Increase the supply.
“I guess, with perfect hindsight, perhaps we would’ve moved to a contractionary policy stance to try to offset some of the supply chain issues and to offset the strong demand from the fiscal stimulus,” Minneapolis Fed President Neel Kashkari tells Axios.
“Offsetting supply issues” with a contractionary policy stance (i.e. creating a recession) is like starving the people as a cure for a food shortage.
But, he added, “I’m a little bit cautious about saying, ‘Boy, we should have just tightened earlier,’ because if the inflation’s being driven by … supply-side factors, it’s not clear what the benefit of that would’ve been.”
It should be clear that there would have been no benefit at all— just punishment of the private sector.
Yes, but: The real risk is that by waiting as long as it did to pivot to tighter money, the Fed will have to move so quickly to catch up that it triggers a breakdown, as the economy struggles to adapt to a world of less abundant cash.
When the Fed moves with maximum speed, consumers and businesses have less time to adjust to higher rates on all sorts of debt.
Time is not the issue. If cash is less abundant, the economy cannot adapt, slowly or quickly. When federal deficit spending does not increase sufficiently, we have recessions. Period.
Starving the economy of money is the issue. Fast starvation or slow starvation, both ultimately produce starvation.
At its meeting that concludes this coming Wednesday, the Fed is likely to begin its catch-up process in earnest by raising short-term interest rates half a percentage point and commencing with shrinking its balance sheet by up to $95 billion a month.
To “shrink its balance sheet,” the Fed must pull money from the economy. That’s $95 billion removed from the private sector (i.e. the economy) every month.
That absolutely, positively will have a depressive effect on economic growth.
The shift toward tighter money has rapidly spread out across lending markets. The average rate on a 30-year fixed-rate mortgage has soared from 3.11% at the end of last year to 5.10% now.
And still, we have inflation because the problem is not low interest rates. The problem is shortages. Cure the shortages and you cure inflation.
This is a situation where the government should throw money at the problem. Give the oil companies money on the condition they use it to raise salaries (to attract more people) and to purchase equipment.
Give farmers higher supplements and tax breaks for growing, and cut supplements for not growing. Similarly fund the building trades, purchase computer chips using the government’s unlimited funds, aid the shipping industries, all with direct supplements and tax breaks.
Meanwhile, eliminate the FICA tax to encourage management to hire, and and lower income taxes to encourage more people to come back to work.
Also, provide Medicare for All, taking that financial burden off corporations, to encourage hiring.
The bottom line: The Fed spent last year driving their metaphorical car at full speed, not realizing that they were entering a dangerous, curvy stretch of road. The road would still be dangerous no matter what.
The mistake was not slowing down sooner — making for a high risk of crashing. And we’re all in the car.
No, the mistake was driving their metaphorical car in the wrong direction. They already have the map in hand. They merely have to use it, and not stubbornly drive faster toward the east, when the goal is west.
Another metaphor: Trying to cure inflation by cutting the money supply is like trying to cure anemia by applying leeches.
Inflation is a supply problem; inflation is not a demand problem.
Today’s inflation is caused by shortages of food, energy (mostly oil but also other forms of energy), shipping, computer chips, labor, and all the thousands of related products.
To cure inflation one must cure the shortages by increasing the supply. There is no other rational solution.
Attempting to cure inflation by cutting demand will result in recession or depression. There is no other outcome.
The U.S. government is Monetarily Sovereign, meaning it has all the tools it needs in order to increase the supply of scarce goods and services.
Congress and the President control the U.S. government, so they, not the Fed, are responsible for preventing, causing, and/or curing inflations, recessions, and depressions.
[No rational person would take dollars from the economy and give them to a federal government that has the infinite ability to create dollars.]
Gap Psychology describes the common desire to distance oneself from those “below” in any socio-economic ranking, and to come nearer those “above.” The socio-economic distance is referred to as “The Gap.”
Wide Gaps negatively affect poverty, health and longevity, education, housing, law and crime, war, leadership, ownership, bigotry, supply and demand, taxation, GDP, international relations, scientific advancement, the environment, human motivation and well-being, and virtually every other issue in economics.Implementation of Monetary Sovereignty and The Ten Steps To Prosperity can grow the economy and narrow the Gaps:
The debt hawks are to economics as the creationists are to biology. They, who do not understand monetary sovereignty, do not understand economics.
For those of you who don’t remember the Great Depression (almost everyone, now), it began in 1929, after several years of federal surpluses ( Item 3.), but by the early-1930’s we already were on our way to recovery – something like today. Then, the government decided to reduce the federal deficit with increased taxes and reduced spending — something like today. So we had four more years of depression (something like tomorrow?)
According to Wikipedia: “The Recession of 1937–1938, sometimes called the Roosevelt Recession, was a temporary reversal of the pre-war 1933 to 1941 economic recovery from the Great Depression in the United States. Economists disagree about the causes of this downturn. Keynesian economists tend to assign blame to cuts in Federal spending and increases in taxes at the insistence of the US Treasury, while monetarists, most notably Milton Friedman tended to assign blame to the Federal Reserve’s tightening of the money supply in 1936 and 1937.”.
Hmmm. Let’s think about that. “Cuts in federal spending . . . and increases in taxes” = federal deficit reduction. “Tightening of the money supply . . .” also = federal deficit reduction. So here you had two different schools of thought, both saying essentially the same thing. The 1937 recession was caused by what we today refer to as “austerity.”
So what do our political leaders favor, now that we are creeping out of the latest recession. Yes, that same austerity. Republicans hate federal spending. They stand ready with dozens of proposals to slash the federal budget. Reportedly, they want to cut $260 billion (25%) from the federal budget. Now that should be stimulative.
Republicans also do not believe their proposed cuts in education, Medicare, unemployment compensation and many other worthy federal projects will hurt anything or anyone.
The Democrats are no smarter. They have to be dragged kicking and screaming, to retain (not even cut, just retain) the Bush era tax levels. They do not believe taxes, which remove money from the economy, slow the recovery. They want to tax the “wealthy,” because . . . well, because that is what Democrats, with their eternal class warfare strategy, do.
Then we have the media. My hometown newspaper, the Chicago Tribune repeatedly rails against the federal debt. They never explain why. They don’t provide data. They just don’t like it. The Tribune is typical of the media, which almost universally hate the debt, and almost universally don’t provide data supporting their position.
And then there is Fed Chairman Bernanke, who feels we must “act to bring down long-term fiscal deficits.” He too, has no clue about why and never gives a coherent reason.
Finally, we have the mainstream economists – all those Nobel winners – none of whom seem to understand monetary sovereignty, and all of whom call for less deficit spending.
Put them all together and things look very bad for this fragile economy. With leaders like these, who needs enemies?
No nation can tax itself into prosperity. Those who say the stimulus “didn’t work” remind me of the guy whose house is on fire. A neighbor runs with a garden hose and starts spraying, but the fire continues. The neighbor wants to call the fire department, which would bring the big hoses, but the guy says, “Don’t call. As you can see, water doesn’t put out fires.”
An alternative to popular faith
Readers of this blog know debt growth is necessary for economic growth. The graphs and data in the various posts, for instance The federal debt and federal deficit are necessary for economic growth, show that surpluses preceded every depression in U.S. history, and reductions in debt growth preceded every recession in the past 50 years.
While this degree of correspondence transcends coincidence, it leaves a troubling question: What is the trigger? The recession of 2001 was preceded by ten years of deficit growth reductions, while the recession of 2007 was preceded by only three. Other recessions also were preceded by varying periods of reduced deficit growth or surpluses. Similarly, the 1929 Great Depression was preceded by nine years of surpluses, while the 1819 depression was preceded by only two.
This makes predicting a recession difficult. While running a surplus seems to be a fairly prompt causative agent for recessions or depressions, debt growth can decline for several years before a recession begins. Reduced deficit growth is a necessary detonator of recession or depression, but some other event must serve as a more immediate signal, a trigger. For example:
*The recession of 1960 may have been triggered by the Vietnam war, which began in 1959
*The 1970 recession: Possible trigger: Also may have been the Vietnam war, this time by the protests and the public realization the war was going poorly.
*The 1973 recession: Possible trigger: The first Arab oil embargo
*The 1980 recession: Possible trigger: The Iranian revolution causing another oil crisis
*The 1990 recession: Possible trigger: Desert Storm
*The 2001 recession: Possible trigger: The bursting of the “dot.com” bubble.
*The 2007 recession: Possible trigger: Collapse of the subprime mortgage market
All recessions and depressions share one factor – reduction in debt growth – but all have had different triggers. It appears if we have only reduced deficit growth without the trigger, no recession or depression will result. And, a trigger event, without reduced deficit growth, will not cause a recession. The recession/depression bomb requires both a detonator (reduced debt growth) and a trigger.
Triggers are difficult to evaluate (i.e., how serious they are), but as one small step toward predicting recessions we should keep in mind that a recession is far more likely during federal deficit growth rate decreases.