The experts shouldn’t be surprised that inflation doesn’t fall in a straight line in a relatively short period as they’ve been claiming. The historical record over the past 800 years is clear: Inflation can take decades, as in tens of years, to revert to the norm.
Wall Street was stunned last week because inflation remains “stubbornly high” and the Federal Reserve might have to reverse its prior guidance on planned interest rate cuts this year, perhaps even raise them further. CNN, meanwhile, made their priorities clear with the headline “Bad news for Biden,” noting that “Inflation is creeping higher at the worst time” and only referencing the impact on Americans in parentheses. “There’s rarely a good time for prices to rise a lot. Good luck finding someone who will tell you they enjoy it when their hard-earned dollars can’t stretch as far. But, if you’re President Joe Biden, now is a particularly bad time for inflation to reaccelerate,” and “reaccelerate” it did with prices jumping 3.5% year over year in March, a 13% increase over the jump in February at 3.1%. CNN continued with the usual lament that the economy is “performing well by many metrics” and the real problem is the way “people feel about the economy,” the old “vibecession” fantasy. They are sure to cite the “Significant progress over the past two years in getting inflation down from multi-decade highs” before acknowledging all “that means is the rate of price increases has slowed but the actual prices we’re paying are still higher than they were in prior years. Since Biden took office three years ago, prices are up 19%, according to CPI data.” For its part, The New York Times rather bizarrely insisted that President Biden could turn the inflation that has occurred on his watch against former President Donald Trump. “President Biden and his economic team had high hopes about how two years of rapid inflation would play out in the months leading to the November presidential election. Price growth would continue to cool. The Federal Reserve would cut interest rates. Mortgage rates and other borrowing costs would fall. Consumer moods would improve, and so would Mr. Biden’s re-election prospects.” They continued to cite the “unexpected acceleration in price gains,” before repeating an outright lie from the President as if it was fact. “We’re better situated than we were when we took office where we — inflation was skyrocketing. And we have a plan to deal with it, whereas the opposition — my opposition talks about two things. They just want to cut taxes for the wealthy and raise taxes on other people.” Somehow, this blatant falsehood is supposed to represent a “small pivot for Mr. Biden but an important one, as he seeks to dig out of a deep hole with voters on the inflation issue.” They continued from there to completely mischaracterize the low inflation throughout four years of President Trump, oddly suggesting that the 1.81% rate enjoyed in 2019, which was actually a decline from the previous year, was a result of the pandemic, flashing forward apparently. “Mr. Trump oversaw relatively low price growth as president and left office with an inflation rate below 2 percent, a hangover from the pandemic recession, when consumer spending was slow to rebound after the national economy experienced an unprecedented shutdown.”
Of course, media organizations spinning the facts and lying to protect President Biden is nothing new, but the entire framing of the inflation crisis reflects an even deeper set of fantasies and outright falsehoods, namely that anyone ever had any reason to believe inflation can be tamed so quickly or that simply raising interests rates is the answer to our prayers in any event. This should be clear to the so-called experts from even a cursory analysis of the historical record. The last time the United States experienced anything like the current trend was in 1966, when inflation rose to 3.02% from 1.59% just the year before. By 1970, inflation continued to climb to 5.84%, but then appeared to slow down, dropping to 3.27% over the next two years, close to where we are now. Over the subsequent two years, however, inflation spiked again, even worse than before, rising to 11.5% before beginning another decline, repeating the cycle. By 1980 it reached 13.55% under President Jimmy Carter, and it did not fall to below 3% until 1986, a six year period. Even then, the inflationary period was not over. After 1986, it began to rise again and remained above the Federal Reserve’s 2% target until 1998, well into the Presidency of Bill Clinton. Between 1966 and 1998, a period of over three decades, inflation was above the target, in many cases well, well above the target, with the exception of 1986. The situation was similar in the 1910s through the 1930s, when actual deflation in 1916 exploded into the most inflationary period in history, hitting over 20% in 1918 and then almost 25% in 1921. Between 1916 and 1921 inflation never fell below 20% until a short, sharp recession caused deflation followed by another rapid increase to 5% by 1926. The depression brought on another deflationary period, but by the late 1930s prices began to rise again, reaching 3% in 1935, before falling and then rising once more with the start of World War II. The various factors in both of these periods were both different and the same as what we face today. In the early 1900s, the first world war caused government “involvement in the economy [to increase] dramatically” to quote the Bureau of Labor Statistics, which led to an “expansionary [monetary policy that] surely contributed to the inflation…Money supply measures roughly doubled from 1914 to 1919, with gross national product rising only by about a quarter.” Calvin Coolidge fought that trend and tamed inflation with aggressive budgetary control measures. Today, the Federal Reserve began tightening monetary policy in March 2022, increasing interest rates for the first time since 2018, but government spending in general increased vastly more than economic growth. In 2019, the economy grew at 2.29% and total government spending was $4.5 trillion, but the pandemic radically altered the trajectory, increasing government spending by a sustained 27% throughout 2022 and 2023 while the economic growth slowed from a much lower 5.95% in 2021 to 2.06% in 2023. In the early 1900s, inflation was driven primarily by a near doubling of the costs of most foods, clothing and dry goods while housing and fuel costs rose at a much lower rate. In the 1970s and today, the price increases have followed the opposite path, with rapid rises in the cost of energy and housing offsetting slower increases elsewhere. Unfortunately, this is even more corrosive given energy’s role in production in transportation, and housing’s large share of the family budget.
The increased role of credit driven by interest rates in the economy has added another layer of complexity. Much of the coverage has focused on the rapid rise in the costs of mortgaging a home or buying a car, but less attention has been paid to the reality that credit now underpins almost the entire economy. The government, of course, borrows trillions every year and payments on the debt are now one of the largest single expenditures in the United States, but businesses, rarely, if ever, pay cash as well. They borrow and finance everything instead to control their cash flow and for the tax benefits on the interest. When you buy a car, the dealer doesn’t own the vehicles on the lot free and clear, for example. They are instead financed by the manufacturer through a floor plan, which accrues interest daily. The longer a car stays on the lot, the more interest is paid. If interest rates go up, not only does the consumer pay more for the loan, but the dealer has to charge more for the car because their overall costs have increased even if the invoice price for the vehicle hasn’t changed. The same is true of most office space, warehouses, factories, land and sea shipping, and the millions of elements of the global supply chain. To say all of it runs on interest is little exaggeration. This is one of the reasons that interest rates in general have trended downward for the last eight centuries – that is eight hundred years – as the economy has modernized and expanded. Three economists, Kenneth Rogoff, Barbara Rossi and Paul Schmelzing, have amassed the largest data set on the subject to determine average costs ever since credit in the form of government borrowing was invented in Venice in 1311. According to their research, “there is a clear and striking trend” (to use The Financial Times phrasing), where rates have been declining “almost 2 basis points a year, on average, since 1311.” “The chart is certainly not smooth. Two big inflection points occurred during the 14th-century Black Death pandemic, and then the European ‘Trinity’ financial crisis of 1557. There were smaller inflections in 1914 and 1981. But what is more striking than these inflections is how rare they are. While long-term rates have often moved in response to recessions, defaults, financial shocks and so on, they almost always revert to trend after a decade or two. As the economist Maurice Obstfeld has pointed out, the result is that they look like mere ‘blips’ from a long-term historical point of view.” Needless to say, it’s not encouraging that these “blips” can take decades to work out, and that the rise in interest rates we are experiencing today is as fast as during the Black Death itself.
This is why common sense rather than vaunted economic expertise should be enough to question whether raising interest rates actually solves the inflationary problem or it would be better to simply let the market run its course. The consensus is that tightening the money supply with higher interest rates reduces demand, intentionally restraining it, until prices fall as a result of the classic economic law, but there is a case to be made that raising interest rates can produce the opposite effect, raising prices instead of reducing them or at least failing to reduce them as much as planned. Interest rates do not merely reduce demand. They increase the costs of doing business as I described above, costs which are almost certainly passed on to the consumer. Any business that relies on credit to finance part of its operations will experience increased costs as a direct result of increased interest rates and therefore, their customers will experience increased prices indirectly. The extent of these increases is not well known or well studied to my knowledge, but with total business debt in the United States at around $18 trillion and a recent study that found even 72% of small and medium size businesses carry debt with 4% carrying a million or more, suggests the exposure can be large. To put this in perspective, best practices in business management generally assume that businesses will carry debt of between 30 and 50 percent of their total revenue, meaning that well managed businesses rely significantly on credit and loans to operate and expand. Given the obvious connection, it is somewhat startling that the relationship between interest rates and prices has not been studied or analyzed from this perspective. Instead, the experts blithely repeat the relationship established by the Federal Reserve with no mention of whether or not there could be unintended consequences. For example, CNBC covered “How increasing interest rates could reduce inflation, but potentially cause a recession” in August 2023. They addressed the potential impact on consumers purchasing items on credit, either through loans or credit cards, but only considered the impact on businesses in terms of pulling “back on borrowing and investing.” “Raising interest rates helps to reduce the overall level of demand and therefore, hopefully, reduces the upward pressure on prices,” explained Michael Gapen, managing director and head of US economics research for Bank of America. “If you’re slowing demand, you’re likely slowing hiring, and there may be layoffs, which could push the unemployment rate up,” he continued. “Hopefully, what you’re also doing is slowing the rate of inflation at the same time.” One would be remiss to point out how tenuous the connection really is: The use of “helps,” “overall level of demand,” “hopefully,” and “slowing,” do not exactly inspire confidence that this connection is nearly as well established as believed by the so-called experts.
Ultimately, the historical record over the past eight hundred years, no small sample size, tells a rather different story, one where inflation is much more volatile and long lasting than the experts are currently spinning it. There is no reason to believe inflation will ease in a straight line anywhere near as quickly as they are claiming. There is every reason to believe the path ahead is rocky as it always has been, and if the experts we rely on were honest, that’s what they would be cautioning rather than effectively cheerleading for their preferred candidate. I say this not as an economist or what Dr. Anthony Fauci would call a “real card carrying expert.” I am merely an interested observer who has read a little about a lot of things. In this case, those things are not hard to find if you do the tiny amount of research the media is supposed to be doing.
Confessions of a Conservative Atheist 