How we should prevent inflation, recession, and depression, all at once and forever.

For over a decade, we have experienced powerful economic growth and low inflation, for which the Congress and Presidents Trump’s and Biden’s administrations have taken credit.

Now, COVID has changed everything. Growth has leveled off and inflation has soared.

Economic growth is shown as the Dow Jones Composite Average (blue). Inflation is shown as the Consumer Price Index for All Urban Consumers (red).

So, the bad news has everyone wrongly looking to the Federal Reserve for a solution and to blame.

Solving, for instance, a medical problem, requires dealing with the symptoms or the causes. Dealing with symptoms works when the symptoms are relatively mild, but when symptoms are severe, one must determine the causes, and address them.

The symptom of a mild ache temporarily can be addressed with asperin. But if the pain is severe, and the cause is a broken leg, aspirin may not be the best solution.

In that vein, I submit that slow growth and inflation are not problems in themselves, but rather are symptoms of more serious underlying problems that beg for solutions.

Unfortunately, Congress has stepped back and claimed that the problems must be interest rates that are too low, and money creation that is too high, and therefore the Fed is officially tasked with curing what ails us.

The Fed has two big jobs and is failing at one of them
Neil Irwin

The Federal Reserve has been assigned a task by Congress that is easy to describe, yet fiendishly difficult to achieve. It’s known as the dual mandate: to achieve both price stability and maximum employment.

“Price instability” (in this case, inflation) is a symptom. Inflation is caused by shortages of key goods and services, which are not controlled by the Fed.

“Maximum employment” (a proxy for economic health) also is not under the Fed’s control.

The Fed’s tools are interest rates and to a slight degree, money supply. Neither tool cures shortages. While money supply does affect economic health, the Fed has much less control over money supply than does Congress.

In short, Congress and the President have total control over the Fed’s dual mandate, control the Fed does not have.

Nevertheless, the politicians find the Fed a convenient whipping boy for any financial problems, while claiming credit for any financial successes.

The Fed goes along with the ruse, perhaps because it enjoys the appearance of power the dual mandate provides.

The formal, legal language of the mandate comes from the Federal Reserve Reform Act of 1977, which says the central bank must steer credit and money supply “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

The part about “moderate long-term interest rates” hasn’t been a problem in recent decades, which leaves open the question of what counts as “maximum employment” and “stable prices.” The Fed has a great deal of leeway to interpret those goals.

How it works: The central bank now formally defines price stability as an inflation of 2% per year, as measured by the core personal consumption expenditures price index.

This is the part where the Fed is failing. Inflation was up 5.4% over the 12 months ended in February, far overshooting the central bank’s target, though by less of a margin than the more widely covered Consumer Price Index.

The definition of “maximum employment” is more squishy. Median official Fed estimates show the longer-run unemployment rate is 4%, though policymakers also emphasize a lot of uncertainty around how low unemployment can go without sparking excessive inflation.

Though “policymakers” (Congress and the President) recognize that low unemployment, i.e., a shortage of labor, is one of the shortages that lead to inflation, they still insist that the Fed use its interest rate and money-creation tools, rather than curing the shortage.

Our Monetarily Sovereign federal government has neither the need for, nor the use of tax dollars. It creates all the dollars it uses, ad hoc, by paying bills.

So, for example, eliminating the useless and regressive FICA tax would relieve employers of a significant employment cost while allowing for substantial salary increases at no cost.

Additionally, if the federal government offered Medicare for All, with no deductibles, employers would be relieved of that cost, too, further allowing them to raise salaries at no cost while attracting more employees.

Putting more dollars into employees’ pockets, at no cost to employers, is one good way to encourage more people to go to work, i.e reduce the labor shortage that is one cause of today’s inflation.

The view at the Fed at the moment is that the job market is too hot — “tight to an unhealthy level,” as Chair Jerome Powell put it in his news conference last month.

Between the lines: Powell and his colleagues are hoping the labor market is so robust they can slow demand just enough that labor shortages and inflationary pressures abate — but employers keep hiring, and the jobless rate doesn’t rise much.

“Slow demand” is another term for “start a recession.” It’s based on the belief that the opposite of “inflation” is “recession,” which is just plain ignorant economics.

The opposite of inflation is deflation, which is accomplished by moving away from shortages toward surpluses.

Slowing demand, which the Fed wants to instigate by cutting the money supply, always leads to recessions if we are lucky and depressions if we are not.

This image has an empty alt attribute; its file name is image-1.png
Every recession (vertical gray bar) is preceded by reductions (diagonal lines) in federal deficit spending growth (blue line).

Fed President Mary Daly said in a recent speech. “It was critical to assist the economy in recovering the job losses that occurred early in the pandemic, and it is now critical to stem what has been a longer-than-expected run of high inflation.”

Ms. Daly may claim that the Fed assisted the economy to recover from job losses, and now is in a position to stem inflation.

That is like the child sitting in the back seat of a car with his toy steering wheel, and claiming that he is driving the car.

In reality, the economy recovered from job losses because the President and Congress pumped in trillions of stimulus dollars.

The inflation can be stemmed, without starting a recession, only by relieving the COVID-based shortages of oil, food, computer chips, lumber, labor, and many imported goods.

The shortage of oil can be addressed by federal funding for drilling, drilling materials, labor, solar energy, geothermal energy, wind energy, electric cars, etc.

What’s next: Over the coming months, with supply chains stabilizing, fiscal stimulus fading, and the Fed doing its job of slowing demand, there is good chance inflation will start to come down.

Since when is “slowing demand” (i.e. causing slower economic growth) the Fed’s job? Why is economic growth the devil, when inflation is the real devil? The two are completely different, as we can, and often have had one without the other.

When we have economic growth without inflation, that is termed “a healthy economy.” When we have inflation without economic growth, that is termed “stagflation,” which easily transitions to full blown recession and depression.

Thus, there is a strong chance that the Fed’s “job of slowing demand” will cause a recession.

The question is whether it comes down quickly enough and decisively enough to give the Fed comfort that it doesn’t need to cause an outright crash in the job market to speed things along.

It’s astounding that the Fed’s solution to inflation could cause a “crash in the job market,” (mass unemployment). Is this the best that all those highly paid economists can do?

The solution to inflation is to cure the causes of inflation, i.e. shortages, not to wreck the economy by cutting demand.

The bottom line: The Fed has two jobs, and is currently coming up short at one of them. It is unclear whether it can fix one side without messing up the other.

The real bottom line: This is what the Fed really was designed to do:

    1. Supervise and regulate banks and other important financial institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers.
    2. Maintain the stability of the financial system and contain the systemic risk that may arise in financial markets.
    3. Provide certain financial services to the U.S. government, U.S. financial institutions, and foreign official institutions, and play a major role in operating and overseeing the nation’s payments systems.Only later did Congress and the President sneak in a fourth responsibility:
    4. Conduct the nation’s monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices.

Essentially, the Fed was designed to do one job: Control the banking/financial system. Congress and the President are responsible for the economy.

Foisting the inflation, deflation, recession, depression, employment, unemployment, and economic growth jobs on the Fed was an admission by Congress and the President that they are not competent to do exactly what they were elected to do: Improve the lives of the governed.

It’s an admission that our recalcitrant, fractious political system cannot cope with the major problems of the day, and that some politically insulated agency must carry the water when our elected officials are more interested in winning elections than in doing their jobs.

SUMMARY

Today, our economic problems center on inflation and slow growth.

But inflation is a symptom; shortages are the cause. Slow growth is a symptom; lack of money is the cause.

The Fed’s primary tools are limited to interest-rate and a minimal money-supply control, both of which are designed to treat the symptoms, not the shortages.

Sadly, the Fed wrongly believes economic growth causes inflation, so it will use its limited tools to force reduced economic growth, and most likely, recession, while the basic causes of inflation will remain.

So, because of economic ignorance, we will endure stagflation.

Spending to cure the shortages would cure both the inflation and the slow growth, but Congress and the President, which solely have the curative power, have abdicated their responsibility.

So, as always, we will bounce from boom to bust in a neverending cycle of incompetence, while the people suffer.

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MORE ABOUT SHORTAGES

Historic fertilizer shortages threaten world’s food security
Elizabeth Elkin and Samuel Gebre, Bloomberg News
For the first time ever, farmers the world over — all at the same time — are testing the limits of how little chemical fertilizer they can apply without devastating their yields come harvest time. Early predictions are bleak. 

In Brazil, the world’s biggest soybean producer, a 20% cut in potash use could bring a 14% drop in yields, according to industry consultancy MB Agro.

In Costa Rica, a coffee cooperative representing 1,200 small producers sees output falling as much as 15% next year if the farmers miss even one-third of normal application.

In West Africa, falling fertilizer use will shrink this year’s rice and corn harvest by a third, according to the International Fertilizer Development Center, a food security non-profit group.

Soaring prices for synthetic nutrients will result in lower crop yields and higher grocery-store prices for everything from milk to beef to packaged foods for months or even years to come across the developed world.

More fertilizer use brings more food production.
But as costs for synthetic nutrients have skyrocketed — in North America, one gauge of prices is nearly triple where it was at the start of the pandemic — farmers have had to start paring back use, sometimes dramatically.

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Gulf of Mexico drilling makes too-little, too-late comeback
Paul Takahashi, Bloomberg News
A new wave of oil platforms is sweeping into the U.S. Gulf of Mexico as crude prices are riding historic levels and demand for barrels is higher than ever.

But don’t count on the new production to close the oil-supply gap that has plagued the world’s economies since the pandemic. Even with the new platforms coming online, gulf oil production won’t grow substantially in the coming years as mature fields decline, according to analysts.

—//—

Can’t find chicken wings, diapers, or a new car? Here’s a list of all the shortages hitting the reopening economy.
Juliana Kaplan and Grace Kay May 25, 2021, 9:54 AM

Computer chips, used and rental cars, gas and oil, plastics, palm oil, truckers, rideshare drivers, homes, vacation houses, lumber, toilet paper. tampons, furniture, chicken, bacon, hot dogs, imported foods like cheese, coffee, olive oil, chlorine, corn, oxygen, labor

And none of these inflation-causing shortages, which affect virtually everything you buy, will be cured by the Fed.

Rodger Malcolm Mitchell
Monetary Sovereignty
Twitter: @rodgermitchell
Search #monetarysovereignty
Facebook: Rodger Malcolm Mitchell

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THE SOLE PURPOSE OF GOVERNMENT IS TO IMPROVE AND PROTECT THE LIVES OF THE PEOPLE.

The most important problems in economics involve:

  1. Monetary Sovereigntydescribes money creation and destruction.
  2. 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:

Ten Steps To Prosperity:

  1. Eliminate FICA
  2. Federally funded Medicare — parts A, B & D, plus long-term care — for everyone
  3. Social Security for all
  4. Free education (including post-grad) for everyone
  5. Salary for attending school
  6. Eliminate federal taxes on business
  7. Increase the standard income tax deduction, annually. 
  8. Tax the very rich (the “.1%”) more, with higher progressive tax rates on all forms of income.
  9. Federal ownership of all banks
  10. Increase federal spending on the myriad initiatives that benefit America’s 99.9%

The Ten Steps will grow the economy and narrow the income/wealth/power Gap between the rich and the rest.

MONETARY SOVEREIGNTY