From: "The Perils of Inflation" at TFTC

Will Durant: "From barbarism to civilization requires a century; from civilization to barbarism needs but a day."

https://www.tftc.io/monetary-inflation-history-rome-modern-lessons/

The Biden Inflation in Two Graphs

1. A Brief Timeline:

Key dates behind the Biden inflation

Friday, March 13, 2020:	313 days before the Biden inauguration
Wednesday, January 20, 2021:	The day of the Biden inauguration
Thursday, March 4, 2021:	43 days after the Biden inauguration
Thursday, March 17, 2022:	421 days after the Biden inauguration

For Jerome Powell's inflation warning of March 4 2021 see the Wall Street Journal Jobs Summit video.

2. Following Milton Friedman:

The Quantity of Money Relative to Output (MRTO) and the CPI

For relevant quotes from Milton Friedman on the Quantity of Money and the Lag see mine of October 12, 2024.

How unusual was the Federal Reserve response to the post-Covid inflation?

This graph at FRED: https://fred.stlouisfed.org/graph/?g=1x6Ir

It was most extremely unusual.

The graph shows the FedFunds rate, the interest rate set by the Fed to manage inflation and economic growth. Usually I just look at the raw data: it is down near zero bla bla bla, it is up near 5 percent yadda yadda yah. This time I'm looking at the "percent change from year ago" in the data -- the same measure people most often use when they talk about the rate of inflation.

The graph goes back to the start-of-data. At no other time was the interest-rate increase anywhere near the extreme reached during the post-Covid inflation -- during, you know, the so-called "Biden inflation". 

The bizarre FedFunds interest rate activity of the post-Covid period was due to 

• the long delay before the Fed began raising the interest rate; and
• the urgency that arose because of that year-long delay.

A less bizarre response would have begun after less delay and could therefore have been more gradual. The less bizarre response would have slowed the increase in prices sooner, and would have caused inflation to top out at a much lower level.

There is only one question that remains, far as I can see: Who was responsible for the delay?

On a good day, only half the profit goes to pay interest

Adam Smith in The Wealth of Nations:

The stock which is lent at interest is always considered as a capital by the lender.

Dirk Bezemer and Michael Hudson in "Finance is Not the Economy" quote J.S. Mill restating Smith and using Smith's view as an example of an all-too-common error:

All funds from which the possessor derives an income … are to him equivalent to capital. But to transfer hastily and inconsiderately to the general point of view, propositions which are true of the individual, has been a source of innumerable errors in political economy.

To transfer to the macroeconomic view, propositions which are true of the micro-economic, has been a source of innumerable errors in economic thought. Say's law comes to mind.

Adam Smith again:

Double interest is in Great Britain reckoned, what the merchants call, a good, moderate, reasonable profit; terms which I apprehend mean no more than a common and usual profit. In a country where the ordinary rate of clear profit is eight or ten per cent., it may be reasonable that one half of it should go to interest, wherever business is carried on with borrowed money.

Bezemer and Hudson:

Adam Smith assumed that the rate of profit would be twice the rate of interest, so that returns could be shared equally between the “silent backer” and entrepreneur. But as bonds and bank loans replace equity, interest expands as a proportion of cash flow. Nothing like this was anticipated during the high tide of industrial capitalism.

Profit and the Cost of Interest since 1947:

Profit (blue) and Interest Cost (red) for Corporate Business

This graph overstates profit and understates the cost of interest. Since the year 2000, half the assets of Nonfinancial Corporate Business are financial assets. So I have to figure that half of what they call profit is really interest income. The blue line should be much lower than what the graph shows.

Google's AI does not know the difference between "the public" and "the public sector"

The public is the people; the public sector is the government. Hey, I didn't make it up.

//

I was reading something where the guy used the phrase "outside financial wealth" without defining it. I think it means public sector debt held by someone in the private sector. But I dunno. 

So I googled what is "outside financial wealth". The AI Overview responded:

Outside financial wealth is a term used in modern money theory to describe government IOUs that are held by the public sector. The private sector holds government currency and bonds as net financial assets. The qualifier "outside" refers to the fact that the wealth comes from outside the private sector.

I believe the AI's first sentence should end with the words "government IOUs that are held by the private sector." Or just "held by the public". But I don't know for sure. That's why I looked it up. If I am right, then this is the second time in a week that the AI has found and paraphrased an error, and offered it to me as fact.

That's dangerous. I expect to be able to trust the AI more than I trust a human response, because the AI is a computer. But I cannot trust the AI Overview. The AI should have to verify every fact that it gathers for paraphrasing.

In a follow-up search, I said:

Verify: "Outside financial wealth is a term used in modern money theory to describe government IOUs that are held by the public sector."

Google Search responded promptly: 

No results found for Verify: "Outside financial wealth is a term used in modern money theory to describe government IOUs that are held by the public sector."

The AI didn't even participate in the response this time. That thing is irresponsible!

//

A separate search for MMT: "outside financial wealth" definition turned up a very good, fully italicized paragraph from L. Randall Wray.

I had it right.

It's not all bad news

Another look at US economic decline. I started with annual FRED data on Real GDP growth, inspected it, and added two trend lines -- one before the economic disaster of 2008-09 and one after:

The black line shows Real GDP, annual rate of growth. I omit the years before 1950, eliminating data from the Depression and World War Two.

The red trend line is based on the data for 1950-2000 and is displayed for the years 1950-2009.

The blue trend line is based on the data for 2010-2019 and is displayed for 2008-2023.

The 1950-2007 trend is visually indistinguishable from the 1950-2000 trend so I have excluded the years 2001-2007 from the trend calculation.

The 2010-2023 trend, excluding 2020 and 2021, is to my eye indistinguishable from the 2010-2019 trend as far back as the mid-1990s, so I have omitted the years after 2019 from the calculation.

The transition from down-trend to up-trend seems to occur during the Financial Crisis and Great Recession years, 2008-09.

The source data values are annual percentage rates. The trend lines are based on annual percentages. I read the trend values as percentage values.

The red trend runs from 4.326772247 (4.3%) in 1950 to 2.801315234 (2.8%) in 2009. The difference, spread over 59 increments, comes to a 0.026 percentage point trend loss per year or 0.26 per decade.

The blue trend runs from 2.02969697 (2.0%) in 2008 to 2.884242424 (2.9%) in 2023. The difference, spread over 15 increments, comes to a 0.057 percentage point trend gain per year or 0.57 per decade. The uptrend, so far, is rising twice as fast as the downtrend was falling. If it hadn't started from such a low level -- and if we didn't have the covid interruption -- the improvement would be obvious.

Assuming that the transition occurred in 2008-09, we can say that during the one year transition, trend growth fell by 0.7405 (0.74%) or, for comparison, just over 7.4% at the per-decade rate. That one-year trend-transition shock is equal to approximately 28.5 years of the 1950-2000 trend decline.

That's an interesting statistic, I think.

This is the first time I looked at the decline of GDP growth and noticed a trend of increase in the years since the financial crisis. So the news is not all bad. But in case you have forgotten how bad our economy was in 2008-09 and how long it took to show improvement, let me refresh your memory.

On August 6, 2016 Neil Irwin wrote: "The underlying reality of low growth will haunt whoever wins the White House in November..."

It was not until a couple of years later that the blue up-trend economy had at last improved enough that people were noticing:

• March 2018 at FiveThirtyEight: The Economy Is Keeping ‘Reluctant’ Trump Voters With Him.
• September 2018 at CNBC: Trump has set economic growth on fire. Here is how he did it.
• March 2019 at Politico: How Trump is on track for a 2020 landslide.

Those old headlines make it sound like Trump performed an economic miracle. He did not, as the blue trend line on the graph clearly shows. Economic growth was definitely coming back by 2013: compare the low that year to the low of 2011. But the financial crisis was so severe that it took a decade for the economy to get back to halfway decent. And now we have Mister Trump taking credit for that improvement. It's not the lies that bother me. It's his flawed understanding of the economy.

CNBC tried to explain why the economy improved, but they had no clue. Financial costs were down, that was really why we started to see vigor. But when the economy grows, debt grows faster, financial costs rise, and vigor fades. 

If policymakers were wise, they would stop creating policy to encourage the use of credit -- policy that drives debt upward at a rapid pace -- and start creating policy to accelerate the repayment of private-sector debt.

Here's why the economy was so good in the latter 1990s. Until covid interrupted the progress, the same was happening in the years after the 2008-09 financial crisis and recession, but more slowly because debt was so much higher.

In 2015-2016 I predicted the return of economic vigor. Here's a page of notes and quotes.

Friedman's warning

We have been forgetting the basic truth that the greatest threat to human freedom is the concentration of power, whether in the hands of government or anyone else. We have persuaded ourselves that it is safe to grant power, provided it is for good purposes.

  Milton Friedman in Free to Choose

The irony in this is that each side in the upcoming election sees the other as the problem identified by Friedman.

I can only repeat what I said before: This little piggy has bad policy, That little piggy has none.

PS: In The Road to Freedom, Hayek said "it is not the source but the limitation of power which prevents it from being arbitrary." 

Presidential immunity is NOT a limitation of power. Just the opposite.