Fed Chair Jerome Powell, maybe pigs will fly

Federal Reserve chair vows to curb inflation with hikes that risk economic pain | The Japan Times

Powell: I know that inflation hurts, but I’m going to try to reduce inflation without causing a recession.

Sad family - Frog Financial Management

Alice: Our landlord said he has to raise our rent because his costs have increased. I can’t afford that. What can you do about it?

P: I’m going to raise interest rates.

Alice: But that will increase my landlord’s costs. Won’t that make the situation worse?

P: Raising interest rates is what I always do to fight inflation. It may not really work, but the politicians think it does, so it’s what I do

A: There’s a food shortage, so our food costs have gone up. I can’t afford to feed my children. What can you do about that?

P: I’m going to raise interest rates.

A: But that won’t help the food shortage. It only will make it harder for farmers to borrow., which will increase farmers’ costs? How will that lower food prices?

P: It won’t, but I also plan to sell off my T-bonds.

A: I don’t know much about T-bonds, but won’t that take money out of the economy? How does taking money out of the economy help the food shortage?

P: Beats me.

A. And the price of gas has gone up due to a shortage of oil. What are you doing about that?

P: I’m going to raise interest rates and sell off my T-bonds.

A: How does raising interest rates and selling off bonds increase gas supply?

P: It doesn’t, but it’s what I do. I think it’s supposed to cool the economy, which by definition, is a recession.

A: You want to cause a recession — a reduction in trade and industrial activity?

Federal Reserve chair vows to curb inflation with hikes that risk economic pain | The Japan Times

P: Yes, but please don’t call it a recession. Let’s call it “a cooling process.”

A: I’m unemployed. I easily could get a job, but when I pay FICA taxes and income taxes, and my employer pays his share of FICA and our healthcare insurance policy, my net take-home pay won’t cover inflation. What are you doing about that?

P: I’m going to raise interest rates and sell off my T-bonds.

Sad family - Frog Financial Management

A: Will that increase my net take-home pay?

P: Of course not. I can’t eliminate FICA, provide Medicare for All, or increase the Standard Deduction, all of which would increase your net pay.

I also can’t stop taxing Social Security benefits and IRA distributions to provide you with more long term net pay.

But, raising interest rates and selling off my bonds is what I do. It doesn’t work, but it makes me look prudent.

A: I understand there’s a shortage of computer chips, which causes a shortage of everything that uses computer chips, and those shortages cause the prices of almost everything electric to increase. What can you do about that?

P: The usual. I’m going to raise interest rates and sell off my T-bonds.

A: Again, how will that cure the shortage of computer chips?

P: It won’t. It only will make borrowing more expensive, and there’ll be less money in the economy, so people like you will have less money to spend. Fundamentally, I’m going to impoverish you to fight the shortage of goods and services that is causing inflation.

A. That’s crazy. Why make borrowing more expensive, which is recessive, and take money out of the economy, which also is recessive?

Recession isn’t the opposite of inflation. Deflation is the opposite of inflation. Your policies could cause stagflation, which is even worse.

The only way to reduce prices without a recession is to cure the causes of inflation: Shortages of key goods and services.

P: Sure, you know that, but the public doesn’t. They think I know what I’m doing.

A: While we’re talking about inflation, and everything being more expensive, the cost of medical insurance has gone up. There’s a shortage of doctors, nurses, and hospital beds, along with a shortage of medical equipment. What can you do about all those shortages that are causing medical inflation?

P:  Don’t you get it? I can’t cure shortages of anything — not shortages of food, nor oil, nor houses, nor computer chips, nor shipping, nor doctors, nor nurses, nor hospital beds — nothing. I have no control over the shortages that are causing inflation.

All I can do is cause a shortage of money, and that, together with all those other shortages will cause the economy to cool, in other words, a . . . .

A: Recession.

P: Or maybe, that stagflation thing. In short, I actually will cause a recession to cure inflation, but I won’t call it a recession. Let’s call it “prudent management.”

A: So if you can’t cure the inflation without causing a recession or, God forbid, a depression, who can?

Federal Reserve chair vows to curb inflation with hikes that risk economic pain | The Japan Times

P: Congress and the President have the power to cure the shortages that cause inflation, and not cause a recession or depression.

To cure the shortages of food, Congress can pay farmers to grow. Previously we’ve paid them not to grow, so prices would be higher.

Now we can reverse that.

A: And oil shortages, computer chip shortages, shipping shortages, and labor shortages?

P: Yes, I’ll let you in on a little secret. Congress and the President could pay to solve all those shortages, which would bring down prices. They have the power.

All I can do is fiddle with interest rates.

Sad family - Frog Financial Management

A: So why . . . ?

P: Today’s Congress is hopeless.

The Republicans don’t care about the economy. All they want to do is win elections.

So they act outraged about everything, but they don’t have actual plans to do anything about the economy.

Let’s face it, white supremacists, bigots, anti-vaxers, anti-gay, anti-immigrant, anti-Mulsim, and anti-black dummies storming Congress are not the kind of people likely to have created coherent plans to improve the economy.

The Dems want to grow the economy, but they think federal spending to cure shortages would cause, not cure, inflation.

Frankly, I don’t understand how curing the shortages of food, oil, computer chips, labor, etc., etc., etc,. could cause inflation, but the Dems are terrorized by the word “debt.”

A: But isn’t debt bad?

P: Nah, debt is bad only if you can’t afford to pay for it. But the federal government never can run short of its own sovereign currency, the U.S. dollar. It can pay off any size of debt instantly, without levying a penny in taxes.

A: So why don’t you just tell the American people all this? Why do you pretend you can cure inflation without causing a recession or depression when you know you can’t.

P: There’s an old story that comes to mind:

The King sentenced a man to death. The man pleaded, “If you spare me, I promise that in one year, I will teach this pig to fly.”

The King laughed and said, “I will give you one year. If the pig doesn’t fly, I will kill you myself.”

When the man’s friends asked him how he could make such a ridiculous promise, the man replied, “Much can happen in a year. The pig might die; the King might die, or I might die.

“Or who knows, I might teach the pig to fly.”

So much could happen in a year. We could go to war with Russia or China, and everyone would forget about inflation. A meteor could fall on Washington. COVID could act up again. The Supreme Court could outlaw gays.

Many things could divert our concerns from inflation.

And maybe pigs will fly.

In any event, Powell’s claims have bought him some lucrative time as Chair of the Fed (over $200K per year, plus many great benefits), and who knows, inflation might just go away, and he’d get accolades, whether or not we had a recession.

It worked for Paul Volcker.

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 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.

MONETARY SOVEREIGNTY

Paul Volker’s accidental success

A short article in the December 20th edition of THEWEEK magazine shows how Paul Volker accidentally succeeded in curing “nearly a decade of runaway inflation and weak growth.”

The central banker who whipped inflation
Appointed chairman of the Federal Reserve by President Carter in 1979 after nearly a decade of runaway inflation and weak growth, Paul Volcker set out to cure the nation’s malaise through a program of economic “shock therapy.”

Volcker slashed the supply of money flowing into the economy, sending interest rates soaring to just over 20 percent at their peak.

The U.S. tumbled into a deep recession, with unemployment peaking at 10.8 percent. Homebuilders mailed Volcker unused two-by-fours and protesting farmers circled the Federal Reserve building with tractors.

But by 1983, inflation had fallen from 12 percent to below 4 percent, allowing Volcker to take his foot off the brakes.

“I’m not sorry about it,” he said last year. “I don’t know any other course of action that would’ve been politically feasible or economically feasible.”

What Volcker did not understand is that economic growth requires money supply growth so his cut of the money supply caused the recession and did nothing to cure the inflation.

Recessions (vertical bars) are introduced by decreases in federal deficit spending growth (black line) and are cured by increases in deficit spending growth.
Raising interest rates (red line) makes money more valuable by increasing the demand for money (This is called “strengthening the dollar.”) By definition, more valuable money is anti-inflationary (blue line).
Contrary to popular wisdom, lowered interest rates (orange line) do not increase economic growth (purple line). In fact, the opposite seems to be true. Higher interest rates are economically stimulative because they require the federal government to pump more interest (growth) money into the economy.

Volcker believed the economy was caught in a vicious cycle, with Americans borrowing, spending, and demanding ever higher wages to keep ahead of inflation, which in turn caused prices to rise.

The blue line shows the Consumer Price Index for all Items. The red line shows the Consumer Price Index just for food and energy.  Shortages of food and/or energy, not excess money supply, are what cause inflations.

Contrary to popular wisdom, inflations are caused by shortages, usually shortages of food and/or energy, not by excess money creation or by the so-called “vicious cycle.”

Volcker worked under the false belief that inflation is the opposite of recession, so to stop inflation one must cause a recession. But the opposite of inflation is deflation.

Commodity prices rise not because of too much demand, but rather because of insufficient supply. Curing an inflation requires curing the shortages of food and/or energy, which generally requires more government spending, not less.

Rather than constricting the money supply, Volker and Congress financially should have helped farmers to grow more and helped oil drillers to drill more. Increasing the food and energy supply would have ended the inflation without causing a recession. Rathers, this approach would have stimulated economic growth.

His success tackling inflation “laid the foundations for governments around the world to give greater independence to their central banks.”

“For a man who understood the mysteries of money more deeply than almost anyone, Volcker had little use for the trappings of wealth,” said The Washington Post.

Unfortunately, the “foundations for governments around the world” are misleading examples, which like austerity, debt reduction, and the euro, demonstrate ignorance of Monetary Sovereignty.

Reappointed Fed chair by President Reagan, he declined a third term amid tensions with the administration over financial deregulation, which he adamantly opposed.

Serving on President Obama’s Economic Recovery Advisory Board in the wake of the 2008 financial crash, “he was highly critical of banks’ risk-taking,” said The Times (U.K.).

The former Fed boss lent his name to the Dodd-Frank financial reform bill’s “Volcker Rule,” which banned taxpayer-protected banks from engaging in speculative trading with their customers’ deposits.

But in a 2018 interview, Volcker said he doubted whether a Washington that had lost public trust and was now stuffed with lobbyists and lawyers would be up to tackling the next crisis. “We’re in a hell of a mess in every direction.”

In this, Volcker was correct. Banks and lobbyists do not operate in the best interests of America. They operate with the profit motive in the best interests of themselves.

That is why all banks should be federally owned, to remove the profit motive and to regain federal control over the money supply. (See Ten Steps to Prosperity, Step #9, below.)

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. Provide a monthly economic bonus to every man, woman and child in America (similar to 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