Why we will have a recession this year

We are on track to sliding into a recession if we are lucky, or into a depression if we are not.

It all is due to a massive misunderstanding about the role of the Federal Reserve, Congress, and the President with respect to inflation.

The Fed blame game
Neil Irwin, AXIOS

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.

From 1960 through 2009, interest rates were relatively high (compared to current rates) and inflation also was relatively high.


Beginning in 2009, interest rates had been low as had been 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.

And also:

Changes in the M2 money supply do not parallel changes in inflation.

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%.)

Wait! What?

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.

When federal debt growth (purple line) declines we have recessions (vertical gray bars), which are cured by increased federal debt growth.

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.

Inflation (red line) parallels oil prices (blue line). Increase the supply of oil and you decrease the price of oil, which will decrease inflation.

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.]

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



The most important problems in economics involve:

  1. Monetary Sovereignty describes 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.