By Rudy Barnes, Jr., February 5, 2022
There are two economies in America: one for the rich reflected in the stock market, and one for the rest. The stock market crashed in March 2020 at the beginning of the pandemic, but it quickly recovered and has surged 30% higher than before the pandemic; and the nation’s GDP grew by 5.7% in 2021. Now inflation threatens both American economies.
Inflation is 4.9% higher than a year ago. That’s much higher than the Federal Reserve’s 2% goal, and the Fed has indicated it will soon increase interest rates to counter inflation. Most of the prices increased by inflation are set by megacorporations that own most of the means of production in America; and during the pandemic those megacorporations reaped big profits.
The rich are the primary beneficiaries of a soaring stock market, and that correlates with both inflation and increasing disparities of wealth in America. A strong middle class is essential to a healthy democracy, and Fed policies have favored Wall Street over Main Street. That has increased disparities of wealth that now threaten the stability of America’s middle class.
The first priority of economic and monetary policy is to provide for the common good. A booming stock market creates a hot economy and inflation. Raising interest rates will cool off an overheated economy by discouraging consumer spending, but higher rates will also increase the taxpayers’ burden of carrying America’s massive national debt that is now over $30 trillion.
Providing for the common good requires balancing spending with restraint. Inflated prices in the stock market can be deceptive as causes of inflation, but not consumer prices. The Federal Reserve controls inflation with interest rates and monetary policies that have benefited the stock market. Congressional entitlements have also had an inflationary effect.
The Biden administration contributed to the rapid rise of inflation by “misreading the rising threat of inflation for a variety of reasons, including Fed influence, the folly of traditional economic forecasting, and political pressure to spend big.” Both the Fed and Congress have seemed indifferent to the relationship between inflation and a booming stock market.
The super-rich on Wall Street can tolerate inflation since the increasing value of stock more than compensates for the negative effect of inflation. Those who don’t own assets like stock or real estate are the real victims of inflation. As taxpayers they bear the burden of a depreciated dollar and an increasing national debt. Providing for the common good requires that all Congressional spending includes the tax revenues needed to repay those expenses.
BIg money controls politics in America, and most of it comes from megacorporations on Wall Street. Since they control most of the means of production, prices and profits in America, they could dampen inflation; but given the lure of profits and the power of big money over Congress, it would take a stock market crash to motivate Congress to regulate crony capitalism. In spite of their illicit power--or because of it--an economic crisis may be closer than we think.
CNBC reported on how the Biden administration “misread the rising threat of inflation.” “In calling for passage of the $1.9 trillion pandemic stimulus bill, just a month after Congress approved a separate $900 billion package, Biden often lamented the small size of the $800 billion stimulus passed in 2009 during the financial crisis that followed. ‘We have learned from past crises: The risk is not doing too much. The risk is not doing enough,’ Biden told reporters from the Oval Office in late January 2021. He signed the bill into law in March. Yellen voiced support for the administration’s desire to “go big,” but was also circumspect on the possibility prices might rise. By fall, as persistent inflation began to erode Biden’s approval rating, the administration shifted its message. Cabinet officials pounded the pavement, pointing to inflation as a sign the economy had strengthened, effectively implying the Fed might need to act.” See https://www.cnbc.com/2022/02/04/how-the-biden-administration-misread-the-inflation-threat.html.
Lawrence H. Summers has opined that the “Fed’s words don’t measure up to the challenges of inflation. See https://www.washingtonpost.com/opinions/2021/12/16/lawrence-summers-fed-inflation/?utm.
Eric Boehm has observed that “America's Huge Pile of National Debt Makes Combating Inflation More Difficult. A one percentage point increase in interest rates translates into a $30 trillion increase in interest costs on the national debt.” Boehm cites Brian Riedl: "Fiscal policy has hamstrung the Federal Reserve. For the Federal Reserve to do basic, commonsense macroeconomic stabilization, it's going to hit the national debt hard because Congress has been so irresponsible. In a new report, Riedl outlines the fiscal and monetary trap facing federal policy makers and central bankers. In short: Rising interest rates will make the national debt a bigger problem. And the already-huge national debt makes it more difficult to combat inflation—inflation that has been triggered, at least in part, by debt-financed spending. The Congressional Budget Office's (CBO) long-term budget outlook assumes that interest on the national debt will rise to 8.6 percent of gross domestic product (GDP) by 2051—that's about $1.9 trillion in today's dollars. That's the rosy scenario where there are no unexpected borrowing splurges and no massive economic disruptions. Even so, this scenario means that interest on the debt would be the largest portion of the federal budget, and would consume about half of all projected tax revenue. What if interest rates exceed the CBO's projection? A one percentage point increase in interest rates translates into a $30 trillion increase in interest costs. That's roughly equivalent to what the country expects to spend on the military over the same amount of time. It would cause interest costs to consume 13 percent of GDP by 2051, equal to about 70 percent of all projected tax revenue in that year. If interest rates average two percentage points above the CBO baseline, interest costs on the debt will be equal to 100 percent of tax revenue by 2051, Reidl calculates. Every single dollar of tax revenue (based on the current tax code) would be directed to paying for money already borrowed and spent. That means nothing left over for the military, social programs, entitlements, or anything else. ‘Once the debt surges, even modest interest-rate movements can impose stratospheric costs,’ Riedl says. For too long, federal policy regarding the national debt has been driven by a sense that the good times would never come to an end. Low inflation and falling interest rates may have lulled politicians into a false sense of security, and poor budgeting left the nation's balance sheet vulnerable to a coming crisis of the government's own making. See https://reason.com/2021/12/30/americas-huge-pile-of-national-debt-makes-combating-inflation-more-difficult/.
Jeff Stein has reported that White House allies have split over inflation as Biden focuses on corporate greed. “In recent weeks, the White House has amplified its case that price increases for gasoline and meat are connected to corporate consolidation and greed, castigating meatpackers, gas companies, and other firms for passing higher prices onto consumers. Corporate profits have soared along with economic growth in the past year, even as Americans face higher prices and inflation-adjusted worker wages stagnate. U.S. corporations are on pace to make more than $1.7 trillion in profits this year, explosive growth compared with roughly $1 trillion they made in 2019. Senator Elizabeth Warren (D-Mass) has gone further than the administrations, saying corporations are ‘exploiting the pandemic to gouge consumers with higher prices on everyday essentials, from milk to gasoline.’” See https://www.washingtonpost.com/us-policy/2022/01/10/white-house-inflation-strategy/?utm_.
Democrats worry Biden could pay the political price for rising inflation. “President Bden and his advisors for months predicted inflation would be only transitory, but new data has challenged that notion. Frank Luntz, a Republican pollster, says ‘Of all the economic issues, this is number one.’ Joe Trippi, a Democratic political consultant says, ‘It doesn’t matter how good everything else is going--people really do feel inflation.’ ‘Larry Summers has said the danger is we’re starting to see a dynamic of wage-price spiral in which rising wages lead to rising prices, which lead to rising prices, which lead to rising wages. The crucial macroeconomic insight from the experience of the 1960s and 1970s is that an overheated economy leads to not just high inflation but accelerating inflation,’ Summers added. ‘We currently have an overheated economy, and there’s not much reason to think anytime soon it’s going to cool off.’” See https://www.washingtonpost.com/politics/democrats-worry-biden-could-pay-the-political-price-for-rising-inflation/2022/01/12/6f76ba68-73c7-11ec-8b0a-bcfab800c430_story.html?utm.
On the issue of inflation, Republicans and Democrats agree that controlling inflation is a top priority, and they are not far apart on solutions: Henry Olsen is a Republican who says “The experts are finally grasping the real reason for inflation. Now, it’s time to act. There’s only two ways for this to end. The first is to stop pumping money into the economy. This means the country cannot afford to pass the Build Back Better Act or other costly measures that would add more fuel to the overheated economy. The second is to constrain consumer spending by raising interest rates. This makes holding cash more attractive and dampens demand. But it also slows economic activity. Done too strenuously, it can throw an economy into recession. That fear has kept the Fed from raising rates thus far, leading to the state we are in now.” See https://www.washingtonpost.com/opinions/2022/01/12/experts-are-finally-grasping-real-reason-inflation-now-its-time-act/.
Paul Waldman is a Democrat who asserts that “To lick inflation, we must raise taxes on the wealthy. And if you raise the wealthy’s taxes, growth will grind to a halt, which happens to be just what we need to address inflation. Demand is outstripping supply, people have too much money and time on their hands, and a round of salutary belt-tightening led by the wealthy will restore order. The Biden administration wants to look like it has everything under control and is taking decisive action to bring down prices, and talking a good bit about fighting against corporate monopolization and price gouging; but even many liberals think that while that’s good on the merits, it won’t have much short term impact on prices. The one actor who can do a lot to cut inflation is the Federal Reserve — but what it will do isn’t painless either. It’s reducing the amount it spends on government bonds (“tapering”), and will raise interest rates. See https://www.washingtonpost.com/opinions/2022/01/12/neither-party-inflation/?utm_.
A bill to ban congressional stock trading is an opportunity for Democrats. They’re squandering it. When House majority leaders Nancy Pelosi was asked about such a bill last year, she “all but ridiculed the idea. This is a free market, and people--we are a free market economy.country. They should be able to participate in that.” Helen Olen disagreed, saying, “No, actually, they shouldn’t.” Olen noted that “Pelosi’s financier husband “pocketed about $5 million last summer after big bets on tech stock options paid off. A recent poll by the Convention of State Action found that 3 out of 4 Americans say members of Congress have an ‘unfair advantage’ from confidential info and should not be allowed to trade individual stocks.” https://www.washingtonpost.com/opinions/2022/01/16/bill-ban-congressional-stock-trading-is-an-opportunity-democrats-theyre-squandering-it/?utm_.
How Americans think Joe Biden has done on jobs and the economy after his first year in office:
In his first year in office, Biden took a number of steps intended to bolster the economy and create jobs, including the signing of the American Rescue Plan and the bipartisan infrastructure law. But as the pandemic has dragged on into its third calendar year, the President has faced challenges trying to ameliorate supply chain issues and inflation, labor shortages and volatile stocks have affected American consumers. A December 2021 CNN/SSRS poll shows Biden comes into his second year with a 44% approval rating to 55% disapproval rating among registered voters on his economic performance. This makes for a -9 point net approval rating. The average of all polls taken in December is quite similar with Biden at -13 points on the economy. The average president at that point in the last 44 years had a net economic approval rating of +5 points. That means Biden's is 18 points worse than the average. A December CNN survey found 54% said they disapproved of the job Biden was doing helping the middle class. See https://www.cnn.com/2022/01/22/politics/biden-year-one-comparison/index.html.
Fiscal stimulus powered U.S.economy in 2021 to its best performance since 1984. “The U.S. economy notched its strongest growth in nearly four decades in 2021 after the government pumped trillions of dollars in COVID-19 relief, and is seen forging ahead despite headwinds from the pandemic, strained supply chains as well as inflation. Growth is 3.1% above its pre-pandemic level. A surge in gross domestic product in the fourth quarter as businesses replenished depleted inventories to meet strong demand for goods was the final push. Last year's robust growth reported by the Commerce Department on Thursday supports the Federal Reserve's pivot towards raising interest rates in March. Fed Chair Jerome Powell told reporters that "the economy no longer needs sustained high levels of monetary policy support," and that "it will soon be appropriate to raise" rates. Inflation increased at a 6.9% rate, the fastest since the second quarter of 1981, way above the Fed's 2% target. That resulted in income at the disposal of households dropping at a 5.8% rate, which also limited consumer spending. Still, households remained cushioned by huge savings, which were at $1.34 trillion. Wages surged at an 8.9% rate before adjustment for inflation, reflecting a labor market that is experiencing an acute shortage of workers, with 10.6 million job openings at the end of November. Though the labor market took a step back in early January as Omicron surged, it is at or near maximum employment. See https://www.reuters.com/world/us/us-economy-regained-speed-q4-2021-growth-best-since-1984-2022-01-27/. See also, Key Fed inflation gauge rises 4.9% from a year ago, fastest gain since 1983 at https://www.cnbc.com/2022/01/28/key-fed-inflation-gauge-rises-4point9percent-from-a-year-ago-fastest-gain-since-1983.html.
The Fed is trying to thread the needle by raising rates without endangering the economy. Having waited this long, the central bank’s chairman, Jerome H. Powell, now appears ready to get tough on inflation. “If the Fed misjudges the situation, the consequences could be dire. Raise rates too much, too fast and the central bank could drive the economy into another recession. Raise them too little and inflation might tighten its grip on the $23 trillion U.S. economy, saddling households and businesses with higher bills. Powell promises that the Fed will be “nimble” in the months to come, willing to adjust as fresh data changes the outlook. ‘The mistake was waiting this long,’ said former Fed economist Michael Strain of the American Enterprise Institute.’The risk of something abrupt happening is higher.’ ‘I don’t think it’s possible to say exactly how this is going to go,’ Powell acknowledged Wednesday. ’The economy is quite different this time’.” See https://www.washingtonpost.com/us-policy/2022/01/30/fed-powell-rates-economy/?utm.
Earlier commentary on stock market growth, inflation and disparities of wealth:
(6/4/16): Christianity and Capitalism: Strange Bedfellows in Politics
(10/1/16): The Federal Reserve, Wall Street and Congress on Monetary Policy
(2/11/17): The Mega-Merger of Wall Street, Politics and Religion
(3/11/17): Accountability and the Stewardship of Democracy
(9/9/17): The Evolution of the American Civil Religion and Habits of the Heart http://www.religion
(9/16/17): The American Civil Religion and the Danger of Riches
(2/17/18): Musings of a Maverick on Money, Wall Street, Greed and Politics
(6/15/18): The Prosperity Gospel: Where Culture Trumps Religion in Legitimacy and Politics
(4/27/19): Musings on the Legitimacy of Crony Capitalism and Progressive Capitalism
(8/24/19): Musings on How a Recession Could Transform Religion and Politics in 2020
(1/4/20): Musings on How a Depression (or a War) Could Make America Great Again
(2/8/20): Musings of a Maverick Methodist on America’s Love of Money and Lack of Virtue
*(3/28/20): Musings of a Maverick Methodist on a Quick and Dirty Economic Revolution
(5/2/20): Politics, the Economy and Religion in a Brave New (Post-Pandemic) World
(5/9/20): Exposing the Corruption of Crony Capitalism
(5/16/20): The Evolution of America’s Libertarian Democracy from Plutocracy to Kleptocracy
(6/27/20): Musings on a Zombie Economy Fostered by the Federal Reserve
(8/15/20): Musings on Racism, Reparations, Racial Disparities and the Federal Reserve
(8/22/20): Musings on America’s Two Economies: One for the Rich and One for the Rest
(2/6/21): Musings on the danger of economic disparities and excessive debt in America
(2/27/21): Musings of a Maverick Methodist on Debt as a Vice or Virtue
(3/6/21): Musings on Socialism, Capitalism, Democracy and Debt in Politics and Religion
(6/5/21): Musings on Why Socialism is no Substitute for Altruism in Politics
(7/31/21): Musings on a Socialist Experiment in a Nation Burdened by Pandemic Debt
(9/25/21): Musings on an American Economic Apocalypse
(10/30/21): Musings on Modern Monetary Theory, and Why National Deficits and Debts Matter