A time for reckoning AIER

Consumer prices have risen by almost nine per cent over a year ago. For a Central American household, this equates to a salary cut of about ,000 6,000. Politicians have blamed corporate greed, the Ukraine war, and the supply chain for trying to get voters to associate with any explanation unless it is properly explained.

The correct explanation involves the whole political class.

For four decades, economists have warned, and warned, and warned again that the federal government should not spend money. But during each crisis, politicians insisted that a “temporary” fight over deficit spending was necessary to get us to the other side. Politicians say the Soviet threat in the 1980s, then the savings and debt crisis in the 1990s, then the 9/11s in the 2000s, then the housing crisis in the 2010s, then the Covid in the 2020s. There was a need If they have their way, then the next 2030s will see further deficits in tackling the social security bankruptcy crisis. In today’s dollars, politicians have added $ 3 trillion to debt in the 1980s and again in the 1990s. They added $ 6 trillion in the 2000s, then about $ 10 trillion in the 2010s. According to the Congressional Budget Office, we expect politicians to add more than 17 17 trillion by 2020. Voters of every generation have complained about debt, and politicians of every generation have taken to the streets, although future generations will have to deal with the consequences.

We are that future generation and the inflation we see today is just a consequence.

Today, the federal government collects about $ 4 trillion in consolidated taxes each year. But it owes $ 30 trillion, and promises to pay future Social Security and Medicare recipients another $ 100 trillion to $ 250 trillion (beyond what it collects in future payroll taxes). From the point of view, it’s like a family with আয় 60,000 income on a 450,000 loan, and then 18 kids to pay for four years of private college education. If it seems sustainable, you have begun to understand the concerns of economists over the last forty years.

What happened?

Despite all these borrowings, inflation has been under control for a long time. What has changed is that debt has become so large that the government has run out of space on planet Earth to borrow more. American citizens, businesses, and state and local governments lend money to the federal government. Foreign nationals, businesses and governments do the same. Until recently, the largest lender was the Social Security Trust Fund. As of 2010, Social Security collected more in payroll tax than retirement benefits and lent the difference to the federal government. But by 2010, the surplus had dried up. For the past decade, the government has had nothing more than a Social Security loan, requiring repayment of previously borrowed money.

As the government needed to borrow more, and the Social Security Trust Fund was able to lend less and less, the Federal Reserve had to relax. But, unlike any other lender, when the Federal Reserve lends money, the money supply increases. And if the money supply grows faster than the economy grows, we get inflation.

The cure for inflation is to reduce the money supply, but the money supply agreement raises interest rates. This is good news for lenders and bad news for borrowers – and the single largest borrower on the planet is the federal government. At $ 30 trillion, a mere one-percentage point increase in interest rates would cost the federal government an additional $ 300 billion annually. A two-percentage point increase in interest rates would cost the federal government the same as the entire Department of Defense each year.

The Federal Reserve’s rise in debt has drawn the Federal Reserve into a corner. The Fed now has to choose between preserving the purchasing power of the dollar and preserving the financial stability of the federal government. If the Fed enters into a money supply agreement, it lowers inflation but raises interest rates. If the Fed expands money supply, it keeps interest rates low but inflation rises.

But if it is true that printing money causes inflation, then why does it take so long for inflation to materialize? The lion’s share of the recent money laundering battle took place in 2020 when the Fed increased money supply by 20 percent. In just four months, from March to July 2020, the Fed increased its funding over the previous five years. Nevertheless, as of January 2021, inflation was low. Where was the inflation?

For a formula, notice something strange. From April to August 2020, the S&P 500 rose 60 percent, more than the sinking it did at the start of the lockdown. What’s surprising is that the S&P 500 was showing a strong recovery at a time when the economy was in its worst contraction since the Great Depression. Much of the economy has shut down, with unemployment reaching 14 percent – several times what it was just a few months ago. No one knew how long any of this would last, and what state we would be in when it finally came to an end. Nevertheless, the stock market was moving at the speed of a dot-com era here.

One possible explanation for the missing inflation is that it was hidden in the financial markets. If those trillions of dollars pumped into the Fed money flow into the financial markets rather than the markets for goods and services, we would expect the price of financial assets to rise while the prices of goods and services remain stable. Since the value of financial assets is not included in the calculation of inflation, the number of official inflation will remain low despite the massive increase in money supply. And, if inflation were indeed hiding in the financial markets, then the money would start flowing out of the financial markets and into the commodities and services market once the covid crisis subsided, causing stock prices to top-out or even fall, when commodity and services prices skyrocket.

And that’s exactly what happened.

In September 2020, the stock market’s steady upward trend slowed, and at the same time, the number of inflation, which was already showing signs of growth, spread to areas not seen since the 1980s.

Comparing the rise of money with prices over the last decade, it seems that there is no link between money supply and inflation. It seems that the increase in money for inflation does not matter whether it is big or small.

However, if we combine inflation and the rise of the S&P 500 together (realizing that the adjustment is an ad hoc measure), the expected relationship emerges. On average, money supply has increased, the sum of inflation and share price rise has also increased. It suggests that inflation may hide in the financial markets, so that it appears that there is no detrimental effect of increasing money supply.

What next?

Proponents of her case have been working to make the actual transcript of this statement available online. They will argue that we have a long history of spending deficit together with low inflation and that once the supply chain and Ukraine problems are resolved, we will be able to return to business as usual. They will argue that we can kick the road.

This is wrong. We’ve reached the end of the road, and that end is Social Security. The Social Security Board of Trustees estimates that Social Security will go bankrupt thirteen years from now. At that point, one (or a combination) of three things must happen if Social Security is to continue: (1) the payroll tax must increase by 25 percent; Or (2) reduce the benefits of retirees by 20 percent; Or (3) the Federal Reserve must print an additional $ 250 billion per year, which, among other things, would further increase inflation permanently.

The insecurity of social security is a financial thorn in the side of the road. One way, increased taxes, leads to more suffering for workers. Another way, cutting benefits, leads to more pain for retirees. The third, printing money, leads to more suffering for customers because we all struggle to handle things that were once affordable.

What was wrong?

What went wrong was that we allowed the founders a limited federal government to avoid its limits. First, politicians discovered that they could win elections by paying voters to pay other people. And so modern elections have become a contest where politicians compete with each other to give their voters “free” things. “Free” phones, housing, healthcare, and education are free for recipients only. Politicians simply force others to pay their bills.

Second, the Supreme Court has decided that its job is to read all the things in the “rewritten” document of the Constitution that are not stated in the simple words of the page. Ironically, it started in the same place where the story would end: Social Security. Politicians and voters wanted social security, yet nowhere in Article I was there any mention of establishing a national retirement and disability program in the list of Article 8 of the federal power. The Supreme Court has canceled social security. Politicians have tried again. The Supreme Court again dismissed it. This continued until the Supreme Court finally agreed and came to the conclusion that despite the simple words on the page, the Constitution, above all, empowers the federal government to create social protection. From there, the CDC, the FDA, the EPA, the ATF, and the thousands of federal departments, agencies, programs, and initiatives we had today were worth getting.

Third, we have abandoned the value of gold. Because the amount of gold (mostly) is fixed, when the dollar is tied to gold, the amount of dollar is also fixed. And when the amount of dollars is determined, not only can the Fed print money unnecessarily, but the federal government is also restrained because the only way to increase it is to impose more taxes on the people. This gives voters an incentive to apply the brakes to the fugitive government.

The inflation we are experiencing today is the beginning of the end of a century of unlimited government experimentation. By kicking government spending down the street, generations of politicians have managed to make it look like the government of the limitless economy – perhaps even “free”. But we have reached the end of the road, and we have seen that in the end we are the ones who have to pay for the unlimited government. Whether through taxes or inflation, we will pay.

Anthony Davis

Anthony Davis

Anthony Davis is a Milton Friedman Fellow of the Foundation for Economic Education, and an associate professor of economics at Dukeson University.

He authored a policy on microeconomics (Cognacla), Understanding Statistics (Cato Institute), and Co-operation and Coercion (ISI book). He has written hundreds of op-eds in the Wall Street Journal, Los Angeles Times, USA Today, New York Post, Washington Post, New York Daily News, Newsday, US News and Houston Chronicle.

She co-hosts the weekly podcast Words and Numbers. Davis was the chief financial officer of Parabon Computing and founded several technology companies.

Receive notifications of new articles from Anthony Davis and AIER.

Leave a Reply

Your email address will not be published.