While the White House was celebrating passage of the Inflation Reduction Act complete with a musical guest, inflation itself continued to ravage the economy and the Dow plunged 1,200 points. Out of touch barely begins to describe the handling of the looming stagflationary spiral. The experts missed it 40 years ago and they are missing it now.
Earlier this week, the irony couldn’t have been more rich. President Joe Biden held a White House event to celebrate passage of the so-called Inflation Reduction Act while the August inflation numbers clocked in higher than expect, suggesting this menace to the economy is far more than transitory and placing the “soft landing” promoted by the real card carrying experts even further out of reach. Fittingly, the President’s event was kicked off by musician James Taylor performing an acoustic version of “Fire and Rain.” Mr. Taylor himself noted, “It strikes me that this is a time when the world needs to cooperate…more than ever before” without making any comments about the President’s increasingly dark turn against those in his own country. Apparently, Mr. Taylor believes we’re supposed to cooperate with China, but declare US citizens “semi-fascists,” worse than Al Qaeda on 9-11. Sadly, the President himself was no more self-aware, claiming “Today offers proof that the soul of America is vibrant. The future of America is bright and the promise of America is real.” Senate Majority Leader Chuck Schumer insisted, “We’re here to affirm that the promises Democrats made are now promises Democrats have kept.” White House Press Secretary Karine Jean-Pierre kept with the same theme when asked if there was “any concern about a dissonance” between the current inflationary economic environment and the celebration. “We have to remember, the ‘Inflation Reduction Act’ is historic,” she said.
Unfortunately, the economy was also making history of the kind you don’t want at the same time Democrats were taking a victory lap over a bill based entirely on a lie. The stock market posted its worst day in two years with the Dow plunging some 1,200 points on the news that inflation has not, in fact, been reduced in any meaningful way despite all the promises, many of which predate this bill. Over the summer, President Biden declared with a straight face that inflation has plunged to zero, as in there’s no inflation and all our problems are solved. “I just want to say a number: zero,” he said in the White House East Room on August 9. “Today, we received news that our economy had 0% inflation in the month of July — 0%. Here’s what that means: while the price of some things go up — went up last month, the price of other things went down by the same amount. The result? Zero inflation last month.” The actual July figure? 8.5% with real wages for Americans down 3%. Before that, the President and his administration were insisting that the inflation numbers were wrong because they didn’t properly count a full month of declining gas prices. The President issued a statement immediately after the June report, claiming it was already “out-of-date.” “Energy alone comprised nearly half of the monthly increase in inflation. Today’s data does not reflect the full impact of nearly 30 days of decreases in gas prices that have reduced the price at the pump by about 40 cents since mid-June.” It was a lie at the time, but two months later the full impact has been captured and inflation remains at levels not seen in decades with some experts claiming it might get even worse.
The August report was fairly typical for the times. Yes, inflation ticked in a tad lower than earlier this year and gas prices have declined from record highs. The problem is that the current prices are still close to $1.50 more per gallon than they were two years ago and the price of everything else has gone up, adding to a whopping 8.3% over the past year. The figure was higher than expected with or without food and energy, resulting in a substantial decline in purchasing power. As CNBC described it, “Energy prices fell 5% for the month, led by a 10.6% slide in the gasoline index. However, those declines were offset by increases elsewhere. The food index increased 0.8% in August and shelter costs, which make up about one-third of the weighting in the CPI, jumped 0.7% and are up 6.2% from a year ago. Medical care services also showed a big gain, rising 0.8% on the month and up 5.6% from August 2021. New vehicle prices also climbed, increasing 0.8% though used vehicles fell 0.1%.” They quoted Mike Loewengart, head of model portfolio construction for Morgan Stanley’s Global Investment Office. “Today’s CPI reading is a stark reminder of the long road we have until inflation is back down to earth. Wishful expectations that we are on a downward trajectory and the Fed will lay off the gas may have been a bit premature.”
Mr. Loewengart was referring to the mythical “soft landing” some real card carrying experts believe can be achieved by the Federal Reserve jacking up interest rates. Goldman Sachs was bullish about this less than two weeks ago. Their Chief Economist Jan Hatzius claimed, “Since the [Fed] started hiking the funds rate early this year, we have argued that the economy can achieve a soft landing, even though the path is narrow.” “While much can still go wrong and our probability that a (mild) recession will start in the next year remains about one in three,” his commentary continued, “we see some encouraging signs that the economy is moving toward all three of these goals.” The disconnect is staggering: By the most commonly used metric, two quarters of declining Gross Domestic Product, the “mild” recession is already well underway and has been for months, but one of the leading investment firms on the planet has chosen to accept President Biden’s insistence that the old rules no longer apply. Putting this another way, Mr. Hatzius believes the odds of a recession next year are about 33%, but the odds are even higher that we are in one right now, as I type these very words. The “much” that could go wrong has already gone wrong, and if we applied the thinking economists used less than two years ago, many of these same people would be saying precisely the opposite. There is not a single fair-minded person in the world who truly believes the “experts” would take a wait and see approach as to whether two quarters of economic decline under President Trump as a recession. In fact, they declared a recession immediately during coronavirus pandemic, before we even hit two quarters. At the end of the first quarter and into the second quarter of 2020, there were no calls to wait 10-12 months for an obscure economic board to tell us what was happening right before our very eyes. The recession was declared as soon as the economy contracted during the lockdowns, as it obviously should’ve been. There is another layer, however, that makes it even worse and more corrupt. While talking down the economy in 2020, all the card carrying experts were downplaying the Trump Administration’s insistence that a speedy opening would lead to a V-shaped recovery, which is precisely what happened. So, they declared it the worst of economic times and insisted it wouldn’t get better, but fast forward a couple of years and none of those rules apply anymore.
There remain some in the Democrat Party, at least, who are honest and forthright enough to tell the truth. A former economic advisor to President Barack Obama, Stephen Rattner, has been vocal about the economic danger we’ve been facing for the last year, but it should not take a degree in economics to understand the obvious: Easy money and excessive government spending are significant drivers of inflation. Combined with a more restrictive fossil fuel policy and challenges caused by Russia’s invasion of Ukraine, the US economy faces a toxic mix that could poison the overall environment for years to come. The Federal Reserve has finally changed course and belatedly tightened monetary policy, but an either obtuse or clueless Biden Administration continues to light money on fire at never before same levels and violate core economic principles as stated clearly by President Biden’s own former boss, Barack Obama. Raising taxes in a recession is a bad idea as is spending money when faced with inflation, and yet that is precisely what they have continued to do while telling us how great they are for the wrong policy at the wrong time. It’s as if they were celebrating in some other dimension where inflation was low and energy supply was high. As Mr. Rattner put it on Wednesday in a conversation with MSNBC, the latest inflation numbers “increased the possibility of a hard landing.” That might be an understatement. President Obama’s former Secretary of the Treasury, Larry Summers, has also been vocal and believes we are looking at years of elevated unemployment in the near future. “We need five years of unemployment above 5% to contain inflation — in other words, we need two years of 7.5% unemployment or five years of 6% unemployment or one year of 10% unemployment,” explained Summers at a speech in London in June. “There are numbers that are remarkably discouraging relative to the Fed Reserve view.”
Sadly, it might even be worse than he believes: The Biden Administration has been bragging about declining gas prices, but a tightening of Russian supply has led some analysts to conclude that any reprieve is only temporary. This comes from President Biden’s own Treasury Secretary, Janet Yellen, this very week. “Well, it’s a risk, and it’s a risk that we’re working on the price cap to try to address,” she explained when asked about oil prices on CNN. She was referencing an effort to cap prices on Russian oil. The European Union has been planning to cut back on Russian purchases, and in her words “will mostly stop buying” from Moscow. They are also implementing a ban on services required to ship Russian oil by tanker. As a result, “It is possible that that could cause a spike in oil prices.” The ominous nature of this news didn’t prevent the Biden celebration a mere two days later, leading me to wonder if one side of the administration even knows what the other side is saying. What do you think is going to happen to inflation and the overall economy if gas prices spike again this winter? The problem with “soft landing” proponents has always been a failure to recognize the full economic picture, exactly as it played out during similar conditions in the 1970s. In theory, high inflation should be accompanied by equally high economic growth. The increase in the costs of goods alone will increase the absolute dollar value of the economy like compound interest. The average person’s purchasing power will remain the same as would everything else relatively speaking, but what cost $100 would now cost $110. If a person’s wages increased at the same rate, there would be no change and technically the economy would grow by 10% under this simplified scenario.
What we are seeing now is completely different, however. We have massive inflation combined with a slowly, actually shrinking, economy. Inflation is outpacing economic growth, meaning buying power has gone down even as wages have gone up. This is the dreaded “stagflationary” spiral that played out for years in the late 1970’s. At the time, the real card carrying experts almost universally claimed it was impossible to have high inflation and a stagnant economy for essentially the scenario I cited earlier. The popular models used the Phillips Curve to describe the relationship between the unemployment rate and wages, and hence inflation. Essentially, decreases in the unemployment rate lead to increases in wages which lead to an increase in inflation. This led economists to believe they could control inflation through Keynesian monetary policy, which likewise denied that stagflation was possible, until of course it wasn’t. It turned out that the Phillips Curve only worked over the short term because inflation ultimately influences behavior. Over time, people end up purchasing less, regardless of their income, and the economy begins to contract with an associated increase in unemployment – except with the higher inflation rate. This is where we are right now. The unemployment rate remains the lone bright spot in the economy, but it cannot remain that way for long as inflation takes its toll on buyer and employer behavior. This is why Mr. Summers and Mr. Rattner are so concerned about the future. They have every reason to be, especially with a President in office who continues to increase costs with restrictive energy policies and new taxes while pumping an additional $6 trillion into the economy. Anyone who says otherwise is either misinformed, lying, or overly optimistic. However much President Biden would like to celebrate, the storm clouds have not dissipated and there will be rough economic weather ahead.
2 thoughts on “Biden’s celebration of inflation was woefully premature and dramatically out of touch”
“Anyone who says otherwise is either misinformed, lying, or overly optimistic. ” It is what it is and what it has always been – LYING. “The Politics of Lying” was a book published in 2000, by Lionel Cliffe and two others. It is the least read (least popular) book EVER on Goodreads. Here’s the authors in conclusion:
“In all these cases, political deception is not explained by any national or public interest, but variously by personal ambition, by the desire to stay in or consolidate power and to protect the interests of the policy makers, by the need to conceal the influence of corporate, commercial or unelected sectional interests on policy making, by the need to minimize public hostility and to avoid political exposure and democratic accountability for actions and policies which are at odds with public beliefs and convictions.” (p.209-9)
Okay, not the best writing, but right on point. Go figure.
LikeLiked by 1 person
Hahaha! I can’t really disagree with you there. 🙂