Sunday, May 29, 2022
54 F

    Latest Posts

    United States Socialist Republic book by HG Goerner

    Inflation Is The Cruelest Tax

    By Mark Schniepp

    Inflation is an old, old disease. We’ve had thousands of years of experience with it. We know how to tame it.
    — Milton Friedman
    Milton is best known for his definitive declaration that inflation was always the cause of easy monetary and fiscal policy, or money supply growth and extraordinary spending by the government.
    The M3 classification of money is the broadest measure of an economy’s money supply. Here is the volume of M3 the moment before the pandemic hit and for the most recent month:
    February 2020:                                   $ 15.5 trillion
    January  2022:                                   $ 21.8 trillion
    percent change in 23 months:            42 percent
    There has never been growth of the money supply so rapid as in the last 2 years.  There has not been general consumer price level inflation as high as it currently is (March 2022) since December 1981.
    Certainly enough, much of the current inflation raging higher in the economy today is the result of unprecedented government spending together with accommodating monetary policy (to pay for that spending) that has kept interest rates near zero and M3 soaring.
    How do we resolve rising inflation?  That’s actually an easy answer. Stop spending. Congress and the Biden Administration are fueling inflation with spectacular spending bills that have poured trillions of dollars into the U.S. economy over the last 12 months. It began with the $1.9 trillion American Rescue Plan in March 2021 and continued with the $1.2 trillion Infrastructure Bill, and most recently, a $1.5 trillion funding program for climate change, public assistance, and additional infrastructure, passed in March 2022.
    And yet another new reconciliation bill may be coming in the next month or two. It is estimated to be another half trillion in spending focused on clean energy credits and climate change. But it is purported to be financed by tax increases on well-to-do households.
    Yes, we have a supply chain issue which is contributing to inflation but the root and branch cause of the surge is the rate at which the money supply has accommodated drunken sailor type spending by the U.S. federal government.  European Central Bank accommodation has been responsible for rising inflation in Europe as well, but the U.S. leads all developed countries in inflation.
    Inflation needs to be contained as soon as possible and this mandates swift Fed action to rise rates and entirely terminate their bond buying program that expands the money supply. They have been reluctant to take draconian measures, but the times have gotten more desperate than ever. Fuel prices in the Los Angeles region are 50 percent higher today than a year ago, and food prices have jumped 9 percent. 
    Inflation is akin to a new tax on goods we as consumers buy every day. Today, not only are gasoline prices substantially higher, but so are prices for meat, seafood, chicken, and bread (or anything made from wheat and corn). Car prices have soared along with furniture, appliances, and hotels.
    Getting serious about inflation also requires that Congress stop spending and at the same time, start imposing onerous tax increases to finance the profligate spending to date, rather than increasing M3.  Tax increases will be hard to swallow but the other choice is a meaningful cut in the federal budget and to rescind the current spending bills if possible. In view of what we’ve experienced, the current Congress does not have the will to do this. 
    While inflation by itself won’t push us into a recession, it will cause consumers to pull back on broader based spending of products and services.  As the Fed raises interest rates to stave off higher rates of inflation, business investment is cut back.  Consumers also curtail their purchase of housing and automobiles because both of these are typically debt-financed. Reduced spending and investment leave the economy fragile and vulnerable to the unknown trigger that can cause a recession.
    Consequently, what the federal government and Federal Reserve have done is to push the U.S. economy towards the brink of a potential recession later this year or next.  This is not a certainty but a looming risk. Desperate measures are needed for desperate times, and this is one of them.   
    Dr. Schniepp is Director of the California Economic Forecast in Santa Barbara. The company prepares forecasts and commentary on the regional economies of California.

    Get Headlines free  SUBSCRIPTION. Keep us publishing – DONATE

    - Advertisement -
    0 0 votes
    Article Rating
    Notify of
    Inline Feedbacks
    View all comments

    Latest Posts


    Don't Miss

    Stay in touch

    To be updated with all the latest news, offers and special announcements.