Inflation rose an astounding 6.8% from last November to now, the largest annual increase since 1982 when Federal Reserve Chairman Paul Volcker had to raise interest rates well into the double digits to combat the stagflation of the Carter era. CNBC’s Carl Quintanilla decided to use the dismal news to argue that, actually, our inflation rate is not “unique, special or anyone’s fault.”
https://twitter.com/carlquintanilla/status/1469311604470730752This is a wildly telling chart — but not in the way Quintanilla thinks.
Despite the Fed keeping U.S. interest rates near zero during the longest bull market in history, central bankers across the pond have proven even more dovish. Even so, in Europe, where the European Central Bank has maintained negative interest rates, nations such as France and Portugal have significantly lower inflation rates than us. (Note: Switzerland and Japan are outliers, as they’ve maintained negative or near-zero inflation and interest rates for over a decade now.)
This defies basic Keynesian monetary theory, which, to be extremely general, urges governments to “spend against the wind.” That is, use monetary and fiscal policy to pump money into the economy when it’s too slow, and dial back the money supply flow when the economy gets too hot. Still, with even lower rates and a greater qualitative easing campaign than ours, Europe is having less of an inflation problem than ours.
When Volcker was forced to trigger the recession of the early ’80s to combat inflation, the federal funds rate had been above 2.5% for decades and more than 5% at the start of stagflation. Right now, remember, we’re near 0%, yet President Joe Biden still wants to blow out an already unprecedented money supply.
For years, hawks have warned that the Fed one day will have to reverse course and put the economy in a world of hurt to prevent the Weimarization of the U.S. dollar. Doves have countered with various arguments about our growth rate and status as the world’s reserve currency. Well, what about now? What about a pandemic that brought our economy to a standstill and a president allowing the country that exported that virus to slowly recolonize Africa? China has made no secret of the fact that it looks to replace us as the world’s reserve currency and chief trading partner, and nothing Biden has done has instilled much confidence in the notion that we have a plan to prevent that.
And all of this is ignoring our existing debt projection, independent of Biden’s spending, due to an aging population about to take an unprecedented bite out of the federal budget.
So, what then? Well, what the Fed will have to do could make the Volcker recession, a completely necessary one, feel like skinning a knee. The economy is on the verge of disaster, and we may eventually need to go under the knife without anesthesia to fix it.
