This morning the financial news talk was centered on the inflation reports, which were at 5.4%, and rising quickly. There was a focus on the looming energy crises around the world, both on extremely high inflated costs, and shortages from all sources, with particular emphasis on natural gas in Europe. Other basic commodities like food, lumber, cooper and other necessities are all experiencing huge surges in prices with corresponding shortages in supply.
The phrase that had many of the interviewers and interviewees stumped was what the Fed and the administration spin the inflation story now as “persistently transitory”; of course such a phrase would confuse anyone paying attention as it is a contradictory construction of opposite meanings. Anything that is persistent is by nature not transitory, and anything transitory is by nature not persistent.
The debates that ensued were predictably about when the Fed will and/or should raise interest rates in order to curb what is obviously apparent as an inflationary trend that is no longer “transitory”. Even so, there were those that still cling to this transitory narrative based on causes that “… are not fundamentally economic in nature.” Now there’s an oxymoron if there ever was one as how can inflation not be an economic issue? True that the cause may be anything ranging from natural disasters, civil unrest, or distortions caused by policies, but all have economic consequences.
One economist who has consistently shown a clear headed understanding of the issues is Mohamed A. El-Erian, President of the Queens College School of Economics at Cambridge University. He correctly cites various government policies that have contributed to inflation, and cautions against the forever bromide of placing everything on the pandemic, i.e. crises come and go, but it is policies that have a persistent effect. He has been interviewed by various media and has repeatedly warned about the looming threat of inflation, the lack of central bank attention to it, and the concern that inflation will spike so egregiously as to force central banks like the Fed to react with a precipitous rise in rates so as to cause a recession.
Such would be the formula for stagflation, a phenomenon many in the US have not lived through given that more than 50% of the US population was born after 1980.For those who were born after that time, and even for those like me who are Boomers, but may not recall the “Volker Shock”, Paul Volker was the Fed chairman from 1979 to 1987. He was brought in by Jimmy Carter to control the double digit inflation the US was experiencing caused by Nixon ending the US Dollar’s gold standard and issuing wage and price controls, both disastrous policies leading to drastic inflation. At one point inflation rocketed to more than 11%, causing a loss of confidence in the USD such to the extent that the US was forced to issue UST notes denominated in Swiss Francs. In 1980, Volker raised the Fed rate to 20% which, while eventually but effectively bringing inflation under control through monetary contraction, also resulted in the Recession of 1981.
Thankfully, Regan reappointed Volker and followed his budgetary advice, as did Bush and Clinton subsequently, such to the extent that during Clinton’s administration the US had a balanced budget and a surplus for the first time since 1849. Since 2001 it’s been a tragic history of skyrocketing deficits and debt resulting from bad fiscal and monetary policies; it’s déjà vu Nixon Era.
Now we are faced again with the results of 20 years of fiscal irresponsibility and the monetizing of debt, such to the extent that we face the prospect of either the dollar’s default and demise, or another “Volker Shock”, this one perhaps even more painful. Yet in the face of that we have the Biden administration proposing the most irresponsible spending programs of such magnitude as to be laughable if it weren’t so tragically dumb, a literal case of spending from empty pockets.
Obviously, the US will be forced to yet again raise the debt ceiling in order to pay its current bills, but DC seems to be ignoring the thousand pound gorilla in the room. They need to face the reality that we can’t afford the dollar’s default and demise, and face the reality of depoliticizing the debate, cut spending, allow the Fed to raise rates and prepare for the inevitable Volker Shock II.
Do Americans have the courage of the 1980’s to accept the results of bad policies, and claw our way back at least to some degree of fiscal and monetary sanity? Consider the fact that if the US allowed interest rates to rise to normal market levels, the total of all revenues would not provide the funds to even service our current debt, a debt to GDP ratio that now exceeds 78%, placing the US 8th in the highest debt of all nations; so what are we waiting for, getting to be first?
Some Fed experts cite the “sluggish” inflation over the last decade, one at a paltry 2% or less, as the basis for judging that this current spike is transitory, as if inflation was a good thing. They need to start understanding that inflation is like that old Lenin saying, “There are decades where nothing happens, and there are weeks where decades happen.”
What is also at stake is losing the reserve currency status of the USD, a metric establishing a currency’s stability, convertibility, credit worthiness, central bank independence and therefore its dependability in world trade transactions. Considering the fact that the US has inflated its currency 26% over the last 1 ½ years, resulting in a serious devaluation, the USD’s stability is an issue. When that happens, currency exchange becomes skewed impacting convertibility. Add to this the fact that UST auctions often result in the Fed having to buy much of the issue, which in turn inflates its own balance sheet, and that all impacts credit worthiness. On top of all this, the politicization of appointing the Fed chairman hardly speaks to an independent central bank. Little wonder that China, the world’s number two economy, and a nation with a debt to GDP ratio better than the US, is looking at a higher reserve status in the near future.
So when we hear such glib but dumb spinning like “persistently transitory”, and when you go to the grocer or the gas pump to see ever rising prices, remember that it’s not monetary and fiscal expansion that causes inflation, it’s that monetary and fiscal expansion is inflation. In the end, Americans need to understand that inflation is a thief and we need to call out our politicians for harboring and abetting the perpetrator.