This week the FED hinted that not only would rate cuts probably not be in the future, but there may even be a rate hike or two to slow down the overall level of inflation.
Milton Friedman, a monetary economist, famously said, “Inflation is always and everywhere a monetary phenomenon”.
That means that inflation will not be solved by raising the cost associated with the overnight borrowing rate of Federal Reserve member banks. (Most publicized rate) Or, buy selling more bonds into the market at higher and higher face rates. The problem is out of control Federal spending. (Period…for emphasis)
This deficit is now $1.5 Trillion Dollars and is predicted to rise to between $1.7 and $2 Trillion Dollars by the end of this decade. Our total national debt stands at $34 Trillion Dollars…or $102,907 for every US citizen. I don’t know about you but that sure concerns me…theoretically, every man, woman, and child (and whatever other genders there may be) begins their day with a $100,000 debt hanging over their heads.
The ramifications are potentially devastating! Despite the current administration’s protestation, the hardest hit by inflation are the people that our President says he is working for. The vast majority of Americans are not Millionaires or Billionaires despite what the World might believe.
According to the U.S. Census Bureau, the median household income in 2022 was $74,580, which is a 2.3% decline from 2021.
Now, I may not be as smart as the people in Washington but a 2.3% decline sounds like a movement in the wrong direction. Combine that with a 3.5% inflation rate, and if’n I get the “ciphering” right that is an overall decline in purchasing power of 7.7%. That means that the average consumer’s Dollar is worth about $.92.
Now, if you are one of the many Millionaires or Billionaires in this country a 7.7% erosion of your purchasing power is probably not even noticeable. But, if you have a couple of kids, a couple of older cars, a house, and are trying to feed and clothes everyone in the family 7.7% can make a difference.
According to recently published information, Gasoline (which is now excluded from CPI calculator) is up 29% in the last 24 months, home heating and cooking fuels are up a similar amount. That does not bode well for the hundreds of millions of Americans trying to make ends meet.
Now, back to my theme. The FED has hinted at raising rates to slow inflation. How does that work? By making the cost of money higher, presumably the consumers of money will be disincentivized to borrow money…ergo, gently slowing the economy and facilitating a “soft landing”.
“Bull Hockey” as Colonel Sherman T. Potter of M.A.S.H. used to say (For those of you too young to remember, a popular 1970’s show)
First, Interest rates have been between 6-8% for the last 100 years. They are never 1-3% and they are never 16-20%…at least not for very long…and tend to gravitate around that “golden mean”. So, the collective amnesia that seems to pervade the capital markets, needs to be lifted and the market realities need to be acknowledged.
Second, WE…We…need to stop the unfettered Federal Government spending, once there was a TV celebrity health guru that used to say “Stop the insanity”. Federal spending needs to be reduced and redirected to long term projects that will produce a “yield” roads, bridges, airports, seaports, real education (science, math, literacy…not critical race theory). Free lunches (not the actual free lunches) need to be eliminated.
Why are we sending billions of dollars that we don’t have to support Ukraine or Israel without a full accounting of where it is going and what we are getting for the money.
There is a precedent for this kind of fiscal prudence. World War II. The United States went from an economy that was just ticking over to wartime production. Millions of young men and women (we only had two genders and pronouns back then) were removed from the labor pool and sent abroad. People who were unemployed or underemployed were rapidly absorbed into the labor force.
American ran up a historically unprecedented massive deficit. As we built tanks, ships, planes, guns, and other war material that we graciously provided to our allies at a small profit. The economy grew but in a very narrow segment. When the war was over the United States faced a dilemma…production of war material came to a screeching halt…what to do with all that capacity? Add to that 2,500,000 returning veterans of working age to the labor pool.
Someone, far smarter than me, came up with an idea. The Servicemen’s Readjustment Act or G.I. Bill, which among many things provided low interest rate loans for homes, business, and education. Is it any coincidence that the US enjoyed an unprecedented period of economic growth after WWII? I think not, people like Huglett and Packard and many other innovators emerged from college and started doing things…things that would lead to major innovations. Innovation that we still enjoy today, telecommunication, computer technology, manufacturing, and the list goes on.
Is it any coincidence that most major interstate highways were built during that post war period. Or, was the expansion of the airline industry a “fluke”…thousands of highly skilled pilots coupled with the recent invention of the jet engine made mass air transport viable. And at one time, even affordable for millions of Americans.
There was the rise of Jenkintown, Havertown, and any number of neighborhoods being built across the country…project being built by former servicemen for servicemen and women. With full employment Americans had “happy dollars” which they then deployed by buying a new family car…and the newly perfected color television sets, refrigerators, and other labor saving appliances.
Businesses prospered, America prospered, and the citizens prospered. Interest rates were low and financing was readily available. Eventually the deficit started to decline and at one point was actually $0…in less than a generation we have gone from $0 to $34,000,000,000,000 that’s what $34 Trillion really looks like.
What do we have to show for it? Crumbling infrastructure, social welfare programs that are out of control, a social security system that was supposed to be inviolable…now pilfered, stuffed full of I.O.U.’s. The highest health care cost of any nation, civilized or not. A substantially reduced military capability, and strategic industries and resources owned by foreign governments known to be antagonistic to the American way of life.
Finally, Rampant, unchecked, and unfettered immigration. Immigration that hurts the American workers that are most vulnerable. Workers flood into this country at 4-5,000 per day thats 1.8 million plus or minus each year and between 11 and 17 million in the last several years. When a labor market has a surplus of workers, just like any other market with a surplus, the price goes down. Immigrants are willing to work “under the table” or for less than minimum wage making it nearly impossible for some people, Americans, to get jobs.
News flash. There are solutions to all of these problems. Exercise fiscal restraint, budget cuts across the board, be more like the average American household, the government needs to live within its means, learn to live on less. Stop the unchecked immigration into this country. Not all immigration, we need immigration, we need the skills and diversity that immigrants bring, but it needs to be orderly, controlled, and merit based and legal.
Stop printing money! Stop giving away money! And end regulatory creep. All of these policies put more money into the system…thereby driving down the value of money…don’t believe me. Ask Mexico, Brazil, Argentina, Venezuela, Nicragua and a few others how that worked…you think 7% inflation is bad…how about 3,200%. Can’t happen you say! Huh, what happens if the US Dollar is no longer regarded as the Reserve Currency of the world…get yourself a stamp with zero’s on it you’re going to need it.
The sky is not falling…not just yet, but unless there are systemic changes made in the Government and Monetary Policy Americans at the bottom of the economic ladder will continue to bear the brunt of these feckless policies. Remember, a Millionaire or Billionaire isn’t going to have to buy less gas so they can feed the kids they’ll be just fine. It is the other 98% of the country that feels the squeeze.
Oh, and by the way, we have been here before and survived. We will certainly be here again. The economy is cyclical…what goes around comes around. Hopefully, next time someone will remember that long term nearly free money causes people to use money…sometimes wisely…sometimes…not so much.
“Those who cannot remember the past are condemned to repeat it”. – George Santayana