Easing Rules, Money Supply, Record-Low Interest Rates
Published: March 3, 2022
COVID-19 created this inflation. Ending COVID will curb it.
Yes, inflation is lasting longer than expected and it is taking a bigger bite out of our paychecks than expected. The cost of gas had started to go down last week but Putin decided our costs should go up (a large chunk of his wealth is derived from oil and gas). The cost of climate change will be more than we can imagine and not just in dollars and cents. The lives of people and animals will be sacrificed to the world’s greed.
But first, the newest inflation fire (pun intended) is described in the book “Learning to Live With Fire” which was released by the United States Forest Service.
The explosion caused by Putin, see my commentary here, may make all of this moot. He wants ALL of the former slave states of the USSR back in his control. NATO cannot and will not let that happen! Who blinks first? This is another gift from Trump. As much as he and other Republicans try to blame Biden, he (and they) were the ones that weakened NATO, blew kisses at Putin, and let Putin think we were weak and disorganized. I am not surprised that Trump didn’t care to learn about the spirit and strength of the American people — just those of a criminal bent.
“By all accounts,” Senator Joseph Manchin has tweeted, “the threat posed by record inflation to the American people is not “transitory” and is instead of getting worse.”
Harvard economist Jason Furman explained to Trevor Noah on his TV program that the Build Back Better plan is not as inflationary as Manchin claims. The benefits won’t kick in until AFTER the budgetary period is over, explains University of Chicago economist Austan Goolsbee.
This article does an excellent job of breaking down the budget of Build Back Better and explaining the impact on inflation.
Federal Reserve Chair Jerome Powell has been ducking charges that he act and do something to reduce inflation because families have been running hard into this wall.
“Corporate Profits Drive 60% of Inflation Increases”
I think businesses have manufactured some of the fear so they can keep prices high to regain some of the profit lost during last year’s pandemic shutdowns. Matt Stoller has an excellent article on his Substack Blog. He writes that he is convinced there is more to the story promulgated by Larry Summers, former Secretary of the Treasury from 1999 to 2001. He also served as Director of the National Economic Council from 2009 to 2010. I have listened to Mr. Summers. It is my opinion that he is not neutral but is influenced by Republican theories. Maybe there is “more to the story?”
Matt Stoller proclaims: Higher prices aren’t just a result of supply chain chaos or government spending. Inflation is being driven by the pricing power and higher profits of corporations, costing $2,126 per American.
What do we common folk know about inflation?
If you read Politico’s Magazine History Section you may be familiar with this article. I will give full credit at the end of this article.
Disclaimer: I am not an economist. I don’t write like one. I am going to tackle a few articles on inflation because that is what I do. If I don’t know much about a subject I will investigate and write about it. It doesn’t lend itself to articles that go viral but that is not why I write. I do think every voting citizen should have a vague idea of how our leaders determine monetary policy. Or maybe, the President wakes up in the morning and says, “Self, I’m going to raise interest rates today.”
Let’s find out.
Consider the man Thomas Hoenig:
This is a link to a speech he gave on January 5, 2011, in which he discusses his views of monetary policy and enlightens his listeners on his reasons for his frequent dissents.
We will be looking at the “Great Inflation.” In 2006 or so we start running into the “Great Moderation.” Did you feel the shake, rumble, and roll? The next phase is well known. “The Great Recession” destroyed a lot of hopes, dreams, and lives.
This article is Federal Reserve History specifically an essay on the Great Recession and its aftermath and is a valuable read. Each industry has a language of its own. Doctors have medical lingo, automotive mechanics have theirs. You will have the opportunity to read bankers’ lingo and decipher what they were saying. A scary image to me was the increase of household mortgage debt from 61% in 1998 to 97% in 2006. It is not a good idea to look at one segment of the economy also because a push in one place results in a pull in another. But when I was ordering inventory for a restaurant it gave me pause to order more than 10% to 20% from one vendor.
Mr. Hoenig retired at the age of 75. I understand this to mean he was dedicated, passionately believed in what he was doing. I think he only put down a project when he considered circumstances settled, or he was told to move on. I don’t have an answer as to the last part.
Consider America and its Finances circa 1970
In the seventies, as I recall, times were tough. A lot of major layoffs. If I remember correctly (yes, I am that old) the term “right-sizing” came into vogue to hide the cruelness of what the action really meant. I spent the first part of that time in the U.S. Army so I was suffering from a major reckoning of my finances.
Gas prices went up, and up, and up. We were driving a Pontiac Starchief at the time (a huge boat akin to Cadillacs). Another name for the model was “Gas Hog.” We were driving back and forth from Alabama to Northern Minnesota. On a trip home for Christmas, we ran out of gas in Wisconsin. I poured it all over my hands trying to get it into the funnel. The result was that I froze my fingers. That made my typist’s job pretty tough when we got back to Alabama.
Mr. Hoenig lived with the very dark side of inflation. We had long gas lines and massive price hikes at the grocery store. He was a bank examiner and, as such, had to close banks that were on shaky ground.
“He spent the seventies watching as the Fed’s policies helped pile on the inflationary tinder” that would soon ignite. These policies were known as “easy money”, meaning the Fed kept interest rates so low borrowing was cheap and easy to get.” “The Fed had kept interest rates so low during the sixties that they were effectively negative, which might be called “super-easy money policy.”
The Seventies became known as the ‘Great Inflation.”
This is called “too many dollars chasing too few goods.” This drives up prices on the things Americans were trying to buy because demand is high.
This is similar to today. When the economy was allowed to re-open, many people had unspent dollars from the government assistance payments they had received. They had no way to spend the money on vacations. There was no gas cost going to work while locked up in the house. In the end, we were happy to start rockin’ again. There weren’t enough goods on the shelves to satisfy Americas’ appetites. Business owners ordered heavily and saw, in my opinion, an opportunity to recoup some of the losses they suffered in the prior 18 months of the pandemic and pumped up their normal margins.
The store shelves are now empty due to pandemic logistics, the assistance money has been spent, and the owners have no incentive to back off prices yet.
Does that sound about right?
Consider Today’s Landscape
I noted that as a bank examiner, Thomas Hoenig had to clean up the messes of failed banks. In 2010, he was president of the Federal Reserve regional bank in Kansas City. As such, he had a seat on the Federal Reserve’s Board of Governors. He was also on the FOMC (Federal Open Market Committee)rotating basis,
The next meeting is on March 15, 2022, and probably will examine a few major themes.
The Fed’s policy is to maintain inflation at 2% in the long run. January’s inflation rate was 7.5%, the highest since 1982.
How high will it raise rates?
It is almost a foregone conclusion that it will raise rates. The real question is by how much? Experts think it will raise rates by half a percentage point. That will be the biggest increase since 2000. So Fed watchers are in a “hold-your-breath mode.
Number of rate increases in 2022
Some economists are forecasting 1.5%. They will try to tackle inflation without slowing growth.
Shrinking the bond portfolio
The Fed used its bond program to ease the effects of the pandemic. It had the desired effect of stimulating the economy but now have to decide whether to sell the securities or just let them mature.
What is your thinking on these decisions to be made?
Thomas Hoenig had opportunities to vote against the easy money policies of the eighties and nineties and he took them. That wasn’t popular in banking circles. But he had seen the effects of easy money and the resulting pain during the seventies.
Voting against other Fed Reserve Governors was not popular, but he stayed the course.
The Fed was intervening in the economy to an amazing degree. This was new territory. The Fed was keeping money “too easy for too long.”
A big thing to remember is that when the Fed opens the spigot, reactions take a while to set in as it filters through different markets. It was increasing the monetary supply by printing more and more money.
These money policies caused an increase in the cost of bread and butter. As a bank examiner, he knew there were more problems than that.
“The money also drives up the price of assets, like stocks, bonds, and real estate.”
During the seventies, low-interest rates fueled demand for assets, which eventually inflated asset bubbles across the Midwest, including heavy farming states.” States with extensively planted crops like Kansas and Nebraska and energy-producing Oklahoma were particularly affected. When asset prices skyrocket, the dreaded asset bubbles are created.
Farmers talked themselves into borrowing cheap money to buy more land. Sales of more land boosted demand for land and pushed up land prices. The assumption was higher land prices would cool off demand.
Consider what happened in Real Life
Rising land prices enticed bankers to believe that this collateral would continue to increase in value so farmers would have an easier time repaying the loans.
This is the loop that spins your head. Asset bubbles churn out loops that get stronger with each spin and drive up the cost of assets.
These scenarios, with the reality of today’s higher asset prices, drove up the value of tomorrow’s asset prices even higher, increasing the spin to run faster and faster.
These bubbles didn’t stay out on the farm. Assets in oil and natural gas did the same. “Rising oil prices and cheap debt enticed oil companies to borrow money and drill more wells.”
Banks built new side businesses dedicated to risky energy loans and their mineral leases. Commercial real estate did the same spin. Everybody was happy except consumers who had to pay the higher prices. WIN “Whip Inflation Now” was the slogan under President Gerald Ford (1974 to 1977). Chairman Paul Volcker raised interest rates from 10% in 1979 to 20% in 1981, the highest they’ve ever been.
Economic havoc resulted! The unemployment rate rose to 10% and homeowner’s mortgages went to 17% and in some places even higher. Volcker realized the banking system would not escape the destabilization of the entire financial system.
Hoenig was right and had argued all of these points. He was ignored.
Today we are reaping the benefits and living in the world he warned of.
The Fed is again in a vise.
Inflation is rising than the Fed believed it would just a few months ago.
Now, add in Putin, with his war against Ukraine has blown all projections to pieces. Higher prices for gas, goods, and cars are fueled by the Fed’s earlier unprecedented volume of money printing.
Between 2008 and 2014 the Federal Reserve printed more than $3.5 trillion in crisp bills. This is almost TRIPLE the amount of money created in its first 95 years! Three centuries’ worth of growth in the money supply was crammed into a few years!
Money poured through the veins everywhere — people, banks, and the entire financial system. Stocks, corporate debt, and commercial real estate bonds plowed prices up through all the markets.
Since 2010 Hoenig consistently voted against the plans. He pitted himself against the Fed chair, “golden boy” Ben Bernanke who had formulated the ambitious plans. He also forced their execution.
Hoenig was the one negative voice. He retired in 2011 with a tarnished reputation. The future turned out as he warned. He warned and he warned — about one thing: coming inflation.
Consider the Consequences
Hoenig wasn’t concerned only with inflation. The record, available 5 years after the activities, shows he worried the Fed was on a risky path that would deepen income equality, stoke asset bubbles, and enrich big banks over everyone else.
He had seen it before. The Fed was getting sucked into a money-printing sinkhole. In 2004 Fed economist Edward Nelson wrote “the most likely cause of inflation during the seventies was due to the Fed keeping its foot on the money printing pedal called “monetary policy neglect.”
Another economist wrote a 2,100-page history of the central bank. The author, Allen Meltzer was not as kind as Nelson. “The Great Inflation”, he wrote “resulted from policy choices that placed more weight on maintaining high or full employment than on preventing or reducing inflation. For much of the period political pressures and popular opinion were reflected in the choices.”
The Fed shifted money from one part of the economy to another. The shifts encouraged speculation and shifted money from the poor to the rich since the rich own most of the assets.
I hope you enjoyed learning how other people in high and rich places decide how you should live. I hope and pray the war doesn’t become the conflagration WWII did.
Thank you for stopping.
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