Amazon founder Jeff Bezos and Elon Musk, CEO of Tesla and SpaceX, blame the government and the Fed for inflation. In Musk’s words, “The obvious reason for inflation is that the government has printed a zillion dollar more than it has. This is not super complicated.”
She and other celebrities subscribe to the inflation sophism: “too much money chasing too few goods.”
Yes, we’ve been “short of goods” due to a pandemic-perfect storm — depressed US oil production and production output, severe supply chain disruptions and warlike labor shortages — but that won’t last. It was exacerbated by the Russian invasion of Ukraine, which drastically reduced global purchases of Russian oil, grain and fertilizers and drastically reduced Ukrainian grain exports.
Meanwhile, our economy recovered much faster than expected (mainly thanks to dollars pumped in by the government and the Fed), reviving demand that was not easily met.
It’s true that when our economy was swamped by COVID, the government borrowed trillions to send stimulus money to most Americans, and — just like after the financial crash — the Fed electronically “printed money” to fund nearly $5 trillion in government debt and mortgages. securities to buy.
But according to an analysis by the Washington Post, most of those dollars couldn’t possibly have fueled inflation — because the financial institutions that paid the Fed parked more than $2 trillion in their accounts with the Fed, and American households used much of their stimulus. , bank about $3 trillion. The Post quotes a former Treasury Department official as saying, “The money supply has increased, but… they’re not spending it.” In fact, money moves more slowly through our economy than at almost any time in 65 years.
Clearly, the unprecedented confluence of supply and demand resulting from the pandemic and the war in Ukraine was the unprecedented confluence of supply and demand in Ukraine, not “too much money.”
So it’s understandable that Fed Chair Jerome Powell recently said, “Now we think more about just the supply-demand imbalances in the real economy than monetary aggregates” (our total money supply, called M2, is the main monetary aggregate). A fridge and pantry stocked with food won’t make you fat unless you eat too much; likewise, even an economy awash with dollars does not inevitably lead to borrowing and spending.
President Biden – despite great growth and employment statistics – is unjustly maligned for fueling inflation.
Historical money statistics further undermine the Bezos/Musk fallacy. Since 2020, M2 has grown by about 50 percent; headline inflation, measured by the consumer price index (CPI), was less than 15 percent. From 2010-2020, while the Fed is still scooping profits on our economy to resuscitate it from the Great Recession, M2 nearly doubled — but the CPI rose only 19 percent. Annual inflation remained below the Fed’s 2 percent target.
There has been a similar disproportionality between M2 and CPI and between annual M2 growth and CPI increases for 52 years. M2 is more than 22 times larger than it was in 1970, but the CPI is only seven times higher – a 3:1 ratio of M2 growth to inflation.
This decoupling — and the fact that extra money in the economy isn’t automatically lent and spent — is related to another seldom-mentioned reality: extra dollars drive not only consumption but also investment — fueling greater production capacity, business formation and expansion, R&D that stimulates innovation and can attract more people into the labor market. These counter inflation by increasing production, lowering prices and limiting the increase in compensation.
Amazon and Tesla embody how this works. Bezos and Musk built their behemoths when the Fed’s policies were accommodative; investors threw money at startups. Now Amazon is limiting inflation more than any other company in history. Tesla plunged the cost of electric vehicles, making EVs affordable for a large number of Americans. SpaceX has amazingly reduced the cost of space travel.
Still, the Fed and a lot of smart people are holding onto the canard that a Fed tightening is needed to tame inflation — even if it leads to a recession.
Indeed, with one exception, the Fed has caused recessions with every tightening cycle that has lasted more than a year — the longer and stronger the Fed fund rate hikes, the longer and deeper the recession. The lone exception was in the midst of the raging technology boom of the 1990s, which eventually flipped the Fed by more than doubling Fed fund rates from their 1994 lows.
Many liken today’s inflation to the late 1970s – but that was brought on by OPEC’s sudden rise as US oil production imploded and President Nixon’s wage price controls, a cynical ploy to prevent Fed tightening and unemployment. during his 1972 campaign. Nixon’s plan caused terrible disruptions in our economy that ultimately fuel the inflation spiral. Unemployment eventually rose along with inflation, a catastrophic combination that has never happened before or since.
Most economists wrongly praise Paul Volcker, the imperious Carter-appointed Fed chairman, for ending that inflation. The horrific recession in Volcker of 1982 caused untold misery. Unemployment peaked at nearly 11 percent — almost a full point higher than during the Great Recession. In reality, that inflation was overcome by Reagan’s lower tax rates and large investment tax incentives, which significantly increased generating capacity, as well as his deregulation of energy prices, which promoted domestic production, and his indexation of income tax rates to the CPI.
How do we know it wasn’t the Fed that “saved” us from this inflation? Because it all but evaporated after Volcker, amid one of our biggest peacetime booms, with Fed rates falling, Reagan’s massive military build-up and a exploding budget deficit — all traditionally considered inflationary. Over the next 37 years, the CPI has increased slightly more than in the past 12 years. In fact, during the tech boom of the 1990s, our longest peacetime expansion, inflation fell to its lowest level since the mid-1960s.
The Fed and haughty pundits are ignoring that while higher prices are certainly painful, they are much preferable to the trauma of losing a job — and at least somewhat neutralized by fee hikes. Social Security is indexed to the CPI, significantly isolating nearly 50 million retired seniors.
The Fed’s tightening also increases the value of our already overvalued dollar, making US exports more expensive and imports cheaper, another blow to our middle-class workers – and absolutely contradicting the crucial goal of Americanizing our supply chain. .
The “conventional wisdom” that the Fed must choke the economy to contain inflation is an orthodoxy that the old medical practice of bloodletting should follow.
In addition, these momentous decisions are made by an unelected seven-member board of governors, often bulldozed by the Fed chairman. For a group smaller than a jury to assume the power to dictate the availability of dollars for our entire $24 trillion economy would be considered un-American if it had not been normalized by the elites. It is similar to the government empowering a small, unelected council to limit the food supply for our entire population in order to overcome obesity.
While the Fed is ineffective at achieving ‘soft landings’, it is quite adept at alleviating financial crises and severe malaise. The Fed distracted catastrophes after the 2008 financial crash and the onset of the pandemic. So the Fed’s freedom to fight contractions should be unfettered.
But the Fed’s unchecked power to tighten the money supply must be rescinded.
The Fed fund rate should be permanently set at half GDP growth — or much lower, as it is now, during and after pandemic-level emergencies. And the Fed’s power to take other restrictive measures must be strictly limited. The current tightening by the Fed must be stopped.
Curiously, many free-market advocates are terrified at the prospect of monetary prerogatives being transferred from the Fed star room to private lenders (under a good-practice regime). Obviously, even if they didn’t have any money, lenders would want their loans to be repaid. They will maintain broad borrowing discipline based on the borrower’s creditworthiness and business conditions, which, being closer to the ground, they are much better qualified to assess than the Fed.
Many who applaud the Fed’s current crusade — which, based on history, could lead to a recession — are in a favorable financial position. Perhaps they wouldn’t so gleefully endorse such a destructive policy if they were fired, lost their hours, or lost tips.
Lee Spieckerman is a political strategy and policy advisor and a sought after television and radio commentator. He served as an advisor to Newt Gingrich during his 2012 presidential campaign and to Texas Land Commissioner George P. Bush during his successful re-election campaign in 2018. Prior to that, he was a longtime director and advisor to the media industry. Follow him on Twitter @spieckerman