By Rudy Barnes, Jr.
The rate of inflation through October 2022 was 7.7%. That’s .4% less than the previous rate of 8.2%; but despite the promise of the Federal Reserve to reduce inflation with increasing interest rates, consumer spending has not slowed and the stock market is booming. The Fed’s promise seems little more than wishful thinking, and a sign of unabated and debilitating inflation.
America has two economies. One for the rich that’s measured by the stock market, and one for the rest; and the economic disparities between the two are increasing. When measured by an increasing GDP based on consumer spending the economy is booming, but so is inflation; and Increasing interest rates have made America’s $30 trillion national debt unsustainable.
The rich can survive inflation, but not the average consumer. Megacorporations on Wall Street control prices on consumer goods and can raise prices to compensate for inflation and higher interest rates, but most consumers can’t invest in the stock market as a hedge against inflation. It’s the average consumer who suffers most from unabated and debilitating inflation.
For America to sustain its massive national debt with increasing interest rates, it must increase taxes and reduce other public expenses like social security, health care and national defense. That would be a recipe for increasing economic disparities and dangerous political volatility, not unlike Germany in the 1920s.
Short of Congress regulating prices, there seems no way to effectively control inflation. The Fed has failed in its primary mission; and Wall Street controls Congress and will oppose any regulation of prices. It took Hitler and national socialism to control Germany’s runaway inflation in the 1930s, and demagogues like Trump will promise to do the same in America.
Unrelenting inflation debilitates the economy, politics and religion. Germany was the most Christian nation in Europe in the 1930s, yet it ignored the moral imperatives taught by Jesus and chose Hitler’s national socialism to save Germany from economic disaster. It could also happen in America if it doesn’t control the pernicious effects of inflation and nationalism.
The problem with democracy is that it allows demagogues like Trump to exploit the lack of morality in politics. Today the American church ignores the moral imperatives taught by Jesus in politics, as did the German church in the 1930s. Most white Christians voted for Trump in 2016, and the radical right retains substantial political support that could be revived in 2024.
Without a moral commitment to control its profligate spending, America remains vulnerable to the economic and political corruption of unabated and debilitating inflation and a return to political demagoguery. If there is no political resolution of the economic debilitation of inflation by 2024, the prospect for violence reminiscent of the January 6 Capitol riot is likely.
This Holiday Season, the Poor Buckle Under Inflation as the Rich Spend. “The Federal Reserve is raising interest rates to make borrowing more expensive and temper demand, hoping to cool the economy and bring the fastest inflation in decades back under control. after 18 months of rapid price inflation — some of which was driven by stimulus-fueled demand — the poor are depleting those cushions. American families were still sitting on about $1.7 trillion in excess savings — extra savings accumulated during the pandemic — by the middle of this year, based on Fed estimates, but about $1.35 trillion of it was held by the top half of earners and just $350 billion in the bottom half. At the same time, prices climbed 7.7 percent in the year through October, far faster than the roughly 2 percent pace that was normal before the pandemic. As savings have run down and necessities like car repair, food and housing become sharply more expensive, many people in lower-income neighborhoods have begun turning to credit cards to sustain their spending. Balances for that group are now above 2019 levels. Consumer spending overall has so far been resilient to the Fed’s rate moves. Retail sales data moderated notably early in the year, but have recently picked back up. Personal consumption expenditures aren’t expanding at a breakneck pace, but they continue to grow. Yet underneath those aggregate numbers, a nascent shift appears to be underway — one that highlights the growing divide in economic comfort between the rich and the poor. Companies that serve more low-income consumers, however, are reporting a marked pullback. Many families paid off their credit card balances during the pandemic, and that is now reversing, despite high credit card rates. See https://www.nytimes.com/2022/11/25/business/economy/economy-holiday-season.html.
Federal Reserve Chair Jerome Powell has revived hopes of a Fed pivot, but that’s a bad thing. He made investors very happy on Wednesday. US stocks popped after the central banker gave a speech strongly indicating that the Fed would ease the historically-high pace of interest rate rises at its next policy meeting in December. What’s happening: Investors have been closely watching for any clues that the Fed might slow or pause its painful path of rate hikes, intended to fight persistent inflation. But their search for signs has led to a hopeful distortion of facts: Powell says “moderate” and investors hear “pivot.” Market rallies can lead to counterproductive easing in financial conditions and boost the economy, which is the opposite of what the Fed is trying to do with its tightening policy. “By any standard, inflation remains much too high,” said Powell. “It will take substantially more evidence to give comfort that inflation is actually declining.” The bottom line: The Fed has increased its benchmark lending rate six times this year in an attempt to discourage borrowing, cool the economy and bring down historically high inflation that peaked at 9.1% over the summer and has since slowed to a still uncomfortably high 7.7%, according to the latest Consumer Price Index. See https://www.cnn.com/2022/12/01/investing/premarket-stocks-trading/index.html.
Catherine Rampell has opined on an inflation conspiracy theory infecting the Democratic party. “Call it “Greedflation.” The theory goes something like this: The reason prices are up so much is that companies have gotten “greedy” and are conspiring to “pad their profits,” “profiteer” and “price-gouge.” No one has managed to define “profiteering” and “price-gouging” more specifically than “raising prices more than I’d like.” For example, a bill introduced by Democratic Sens. Elizabeth Warren (Mass.) and Tammy Baldwin (Wis.) and Rep. Jan Schakowsky (D-Ill.) bans “price-gouging,” which it defines as “unconscionably excessive” pricing. So what’s the supposed evidence that businesses are pro-inflation? The greedflationists — including President Biden — complain that executives are boasting on corporate earnings calls about how much money they’re making. This might sound like a smoking gun if you have never listened to an earnings call, in which executives usually boast about how great profits are or will be. The greedflationists argue that something fishy is afoot because companies are not merely “passing along” their higher costs; their profit margins are expanding, too. But this is exactly what you’d expect when flush customers are buying more stuff and willing to pay whatever’s necessary to get what they want. Prices and profits rise.” Unlike Rampell, I believe the greedflationists have it right. What might be acceptable capitalistic greed and profiteering in normal times should be restrained in periods of high inflation. See https://www.washingtonpost.com/opinions/2022/05/12/democratic-conspiracy-theory-on-inflation-makes-things-worse/?utm_campaign=wp_todays_headlines&utm_medium=email&utm.
Top economist Mohamed El-Erian says we’re not just headed for another recession, but a ‘profound economic and financial shift’. “The first of three major shifts transforming the world economy was driven by the effects of the pandemic, beginning with the entire system coming to a halt and stimulus from the government, or what El-Erian called “enormous handouts,” causing “demand surges well ahead of supply.” it became clear that the issue of supply “stemmed from more than just the pandemic.” It’s tied to Russia’s invasion of Ukraine that resulted in sanctions and geopolitical tensions, along with a widespread labor shortage brought forward by the pandemic. These disruptions in supply chains gave way to “nearshoring,” a more permanent shift of companies moving their production closer to home, rather than a reconstruction of the 2019-era supply chain. This essentially reflects a change in the “nature of globalization.” “Making matters worse, these changes in the global economic landscape come at the same time that central banks are fundamentally altering their approach,” El-Erian has criticized the Federal Reserve in particular for being too slow to recognize inflation entrenching itself into the economy, and then for its steep rate hikes to make up for lost time. As inflation soared, the Fed pivoted to aggressive rate hikes—with the last four increases all being by 75 basis points that lifted the federal funds rate to a range of 3.75% to 4%. But this fundamental change in approach led to the third problem, El-Erian writes. “Markets recognized that the Fed was scrambling to make up for lost time and started worrying that it would keep rates higher for longer than would be good for the economy. The result was financial market volatility.” Markets have been trained to expect easy money from central banks, he said, and the “perverse effect” of that has been for “a significant chunk of global financial activity” to flood into asset management, private equity and hedge funds, among other less-regulated entities. El-Erian concluded that these changes mean economic outcomes will be harder to predict. And it won’t necessarily mean one simple outcome but rather a reflection of a “cascading effect”—in that one bad event could likely lead to another. See Alena Botros, Fortune, November 23, 2022.
On how Holiday Spending Grows Despite Inflation Woes, see https://www.statista.com/chart/28828/us-online-holiday-spending-black-friday-cyber-monday/?utm.
Previous commentary on inflation, politics and the economy:
(5/9/20): Exposing the Corruption of Crony Capitalism
(6/27/20): Musings on a Zombie Economy Fostered by 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
(5/14/22): Musings on Inflation, the Stock Market, and the Economy http://www.religionlegitimacyandpolitics.com/2022/05/musings-on-inflation-stock-market-and.html.
(10/17/22): Musings on How Fed Interest Rates Feed Inflation and the Stock Market