Recently I’ve received several responses from readers that say raising interest rates is the only way to stop this current bout of Inflation. It’s an argument that stems from a misunderstanding of what occurred in the 1980s when the nation also faced a time of low productivity and high Inflation.
A particular contagion in Washington stems from believing they are the center of economic activity in the nation. It’s the sense that unless our “leaders” guide this economy, it will fail. At its heart is an arrogance of power. The belief is that Washington, and only Washington, has the answers to all today’s economic problems. The Biden Administration suffers from this particular malady more than any other Presidency in recent memory.
The Biden Budget, and subsequent deficit, are nearly 500% greater than any other Budget. The scope and reach of their control of the economy is, arguably, the greatest ever. Biden’s Stimulus Program, sending out “stimulus checks” alone, increases the money supply by over $5 trillion. And it’s been recently reported that there will be a Biden Tax increase of over $4 Trillion, historically more than ever before.
This President is doing more to insert Government into the economy than anyone imagined was possible just a few years ago. There is a word for this: Socialism. Its Government control of the means of production. The step beyond this would be Communism, Government ownership of the means of production.
Simply put, the Biden Administration will tax and regulate production so that the entire private sector will bend to their will. Carbon-based energy is to be eliminated; hiring will adhere to Washington’s social norms and morals, while the private sector will need to pay for these new programs and initiatives of the President.
It is an onerous burden that will be placed on private enterprises and ordinary citizens primarily through higher taxes. And, at its heart, this is the origin of Inflation.
The conventional definition of Inflation is too many dollars chasing too few goods and services. We often visualize Inflation as rising prices. That’s how we measure Inflation: the rise in price levels. So the Consumer Price Index (CPI) rises, that’s higher Inflation. But in actuality, Inflation is the other side of the coin; it’s the decline in the “buying power” of the Dollar.
Let’s look at this from the Macro Level. In the Great Depression of the 1930s, the “buying power” of the Dollar was rising. It was a time of Deflation. An economist named John Maynard Keynes recommended that the Government spend more than it received in taxes. Although this would create a deficit, it would also put more Dollars in the hands of the country’s citizens, encouraging them to spend, thereby enhancing economic activity. So, although it was inflationary, it was just what we needed to help us climb out of the Deflationary Spiral we were in. President Franklin Roosevelt followed Keynes’ plan, bringing the nation out of the Great Depression.
Government spending created Inflation (brought us out of Deflation) back in the 1930s, just as it does today. Biden’s Government Spending Programs, the greatest in our history by far, is a principal contributor to current Inflation. Stop the incredible Government Spending, and we’d go a long way in stopping Inflation.
There is another, perhaps as important, method that this Administration is promoting Inflation, and that is through Regulation. Since the beginning of the current inflation trend two years ago, the largest area of Inflation has been energy–energy inflation.
New Biden Energy Regulations are a principal driver of Inflation. In the President’s war on carbon-based energy, he advocated energy sources that are much more expensive. Whatever else you can say about “Green” Wind and Solar, the fact remains that it is much more costly than oil and gas.
We are now in the second wave of Inflation, promoted by the initial higher prices in energy. It’s the “catch-up” phase, where wages and salaries need to increase to meet the “Cost of Living” (COLA) increase. Beginning with Governmental Social Programs, like Social Security and Medicare, also including Government Contracts and Grants, Inflation by law will become embedded in the economy’s overall price structure — Inflation by law.
We could go on, but you see the trend. Unfortunately, we have entered a vicious Inflation Cycle, where higher prices in one sector of the economy lead to higher costs in another.
Fortunately, there is an answer to all this. A tried and true method that has been the source of this country’s wealth and success all along, it is called the Free Enterprise System. Regrettably, many have forgotten or never knew the true origin of America’s riches. Many will need to reorient some basic tenants in their economic thinking.
Most of the credit for ending the Inflation of the late 1970s is given to Paul Volcker and the Federal Reserve and their policy of higher interest rates. And there can be no doubt that those higher interest rates did reduce economic activity and thereby brought down Inflation. Volcker did “break the back” of the Inflation of that day.
But how do you explain the next three decades of inflation-free prosperity? Indeed, that was not created by a one-time spike in interest rates. After all, Volcker quickly reversed those rate hikes and brought interest rates back down to nearly the same level as before.
There has to be another answer to the prosperity puzzle, and there is. Put: reverse what we are doing now: Lower taxes, Deregulate, and allow the Private Sector to return to work. In short, take the Administration’s grip off our throat.
Deregulation and lower taxes are just the medicine Ronald Reagan prescribed in the 1980s. The economic miracle that began then resulted from just such an exercise in financial freedom. Although it took some time to implement, once Reagan’s policy of promoting the Private Sector gained momentum, it lasted for years.
In the years following the Reagan Presidency, the American Economy (real GDP) has increased by a remarkable 2000%, while the stock market (Wilshire 500 Index) has had the longest “Bull Phase” in history, up by double that.
There can be little doubt that the 40-plus years since Reagan reinstated our Free Enterprise System have been among the most prosperous in human history. This prosperity is now threatened by this President and his Administration, who want to drag us back to a Neo-Socialist State of high taxes and stiff regulations.
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