Inflation: where are we going now?
In the past two decades alone, Congress and several administrations, with the full support of the Federal Reserve, have increased our budget deficit to over 130% of GDP with no end in sight. This increase placed the United States among the 10 worst deficits in the world, alongside Greece and Italy. According to the recent US Treasury Department report U.S. government financial report“Current US fiscal policy is unsustainable.”
This cannot continue and the Federal Reserve must immediately stop aiding and abetting it. The scourge of inflation is upon us again. For a playbook on how we might deal with it, we can look to the period from the late 1970s to the 1980s, when we dealt with it successfully, albeit with pain and suffering. extreme disturbances.
The cause of inflation during the 1970s is simple. President Kennedy was assassinated in 1964 and Vice President Lyndon Johnson became President. Johnson decided to dramatically expand an already costly and wildly unpopular war in Vietnam without raising taxes to pay for it. Then he declared a very expensive war on poverty by implementing hugely expensive welfare programs, again without raising taxes to pay for them.
The Federal Reserve expanded the money supply to meet massive deficit spending and kept interest rates at moderate levels. President Nixon inherited both the war in Vietnam and growing deficits, but he was so weakened by the Watergate scandal that he had little political capital to devote to fighting inflation and was eventually forced to resign from his post.
When President Carter was elected in 1976, rapidly rising prices, particularly of oil used to heat homes and power cars, became a major political issue. The impact was felt across the financial world, putting pressure on interest rates and threatening banks and thrifts, especially those that provide long-term fixed-rate loans.
Carter turned to Paul Volcker, then president of the Federal Reserve Bank of New York, appointing him chairman of the Federal Reserve Board in 1979 with a mandate to do whatever it took to stamp out inflation. Volcker responded with alacrity, boldness and determination, eventually raising the prime rate to an unheard-of 21.5%.
This in turn led to two recessions, a depression in the agricultural sector, a crash in energy prices, massive business and personal bankruptcies, as well as more than 3,000 bank and savings bankruptcies, some of which of the largest banks in the country. Things were so serious that the Fed and the Federal Deposit Insurance Corporation (FDIC) were planning for the possible nationalization of the nation’s largest banks if their loans to Third World countries defaulted.
Everyone involved in the implementation of these policies believed that we had no realistic choice. The longer it took to eradicate inflation, the more pain and hardship it would inflict, especially on our middle and lower income Americans.
In addition to monetary policy, fiscal policy today is much looser than in the 1970s. Federal debt stood at $5.5 trillion, or about 55% of GDP, at the end of the Clinton administration. in 2000. Just over 20 years after Clinton’s departure, the federal deficit had increased nearly sixfold, much of which was monetized by the Fed.
President BidenJoe BidenJan. 6 defendant asks to subpoena Trump as witness in On The Money trial – Breaking the January jobs boom Pics of the Week: Joe Biden, Punxsutawney Phil and Sarah Palin MORE shows no sign of wanting to urge Fed Chairman Jerome PowellJerome PowellBalance/Sustainability – Beijing pollution halved since last Olympics Biden Fed pick faces GOP fire over climate stances The Hill’s Morning Report – Dems juggle priorities in face of new challenge MORE follow in Volcker’s footsteps. Powell, like his two immediate predecessors, shows no sign of wanting to either. Nor does there seem to be much appetite among congressional leaders to go down this road. The COVID-19 pandemic took center stage about two years ago. Congress, backed by two administrations, has pumped trillions into it with a seemingly insatiable desire to increase spending even more – to hell with the inflationary consequences.
The Volcker playbook used to defeat inflation in the 1980s may not work this time around. Monetary policy has been out of control for far too long and the Fed has carved out such a big role for itself in financing the government’s huge budget deficit (in addition to supporting housing markets) that we might be hooked and not not be able to come out of the top – at least not without more pain than our current leaders are able to tolerate.
We have already criticized the policy of the Fed obsession with raising the inflation rate to 2% and called on the Fed to immediately begin normalizing/raising market interest rates. We observed that the Fed’s ultra-low interest rates “benefited primarily the wealthy, with weak income growth for middle- and low-income Americans, including retirees trying to live off their pensions.”
We then urged the Fed to “start shrinking… its bloated balance sheet and let the markets start working properly.” We noted that prior to recent years, the “Fed balance sheet had never reached $1 trillion,” but in 2017 “it is over $4 trillion, or nearly 25 % of total federal government debt”.
We also noted that “the Fed’s eight-year intervention in the markets [had] helped push asset prices to bubble-like levels, including the stock market, long-term bonds, at least some commercial real estate and other assets, [which are now] starting to show signs of stress… [while the] the incomes of a substantial and growing number of Americans are stable or falling, and still too many people who want to work cannot find decent jobs.
Ironically, we are today in the opposite situation where there are twice as many jobs available as there are unemployed people receiving government aid which does not oblige them to look for a job.
Our calls – and those of the former Volcker over the same period – for sound monetary and fiscal policies have gone unheeded. It is high time to put an end to reckless spending and the monetary policies that allow it.
William M. Isaac, former Chairman of the FDIC and Fifth Third Bancorp, is currently Chairman of Secura/Isaac Group and Blue SaaS Solutions.
richard Mr. Kovacevich is a retired Chairman and Chief Executive Officer of Wells Fargo & Company.