Trump created the Biden inflation

Recently we looked at this graph. I like the colors, so I'm showing it again:

Graph #1: Blue is the interest rate. Tan is inflation. Brown is blue behind tan.

The purpose of the graph is to compare inflation to the interest rate, because the interest rate is the tool used by the Federal Reserve to control inflation. Inflation increased for a whole year with the interest rate at zero, before the Fed raised the interest rate. 

The graph only shows a few years. It would be difficult to see what the graph shows, if it showed a lot of years. But I can show it a different way: I can subtract the blue data from the tan. I can subtract the interest rate from the rate of inflation. This way we get only one line on the graph, a line that shows how much the rate of inflation is above (or below) the interest rate. This graph:

Graph #2: The Rate of Inflation less the resistance provided by the Interest Rate

The graph is a hobbyist's version of the Federal Reserve "reaction function": It shows how hard the interest rate is pushing down on inflation.

The tallest spike on the graph, on the right, after the year 2020, shows the so-called Biden inflation. It shows that the rate of interest (which was then zero) did not push inflation down at all. The graph shows how very unusual policy was in response to that inflation. Policy was never more lenient. No spike ever went so high.

The early years on the graph, until 1980, show rapid increase at every recession. The biggest (highest and widest) of these spikes comes late in the 1974 recession. But even that spike is small, compared to the Biden spike.

After 1980 on the graph the plotted line goes low, because the interest rate went very high due to the policies of Paul Volcker. It takes a long time for the line to come back up to the zero level. This shows a long period when the interest rate was significantly more than the rate of inflation.

When we get to the Great Recession of 2008-09, interest rates drop to zero, so even 2 percent inflation puts the plotted line above the zero level.

Recovery from the Great Recession was lengthy and slow. Late in 2015 the Fed at last had enough confidence in the economy to start bringing the interest rate up from zero to something closer to normal. Then in 2020 the coronavirus hit, and the Fed dropped the interest rate back to zero.

A year later, in March 2021, Fed Chairman Jerome Powell warned that we would be getting some inflation, some "transitory" inflation he said. That same month, inflation started climbing. 

Interest rates remained at zero for a year after Powell's warning.

The interest rate started going up in March 2022. The tall spike on the graph peaked in March 2022, and started to come down as interest rates went up. Not a coincidence.

Interest rates at zero offer no resistance to inflation. As the first graph shows, when the Fed finally started raising the interest rate in March, inflation peaked three months later, in June. By July inflation was coming down. It was not difficult to stop the rise of inflation. There was no lengthy process involved. 

There was a whole year when the Fed chose to do nothing instead of raising the interest rate. So inflation went up and up. And then, because inflation went up so high, it took a year to come back down. But when they finally did decide to raise the interest rate, there was no difficulty getting inflation to go down instead of up.

So the question is: Why did the Fed refuse to raise the interest rate for a whole year? I blame Trump. This wasn't Biden's doing. It was election interference by Donald Trump. 

By the way, Biden supports Federal Reserve independence. Trump doesn't. Trump wants to stick his finger in there to make thing go his way. I think he already did that. I think Trump created the Biden inflation.

A Nixon Chronology

In "How Richard Nixon Pressured Arthur Burns: Evidence from the Nixon Tapes", Burton A. Abrams writes:

In Nixon’s 1962 (p. 309-310) book, Six Crises, he recounts that Arthur Burns called on him in March 1960 to warn him that the economy was likely to dip before the November election. Nixon writes that Burns “urged strongly that everything possible be done to avert this development. He urgently recommended that two steps be taken immediately: by loosening up on credit and, where justifiable, by increasing spending for national security.”

The idea was to improve the economy enough that Vice President Nixon would win the election and take his turn as President when Eisenhower's second term was up. But no steps were taken, and Nixon ultimately lost to John F. Kennedy. Abrams writes:

But when then-Vice President Nixon took this recommendation to the Eisenhower Cabinet, “there was strong sentiment against using the spending and credit powers of the Federal Government to affect the economy, unless and until conditions clearly indicated a major recession in prospect.”

This excerpt ends as they all should, with economic policy actions reserved for economic rather than political purposes. But then, this one wasn't Nixon's decision.

From the National Review article "(More) Politics At The Fed?", dated April 28, 2004, which Wikipedia's "Arthur F. Burns" article attributes (in footnote 13) to Bruce Bartlett:

Richard Nixon was acutely aware that Fed tightening in late 1959 brought on a recession that began in April 1960. As the nominee of the incumbent party, Nixon took the blame for slow growth. In his book Six Crises, he complained bitterly that the Fed had, in effect, thrown the election to John F. Kennedy, whose most potent campaign pledge was that he would get the economy moving again.

From the "Federal Reserve Chairman" section of Wikipedia's article on Arthur Burns:

Nixon later blamed his defeat in 1960 in part on Fed policy and the resulting tight credit conditions and slow growth.

The purpose of economic policy, in Nixon's view, was not to promote the general welfare, but to make things better for Nixon.

From Politico, 10 October 2020: "The Time Nixon’s Cronies Tried to Overturn a Presidential Election"

[Nixon's] top aides and the Republican Party, almost certainly with Nixon’s backing, waged a campaign to cast doubt on the outcome of the election, launching challenges to Kennedy’s victories in 11 states."

It didn't work, that time.

From "Nixonomics: How the Game Plan Went Wrong" by Rowland Evans, Jr. and Robert D. Novak, in Atlantic Monthly, July 1971:

During that difficult decade after his defeat in 1960, aides and close friends had heard Nixon say privately time after time that had President Eisenhower only taken his and Arthur Burns's advice early in 1960 and moved rapidly toward stimulating the economy, he -- not Jack Kennedy -- would have been elected President. The implication, not quite stated flatly, was that Richard Nixon, if he had the power, would never again go into a presidential election with the economy in a state of deflation.

From The Chennault Affair  at The LBJ Presidential Library

Fifty years ago this year, on Oct. 31, 1968, President Lyndon B. Johnson announced a halt to the bombing of North Vietnam in hopes of encouraging peace talks to end the Vietnam War. At the time, Johnson knew a secret. Some in the Nixon campaign were secretly communicating with the South Vietnamese Government in an effort to delay the opening of the peace talks. They offered the prospect of a better deal for South Vietnam if Nixon became president...

When he learned of the back-channel communications, President Johnson called the effort "treason."

From “This Is Treason” at The LBJ Telephone Tapes:

Three days before the 1968 presidential election, President Johnson contacted Senate Minority Leader Everett M. Dirksen [R–Illinois] to inform him that the White House had received hard evidence from the Federal Bureau of Investigation that the campaign of Republican presidential candidate Richard M. “Dick” Nixon was interfering with Johnson’s efforts to start peace talks to end the Vietnam War. In this call, Johnson referred to contacts between Nixon’s campaign and South Vietnamese president Nguyễn Văn Thiệu that urged Thiệu to thwart any such negotiations.

From the National Review:

When Nixon became president in 1968, he vowed that he would not let the Fed do it to him again. At his earliest opportunity, he appointed a trusted aide, Arthur Burns, to the chairmanship of the Federal Reserve. His job was to make sure that money and credit stayed easy through the 1972 election.

As Wikipedia has it:

After finally winning the presidential election of 1968, Nixon named Burns to the Fed Chair in 1970 with instructions to ensure easy access to credit when Nixon was running for reelection in 1972.

Later, when Burns resisted, negative press about him was planted in newspapers and, under the threat of legislation to dilute the Fed's influence, Burns and other Governors succumbed.

Abrams writes:

Evidence from the Nixon tapes, recently made available to researchers, clearly reveals that President Nixon pressured Burns, both directly and indirectly through Office of Management and Budget Director George Shultz, to engage in expansionary monetary policies prior to the 1972 election.

And then there was the election interference called "Watergate", with Nixon's people breaking into Democratic headquarters and getting caught in the act. I refer to the "Smoking Gun" tape section of Wikipedia's Nixon White House Tapes article:

Nixon announced his resignation on the evening of Thursday, August 8, 1974, effective as of noon the next day.

 

Finally, from "Trump and Nixon were pen pals in the ‘80s. Here are their letters" at Politico:

The last letter in the Trump-Nixon series is dated Jan. 26, 1993. Trump writes to Nixon not long after his 80th birthday to thank him for a birthday photo and says, “You are a great man, and I have had and always will have the utmost respect and admiration for you. I am proud to know you.”

Birds of a feather.

What if Trump really did create the Biden inflation?

If you were convinced that Trump had created the Biden inflation, what would you think? Was it worth it?

Trump would say of course it was worth it, because it made people angry and unlikely to vote for Biden.

But what about the Trump supporters? Was it "worth it" to them, to do this to Biden? I think most of them would say No, not worth it. 

Their lives changed. Like the rest of us, now they worry about having enough money to eat every day and pay the rent.

You don't do that to the economy. You don't create 9 percent inflation just so the other guy will lose the election. And you don't do that to people, whether they vote or not.

If Trump did delay the rise of interest rates and did really create the Biden inflation -- and if people knew of it -- Trump lovers and Trump haters would be on the same side, and Trump would lose the election. It would be a landslide loss.

If we don't find out about it and Trump wins the election, that doesn't make it okay.

Blue is the interest rate. Tan is inflation.

Inflation went above the 2 percent target early in 2021. The Federal Reserve waited a year before raising interest rates.

Graph #1: Blue is the interest rate. Tan is inflation. Brown is blue behind tan.

Why the year-long delay? Clearly, inflation continued to grow worse until they raised the interest rate. Clearly, inflation started to go down soon after the interest rate started to go up. Why the delay?

Was it election interference by Donald Trump?

Profits doubled since the pandemic

Graph #1: Nonfinancial Corporate Profits, Q1 2012 thru Q1 2024

Chairman Smith, second try

I got distracted yesterday and ended up at my favorite topic -- misunderstanding the economy. I'm back now, trying to focus on Chairman Jason Smith's statement on the Biden inflation. I have to begin by restating something I said, wow, almost a month ago now.

On the graph below, blue shows "Headline" CPI inflation and red shows "Core" CPI inflation. The two follow roughly the same path, but the blue line shows a lot more up-and-down motion than the red line does. The blue line, in other words, is more volatile.

Headline and Core inflation have their differences. But often when Headline inflation is rising, Core is rising also. And often when Headline is falling, so is Core. Sometimes the two follow the same path, but blue is much more jiggy than red. The jigginess is volatility. And then sometimes, Headline inflation shows a substantial drop or substantial increase, or both in turn, while Core makes nothing but small steps. Again, there is less volatility in Core than in Headline.

The red line is less "jiggy" because Core PCE is less "volatile". Core PCE is less volatile because they leave out the most volatile data -- food and energy. The stats people want to take some of the noise out of the numbers -- or at least that's what I would want to do -- so they omit that volatile data.

Graph #1:  Headline (blue) and Core (red) CPI Inflation since 1980

Before I made the graph and actually looked at it, I thought that Core PCE understated inflation. It does not. It understates changes in inflation. Usually, with Core PCE, the highs are less high and the lows are less low. Usually, but not infallibly, Core PCE smooths out the data. It's all there on the graph. All I had to do was look.

When inflation is in the news, it is because inflation is increasing. When inflation goes high, if we compare Core inflation to Headline on a graph, Core will often appear to understate the inflation, because the highs of Core inflation are less high than those of Headline inflation.

When inflation goes low, Headline inflation (the more volatile one) goes down rapidly. Core inflation (the less volatile one) goes down more slowly. At such times, Core inflation appears to overstate the inflation, because it understates the decline. 

As a rule, Core inflation understates the changes. The highs are less high, and the lows are less low.

//

Chairman Smith's statement ends with half a dozen bullet points under the heading "Key Background". The last of these bullet points is

• Inflation has become so deeply ingrained in the economy that when removing food and energy this month’s core inflation number of 5.3 percent is even higher than the topline figure.

I want to restate that, for clarity:

This month’s core inflation number of 5.3 percent is even higher than the headline number.

I am left with several considerations:

1. Smith mentions "removing food and energy" from the inflation data. This removal is done by the people who provide the stats. Food and energy prices are seen as more "volatile" that other prices. Removing these more volatile prices from the calculation leaves the less volatile "Core" data that the Chairman mentions. So the jiggies of Core inflation are smaller than the jiggies of Headline inflation.

2. I figure what Smith calls a "topline" number is the one that I've seen called the "headline" number. "Topline" sounds like a decent synonym. To avoid confusion, I prefer not to use synonyms. Except, of course, "jiggies" for "volatile".

3. I don't know what the Chairman means by "deeply ingrained" inflation. I suppose he means that inflation expectations are no longer anchored at 2 percent (as Jerome Powell might put it) and that people expect higher inflation. I don't know if the statement is true or not (and I won't guess), but it is how I interpret Chairman Smith's words.

4. Smith's statement doesn't say whether he's looking at PCE inflation or CPI. But the statement is dated 15 June 2023. By that date the May data was probably available for the Chairman's use. A FRED search for headline inflation turns up 6 datasets, including Core PCE and Core CPI:

• Core PCE (FRED PCEPILFE) for May 2023 is given as 4.68783 percent. That rounds to 4.7 percent, which does not match Smith's 5.3 percent.
• Core CPI (FRED CPILFESL) for May 2023 is given as 5.33225 percent, or 5.3 percent when rounded. This is the data Chairman Smith was looking at.

5. Smith says Core CPI was "even higher than" Headline CPI for May, 2023. Headline CPI (FRED CPIAUCSL) for that month was 4.12069 percent, which rounds to 4.1 percent. Core CPI for that month, at 5.3 percent, was certainly higher than Headline CPI. Chairman Smith is right about this. And I get a Milk-Bone for my painstaking effort here. 

You can have half, for reading these tedious notes.

//

Now that I know what Chairman Smith is saying, and the data he used, I can evaluate what he said. As I read him, he says

Inflation has become so deeply ingrained in the economy that the core inflation number is even higher than the headline figure.

His statement strongly suggests that in his view Core inflation is almost never higher than Headline inflation. That's what I used to think. As I said above: Before I made the graph and actually looked at it, I thought Core PCE understated inflation. If Core understated inflation, it would be unusual for Core to be higher than Headline. But Core doesn't understate inflation. It understates changes in inflation. 

It is not unusual for Core inflation to go below Headline. Core is below Headline when it understates rising inflation. 

It is not unusual for Core inflation to go above Headline. Core is above Headline when it understates falling inflation. It's all right there on the graph.

It is likely that we are most concerned about inflation when inflation is rising. So it is probably true that usually, when we look at inflation on a graph, we see Core understating the increase. But if we should look at a spot on the graph where inflation is falling, or falling rapidly, we would very likely see Core inflation understating the decline. We would very likely see Core inflation higher than Headline inflation because Core understates the decline.

I got the Excel data for Graph #1 above, and subtracted the Headline values from the Core values. I put the results on a bar graph. When Core is greater than Headline, the result is above zero. When Core is less than Headline, the result is below zero:

Graph #2: Core CPI is Greater than Headline CPI when the bars are Above Zero

This graph shows 534 months of data, from January 1980 to June 2024. 295 of those months are above zero (Core is greater than Headline). 239 of those months are below zero (Core is less than Headline). For this sample, Core inflation is more often above Headline inflation than below it. It happens during disinflation, when the rate of inflation is falling. Core goes above Headline when it understates falling inflation. It happens often.

I only figured this out a month ago. But I'm a hobbyist, studying the economy for my own satisfaction. It troubles me that Chairman Jason Smith of the House Ways and Means Committee doesn't know it.

On Graph #2, most of the 1980s show the blue bars above zero, meaning Core inflation was higher than Headline inflation. This was during the Volcker disinflation. Headline inflation came down rapidly. Core understated that decline every month from July 1981 to July 1987.

And again, every month from March 2023 to end-of-data show the blue bars above zero, meaning Core inflation was understating the decline of Headline CPI. I guess we'll have to call this the Biden disinflation.

Core inflation understates changes in Headline inflation. It's a pretty good rule. I just wish the Chairman of the House Ways and Means Committee understood it.

//

The Core inflation Smith mentions for May 2023 was higher than the Headline number. Chairman Smith seemed to think this most unusual. But it is often true that Core inflation is higher than Headline inflation.

Looking at the May 2023 data, Chairman Smith said Core inflation was higher than Headline inflation because inflation "has become so deeply ingrained" in us. Maybe he meant we expect inflation to be higher than 2 percent. Or maybe he just meant we expect inflation, always.

We do expect inflation, always, because we always have inflation. Granted, we don't always have 9 percent inflation. Usually it is much lower. But almost always, we have inflation.

Core inflation was higher than Headline in May 2023 -- in fact, higher in every month from March 2023 to the most recent data, June 2024 -- but not because inflation is "deeply ingrained". Core inflation has been running higher than Headline inflation because Headline inflation has been coming down. Headline inflation has been coming down, and Core has been understating that change. So Core inflation  has been higher than Headline inflation. It is not unusual, and it is not because inflation is "so deeply ingrained."

This is the Biden disinflation, remember. Inflation is coming down. and Core understates that change. So Core inflation has been running higher than Headline inflation. Just like the Volcker disinflation.

Chairman Smith

I'm looking at this article, dated 15 June 2023: "Chairman Smith: Biden’s Failed Economic Policies Forcing Fed to Choose Between Chronic Inflation or Risk of Recession"

Chairman Smith is Jason Smith, Chair of the House Ways and Means Committee. The Committee "shapes fiscal legislation". Here are the opening sentences of the article:

WASHINGTON, D.C. – Despite prices continuing to rise and inflation having increased 15.5 percent since President Biden took office, the Federal Reserve has been backed into a corner by the Biden Administration’s failed economic policies and forced to choose between pausing interest rate hikes or moving forward with another increase, which would further squeeze our weakened economy and risk recession.

Chairman Smith released the following statement in response to the Federal Reserve’s decision to pause interest rate hikes:

“President Biden’s reckless actions have put the Federal Reserve between a rock and hard place. The Fed is having to choose between hiking interest rates to combat the inflation crisis caused by reckless Democrat spending, risking the health of our overall economy, or pausing those rate hikes and hoping prices do not continue to spiral out of control...

That last paragraph pretty well describes what people seem to feel about the inflation of recent years: caused by reckless Democrat spending. Even Democrats feel that way, if we judge by the way the Dems on TV have failed to offer an equally strong alternative cause of what is commonly called "the Biden inflation".

I want to point out that Chairman Smith's phrase "caused by reckless Democrat spending" is an assumption. It seems strong because people accept that explanation. But the Chairman sticks the phrase into that sentence with no examination of relevant facts.

I want to point out also that failing to examine the relevant facts very often leads to misunderstanding the cause of the problem being examined. And misunderstanding the cause of the problem very often leads to solutions that do not work. 

Federal deficits are a case in point. Everyone thinks the federal deficits are caused by excessive government spending, and that this spending and those deficits are the reason our economy is in such bad shape. But federal spending and deficits are the result of our long economic decline, not the cause of it.

We have been struggling to overcome the federal deficits now for 50 years or more, with very little success. The reason for our lack of success is that we misunderstand the problem. It is not federal debt that slows the economy, but excessive private debt. Yet not once in 50 years have we tried to reduce private debt. Oh, sure, Biden has tried to forgive student debt, while Congress and the Court have undermined his efforts. But Biden's efforts address such a small part of private debt that even if he succeeded there would be no noticeable improvement in our economy. Anyway, Biden's plan for debt forgiveness is offered as a way to help people out, not as a way to improve the economy by reducing excessive private debt. Biden misses the point entirely.

Biden's plan for debt forgiveness is a way to help people cope with a bad economy. It isn't a plan to fix the economy. This tells me that Biden and his advisers misunderstand the economic problem. They fail to see that it is not government debt, but private debt that holds our economy down.

It was the same with Bill Clinton. Clinton spent the 1990s reducing federal deficits and finally, it is said, balanced the budget. Household debt picked up the slack, increasing more rapidly in the 1990s than before, and more rapidly yet in the 2000s -- until the 2008 financial crisis brought that all to a sudden halt.

That sudden halt was evidence of misunderstanding.

Before we decide to blame Democrats in general, along with Biden and Clinton, let us pause to remember that Bill Clinton and Newt Gingrich worked together to come up with the plan to balance the federal budget. The Democrats, under Clinton, adopted the Republican strategy. Unfortunately, the Republican strategy is based on a misunderstanding of the economic problem.

Democrats don't have a clue about the economy. Democratic policy is always and everywhere a way to help people cope with a bad economy. Coping is not the same as fixing.

Republicans do have a clue about the economy. They seem to want to return to the policies of the 1800s. Unfortunately, those policies no longer work. The economy changes. The economy evolves. Economic thought must evolve with it, or it is Fall-of-Rome for us.

This little piggy has bad policy.
That little piggy has none.

On measuring inflation

From CNBC, 28 June 2024:

The Fed focuses on the PCE inflation reading as opposed to the more widely followed consumer price index from the Labor Department’s Bureau of Labor Statistics. PCE is a broader inflation measure and accounts for changes in consumer behavior, such as substituting their purchases when prices rise.

While the central bank officially follows headline PCE, officials generally stress the core reading as a better gauge of longer-term inflation trends.

So now I know: Headline PCE is "preferred" but Core PCE is "better".

The CPI runs higher than the PCE measures, and the Fed doesn't like it at all.

That part about the PCE measures accounting for changes in consumer behavior, well isn't that special. It means when prices get so high that we can no longer afford to buy meat, they take meat out of the inflation calculation. This is the preferred way to keep inflation down.

Well, at least the irony is good.

An alternative to will-he-or-won't-he

I am so tired of Democrats in the news, wasting their days bickering about whether Biden should stay in or get out of the November election. It would be far more productive to directly attack Donald Trump.

Trump created the Biden inflation, just as Nixon created the early-1970s inflation, by convincing enough of the voting members of the FOMC to delay raising interest rates. Call it election interference.

Asked if he created the Biden inflation, Trump would of course deny it. But Trump lies. He lies all the time. And he lies to make himself look good. So I have no choice but to believe that the truth would make Trump look bad.

It was never Biden's inflation

 

"... the federal funds rate had never been so low with inflation so high at a point when the Fed began increasing rates."

Economic Brief No. 23-26, Federal Reserve Bank of Richmond

The Biden inflation was created by Donald Trump. All Trump had to do was delay the increase of interest rates after Jerome Powell's March 2021 warning that inflation was coming. 

I don't know how Trump did it, but I know he did it. Rates did not increase for a year after Powell's warning.

15 March 2020: Covid is in the air. The Federal Reserve ("the Fed") lowers the interest rate to zero.

4 March 2021: Fed Chairman Jerome Powell starts the clock. At the WSJ Jobs Summit, Powell said:

So right now inflation is running below 2%, and it's done so since the pandemic arrived. We do expect that as the economy reopens, and hopefully picks up, we will see inflation move up...

17 March 2021: At the press conference, Powell said pretty much the same:

Over the next few months, 12-month measures of inflation will move up... as the very low readings from March and April of last year fall out of the calculation. Beyond these base effects, we could also see upward pressure on prices if spending rebounds quickly as the economy continues to reopen, particularly if supply bottlenecks limit how quickly production can respond in the near term... The median inflation projection of FOMC participants is 2.4 percent this year and declines to 2 percent next year...

 15 April 2021: The Bureau of Labor Statistics reported:

Consumer prices increase 2.6 percent for the 12 months ending March 2021

Already in March of 2021, when Powell said he expected 2.4% inflation, he got more than expected. And all the rest of the inflation we've had since then has been above the 2.6% number.

March 2022: One year after Powell's inflation warning, the Fed begins raising the interest rate. They were a year too late. The interest rate was at zero. Low rates encourage inflation, and you can't go lower than zero. The one-year delay before raising rates was a highly effective way to create inflation and turn voters against Joe Biden.

June 2022: Just three months after the Fed finally began raising interest rates, inflation peaked. It took very little effort to break inflation's upward momentum. That's why I say printing money was not the direct cause of this inflation. The delay in raising interest rates was the cause.

It took a year for inflation to fall from 9 percent to 3 percent. Since June 2023 inflation has been stable at around 3.3 percent. In sum, it is now three years and four months since Jerome Powell warned us of inflation. It is two years and four months since the Fed decided to do something to fight the inflation. The one-year delay was a very effective strategy for turning voters against Joe Biden.

"Attack. Attack. Attack," wrote the New York Times. "Delay. Delay. Delay. Those two tactics have been at the center of Donald J. Trump’s favored strategy in court cases for much of his adult life..."

It worked with monetary policy, too: Attack and delay. Trump created the Biden inflation.

Download and share my 12-page PDF: "The Plan, Parts 1 and 2"

Coordinating for Prosperity

I watched the new John Oliver the other day, S11E15, June 16 2024, "Trump's Second Term". And I watched it a second time.

He ran a clip from a promotional video for Project 2025, a conservative manifesto I guess you'd call it. The line in the video that caught my ear was this:

"... to end Washington's bureaucracy and restore American prosperity..."

as if ending the bureaucracy will restore prosperity.

It was the word "prosperity" that got my attention. If you're talking prosperity, you're talking about economic performance. You're talking about the economy.

These Project 25 guys, they think they know how to fix the economy. But it sounds like they are still thinking what Reagan thought:

"Only by reducing the growth of government," said Ronald Reagan, "can we increase the growth of the economy."

After 40 years, these people have learned nothing. Reagan was wrong about why economic growth is slow.

Growth is slow because we have too much private debt.

 

Hey, we don't want the government to grow, right? We want the private sector to grow. That's where the money is, and the jobs and all. So the Project 25 guys want to "end Washington's bureaucracy" and "reduce the growth of government". But other people say government should spend more, to help the private sector grow. The two sides couldn't be more at odds.

As these other people often point out, Reagan grew the federal debt. But if you look at the debt of all US sectors, or of domestic non-financial sectors, or of the private non-financial sector, or of households alone, you'll notice that debt growth slowed in the mid-1980s, and slowed again around 2008 due to the financial crisis of that time. 

And if you look closely at household debt,

Graph #1: US Household Debt, 1946-1980

• you will see it slowing from 1946 to 1955 (the line curves downward), 
• running at a constant rate from 1955 to 1965 (the line runs straight), and
• slowing down from 1965 to 1970 (the line curves down relative to 1955-65).

So there was also a slowdown of debt growth in the mid-60s, at least for household debt.

It is all these slowings of debt growth that have slowed our economy. Slower growth of debt means a slower increase in borrowing and spending -- and a slower increase in spending is pretty closely tied to slower economic growth. 

Also, the lines on the FRED graphs only go up, which means our debt is always increasing. Maybe increasing faster sometimes and slower at other times, but always increasing. So debt service is also always increasing, at least in the big picture. Increases in debt service take money away from current spending, and therefore contribute to making our economy run more slowly.

I attribute the slow growth of our economy entirely to our accumulated debt. Most people ignore that line of thought. I will settle on a compromise if you will, and say accumulated debt and other factors have combined to slow our economy.

In the latter 1960s debt growth slowed, and in the mid-80s, and again after 2008. Three warnings, the economy has given us. Three warning we have ignored. We're not too bright, are we.

Speaking of which, the Project 25 guys seem to think that cutting back on government bureaucracy (and on government spending and government debt, I presume) will lead us to "prosperity". Their word: prosperity.

It's funny, you know, there is a connection between government debt and prosperity. But that connection does not require us to reduce government debt. Nor does it require us to increase government debt. It requires that private debt be low enough (relative to government debt) that private debt can grow fast enough that the economy grows at the rate that we want.

It requires that private debt be low enough (relative to government debt) that private debt can grow fast enough that the economy grows at the rate we want.

When I Google times of US prosperity, three periods come up: the "Roaring '20s", the 1947-1973 "golden age", and the "new economy" of the mid-to-latter 1990s. All three of those periods of prosperity were times when private debt was increasing relative to public debt:

The Tides of Prosperity (Click image for a less cluttered view)

The other times, when private debt was falling relative to public debt, are not times noted for prosperity.

It's not that we have to increase the federal debt or reduce it. It's not that we have to increase or reduce private debt. What we have to do is coordinate the two measures of debt.

When private debt gets too high, relative to public debt, prosperity cannot continue. The problem (as I see it) is that excessive financial cost hinders growth. I don't know how economists have missed that detail, but it seems they have.

When private debt gets low enough, prosperity is able to resume. When it does, it seems to become self-supporting. But the growth of private debt always out-paces the growth of our economy. And the federal government tends to use times of prosperity to minimize its financial obligations. So the private-to-public debt ratio rises until prosperity can no longer be sustained.

When private-sector financial cost becomes excessive, prosperity fades.

One thing that does not show up on the Prosperity graph is the growth of debt. Debt only increases. The private-to-public debt ratio sometimes rises and sometimes falls, but debt only increases.

Suppose that we want prosperity, but we also want the federal debt to be less than it is. Okay, then we have to do something to make private-sector debt less than it is. And private-sector debt has to decrease faster than federal debt, to bring the ratio down until prosperity resumes.

So we have to bring private-sector debt down. And that is difficult to do.

It is difficult to do because our policies promote the use of credit. Because of policy, the use of credit grows fast, unnaturally fast. And the use of credit creates debt, so our debt also grows unnaturally fast. We have to come up with policies that encourage and accelerate the repayment of private-sector debt.

We have policies that encourage credit use and the growth of debt. To offset the effect of those policies, we need policies that encourage the repayment of debt. Such policies will lead to prosperity and, if we do it right, to long-term prosperity. 

You heard it here first.

"Preferred" data

NOTE: The first part of this essay presents my view BEFORE I looked into this "headline" and "core" inflation stuff. I say a lot of things I am now unhappy with. If you read it, be sure to read the rest of the essay, where I revise my thinking.

I use the CPI as my inflation measure. I use it because I remember it from the 1970s, and because news reports today still use it. The Fed prefers a different measure -- the PCE price index, something that sounds like it is mostly based on "Personal Consumption Expenditure" prices. 

There is already PCE data on the volume of purchasing. Now we also have PCE data on prices. You should know not to mix them up. The PCE price data is an index, a "price index", so you can call it the PCE index and know that it shows a history of the price level, not the volume of purchasing.

What do they mean by "index"? I dunno. It hardly matters. I just make sure to include the word "index" when I search for the PCE price index data.

The Fed prefers to use the PCE price index in its work on inflation. I am not in the habit of using the PCE price index data. But for this essay it is relevant, so I spent half a day yesterday trying to find a news story that identifies the PCE index well enough that I can find the data. Everybody mentions the PCE price index and says the Fed prefers it, but nobody identifies the data.

I finally found something useful. From early in the 2021-2023 inflation, "Fed's inflation measure holds at record annual pace for fourth straight month" (October 29, 2021) at Fox Business, says:

The core personal consumption expenditures index, the Federal Reserve’s preferred inflation measure, continued to climb at the fastest annual pace on record in September.

They call it the "Core PCE index", and say it "excludes food and energy prices".

At this "record annual pace" article, the sidebar offers a link that sounds promising: "Inflation measure closely watched by the Fed rises 0.3% in April" (May 31, 2024). The "closely watched" article refers to a "closely watched" measure, and calls it the "personal consumption expenditures (PCE) index". They refer also to a second measure, the "core prices" measure, which strips out "the more volatile measurements of food and energy". This second measure is the one noted in the first article, the "record annual pace" article.

The "closely watched" article shows a graph of the two measures. The graph has the two measures labeled as "Core PCE" and "Annual PCE". They're both annual, actually (or what FRED calls "Percent Change from Year Ago"). In the paragraph below the graph, they say:

Both the core and headline numbers point to inflation that is still running well above the Fed’s preferred 2% target.

Here they call the one measure "headline" instead of "annual". They use the word "headline" twice in that paragraph. I'm going with that, with "headline", for the one that is not "core". The headline measure includes food and energy. The core measure excludes food and energy. I remember better if I write it down.

At the Bureau of Economic Analysis they figure the price level every month. The "closely watched" article has it as "0.3% in April". That's the monthly version (or FRED's "Percent Change" from the previous month). Then, going back a year, they take a dozen of the monthly numbers and put them together (with compounding, I figure, as banks do when interest accumulates) to get the "Percent Change from Year Ago" number. "Closely watched" has the percent change from year ago at 2.7%.

That same paragraph (below their graph) also says this:

While the Fed is targeting the PCE headline figure as it tries to wrestle consumer prices back to 2%, Chair Jerome Powell previously told reporters that core data is actually a better indicator of inflation.

They always say the one measure is better than the rest. But they never say what makes it better. Headline PCE is "preferred" to the CPI, but Core PCE is "better". These excruciatingly insignificant opinions are endlessly repeated in news stories on inflation. But neither those stories nor the Fed's talkers ever say why the Fed prefers the PCE to the CPI. And nobody ever says why they think Core PCE is better than the Headline PCE. 

But I think we know why. I think we know why Core PCE is "better". The primary job of the Fed is to keep inflation low. And Headline PCE runs lower than the CPI, so the Fed "prefers" it. But Core PCE often runs even lower than Headline PCE, so Core PCE is "better". The data that shows the least inflation is the data that best suits the Fed's purposes. 

Go ahead: call me a cynic.

Hey, inflation is what it is. Having different ways to measure it, and picking the lowest number, does nothing to reduce inflation. It does nothing to solve the problem.

Let the corrections begin!

What's the difference between Headline and Core PCE? Yeah, Core doesn't include food and energy, I remember. But what's the difference on a graph? What's the difference in the numbers? I thought I was going to be able to say this:

In an economy where prices tend to go up, most of the price changes are increases. Few are price declines. Stripping out volatile price changes, or even changes at random, will on average remove more price increases than declines, and will reduce the inflation reported by the modified dataset. The Core PCE measure understates inflation by design.

But I cannot say it. My graphs refuse to show it. I spent the whole afternoon trying to get them to show it, and my graphs refused. Why? I dunno. But I trust my graphs.

This graph compares the CPI to Headline and Core PCE. As a rule, CPI shows inflation higher than the other measures. No wonder the Federal Reserve doesn't like the CPI!

Figure N: Comparison of CPI (red), Headline PCE (blue), and Core PCE (black dots)
Click Graph to Enlarge. Click This Text for the Graph at FRED

On this graph, red shows the CPI, blue shows "Headline" PCE inflation, and the black dots show "Core" PCE inflation. When red and blue are going up, the black dots go up less. When red and blue are going down, the black dots go down less. The black dots move less because Core PCE is less "volatile". Core PCE is less volatile because they leave the volatile data out: Food and energy. Right. Who needs food and energy?

Time for a snack.

I get it now. Core PCE does not understate inflation. It understates changes in inflation. It works like the Hodrick-Prescott filter was thought to work before it fell out of favor: Core PCE smooths out the data. With Core PCE, the highs are less high and the lows are less low. It's right there on the graph.

When inflation is in the news, it is because the data is changing. It is going up. It is "volatile". At such times, if we look at it on a graph, "Core" inflation will always appear to understate the inflation, because the volatile data has been omitted.

It's just the opposite when inflation goes suddenly low. Headline inflation, the volatile one, goes down rapidly. Core inflation goes down only a little. At such times, Core inflation appears to overstate the inflation, for the same reason: the volatile data has been omitted.

I hope you can see why I like graphs so much!

After all the work was done, I had an idea. I went to FRED and searched their data for headline PCE. Just three results turned up:

• Real Personal Consumption Expenditures (PCEC96)
• Personal Consumption Expenditures: Chain-type Price Index (PCEPI)
• Personal Consumption Expenditures Excluding Food and Energy (Chain-Type Price Index) (PCEPILFE)

The first one is the volume-of-spending data. The other two are the headline and core PCE measures that I spent half a day looking for.

As an afterthought...

As I picture the process, they check prices once a month on a specific set of things people buy, goods and services say, and get the price of that "market basket" of stuff. After a few years, say, they have a set of prices, once price per month, for the same set of goods and services.

They can take those prices, or an "index" of those prices (which would follow the same path, on a graph), and figure "percent change" values to see how much prices changed, each month relative to the month before. That's when they get a small number like 0.3%.

Above, I said

Then, going back a year, they take a dozen of the monthly numbers and put them together (with compounding, I figure, as banks do when interest accumulates) to get the "Percent Change from Year Ago" number.

Yeah, they don't have to do that. They can just take the price (or the index number) from a year ago and figure how much the current price (or index number) has increased. This is when they get the bigger number, like 2.7%. This way there is no need to figure percent increase based on the monthly percentages. (That thought is what woke me up this morning, at 3 AM.)

The Plan: Part 2: The Biden Inflation: What Happened?

Download 12-page PDF: "The Plan, Parts 1 and 2" (June 29, 2024)

 

"The central bank's rate policies over the next several months could also have consequences for the presidential race."

MoneyWatch, 12 June 2024

We begin with a picture of the Biden inflation -- the blue line in the image below:

Figure 2.1: The Biden Inflation

The blue line shows the Consumer Price Index (CPI) since June 2019. On the right, the plot window extends out to 2025 so the rise-and-fall of the Biden inflation is more or less centered on the graph. Dots on the blue line indicate monthly values for the CPI. Bigger gaps between dots indicate bigger changes in the rate of inflation.

The gray line that runs low from early 2020 to early 2022, and then rises, is the Federal Funds rate, the interest rate used by the Federal Reserve to keep inflation under control. The Fed raises the interest rate to slow the economy when prices start increasing at an unacceptable rate. The Fed lowers the interest rate when it wants the economy to grow faster.

The red line at the 2% level on the graph shows the Fed's 2% inflation target. The target is the maximum "acceptable" level of inflation. The rate of inflation varies, of course, but until 2021 inflation varied around the 2% level and was not generally seen as a problem by the Fed or in the news.

I stopped the red line short to make the graph less cluttered. The Fed still loves its 2% target.

The dashed red line shows that since June 2023 the rate of inflation has "stabilized" at a 3.3% annual rate. That could change tomorrow; I don't predict. But the past 11 months -- and as of 12 June, the past 12 months -- show inflation running near the 3.3% rate consistently. That is not something we hear in news reports and such:

• CNN's "Facts First" of 14 May 2024 makes it sound as if inflation is still on the increase:

  "The March 2024 inflation rate ... was about 3.5%, up from about 3.2% the month prior."

• On 15 May 2024, Andrew Ross Sorkin showed up at Morning Joe to talk about inflation. The April data was just out. Sorkin said the monthly rate of inflation was 0.3%.[2]

  "This is only one month's data," Sorkin warned. "We should not assume that it represents a trend."

Sorkin is right, of course: We should not assume that one month's data represents a trend. And yet his statement is nonsense. It was Sorkin who gave us one month's data. The BLS comes out with a new number every month. If Sorkin looked at the numbers, instead of ignoring them, maybe he would see a trend. 

To me, the recent trend -- the dashed red line -- looks flat and stable at something over 3% annual. That's higher than the Fed's 2% target. But the monthly reports indicate that inflation has been stable for a year now. The monthly reports show that prices are consistently rising at a 3.3% annual rate, give or take.

A 3.3% annual rate of inflation is quite a lot. But it's less than the inflation that we had from April of 2021 to May of 2023. And it is not really a lot more than the Fed's 2% inflation target. In addition, it is less than the 4% target economists considered in the wake of the financial crisis of 2008.

NOTE 2: The 0.3% number sounds low because it represents change-from-previous-month data. It is more common to speak of the change-from-year-ago rate, which is equivalent to twelve monthly rates, compounded. For example, the 3.5% and 3.2% noted by First Facts are change-from year-ago values.

The Fed Was Behind the Curve on Raising Rates

To grasp the graph above, remember 3 dates: March 2020, March 2021, and March 2022.

March 2020: Covid. The Fed lowered the interest rate to zero because Covid was upon us.

March 2021: 12 months after the interest rate dropped to zero, Jerome Powell warned that inflation "moderately above 2 percent" was coming. Shockingly, after Powell's warning, interest rates remained at zero for 12 months more.

March 2022: One year after Powell warned of inflation, and with the annual rate of inflation at 8.5%, the Fed decided it was time to start raising the interest rate.

Consider that whole two-year period, from March of 2020 to March of 2022. We had two straight years with interest rates at zero, stimulating the economy out of a pandemic stupor. At the one-year mark, the Fed chairman warned that inflation was on the way. Then, a year after that warning, and with inflation at an outrageous 8.5%, the Fed at last decided it was time to begin raising interest rates to fight inflation.

That delay, that year-long delay after March of 2021, that is what allowed the rate of inflation to surge. It was this one bad policy decision, repeated over and over for a year, that was responsible for the Biden inflation.

 

Two more dates to remember: June 2022 and June 2023.

June 2022: The Fed finally decided to start raising interest rates in March 2022. Three months later, in June, inflation peaked. By July 2022, inflation was coming down. The economy did not wait. The economy responded within three months. It was the Fed that dragged its feet.

June 2023: Exactly one year after it peaked in June 2022, inflation hit a hard bottom at 3.0% in June of 2023. It bounced back up to 3.7% in August of that year, then settled down to around 3.3%. It is almost as if the economy found a "natural" inflation target. Maybe that sounds strange, but you can see it right there on the graph.

Since June 2023: The average of the 12 annual rates of inflation, from June 2023 to May 2024, is 3.3%. The highest of the 12 annual rates is 3.7%; the lowest is 3.0%. And Excel shows a linear trend line that slopes ever so slightly downward, suggesting that future rates will be lower. But I don't predict.

The Fed Is Behind the Curve on Lowering Rates

There is one more date worth noting.

August 2023: After inflation hit hard bottom in June 2023, the Fed continued to raise interest rates for two more months. Since August, the interest rate has remained unchanged at 5.33%. The most recent reading, for May 2024, is still unchanged at 5.33% -- high enough that inflation is trending ever so slightly down.

Low interest rates encourage economic growth but can stimulate inflation. Raising rates reduces inflation but can slow the economy. The unemployment graph at FRED shows gradual increase in 2023 and 2024. Unemployment is rising. That being the case, interest rates are probably too high.

It is difficult to see much detail in the FRED graph because of the Covid recession and 2020's monster increase in unemployment. To get a closer look, I brought the data since 2022 into Excel, and looked at the trend since January 2023:

Figure 2.2:  Detail View, The Rate of Unemployment, Jan 2022 to April 2024
Linear Trend Line based on Jan 2023 to April 2024
Trend Line extended to December 2024
The small red dots indicate the data used to calculate the trend.
Source Data: https://fred.stlouisfed.org/graph/?g=1oeJn
View the Excel File at DropBox

The detail view makes it clear: The rate of unemployment shows increase since early 2023. As I figured it, if the trend continued, the rate of unemployment would reach 4% in September 2024 (before the November elections) and likely go above 4.1% in December. But FRED came out with updated data before I came out with this post. FRED now shows unemployment already at 4% as of May 2024, after the 7 June data release. 

The one area where the Fed has not stalled economic progress is in letting unemployment go up. But of course that means it has dragged its feet when it comes to reducing interest rates to prevent recession.

MoneyWatch of 12 June 2024 reports:

The central bank's rate policies over the next several months could also have consequences for the presidential race. Though the unemployment rate is a low 4%, hiring is robust and consumers continue to spend, many voters have taken a dour view of the economy under President Joe Biden. In large part, that's because prices remain much higher than they were before the pandemic struck in 2020.

4% unemployment probably doesn't look "low" to the people who were laid off in May 2024.

It's good they bring up "consequences for the presidential race" but at this point we are late in the election interference game. It was the Fed's refusal to lift interest rates above zero for a year that allowed inflation to rise to 9%. That delay did tremendous damage to Biden's chances of re-election. And when you look at how the Fed dragged its feet for so long, without raising interest rates at all, it becomes obvious that the delay was almost certainly a scheme of planned election interference: It was the plan.

And now, when interest rates should be coming down, the Fed is dragging its feet again, keeping interest rates high while unemployment rises. At some point, it will be too late to prevent the approaching recession. Donald Trump has already predicted a "crash" and mentioned Herbert Hoover, as if he foresees something akin to another Great Depression. 

"A crash, however, seems increasingly unlikely", according to FOX2now. 

 

In April 2016 Trump predicted a "massive recession". In June 2019 he predicted "a market crash" if he didn't win the 2020 election; in August of that year he downplayed the odds of a recession on his own watch; and in October 2020 he said a Biden win "would unleash an economic disaster of epic proportions". In July 2022 he "warned that the nation could enter an economic depression due to the fiscal policies of President Joe Biden." In December 2023, Rolling Stone reported "Donald Trump warned that if he was not elected president in 2024, the U.S. would see its economy plunge into a “1929”-era depression." In January 2024 Trump said he didn't want to be another Herbert Hoover. And in February it was the market crash again: "If we lose, you’re gonna have a crash like you wouldn’t believe... the largest stock market crash we’ve ever had."

Maybe Trump got tired of being wrong, and decided to talk the Fed into doing some election interference: Just delay the interest rate hike, just delay it a little. And inflation went up-up-up. And then: Don't lower interest rates yet, inflation is still high at 3 percent. And unemployment is going up-up-up. And this is all standard policy stuff for the Federal Reserve, except the year-long delay that let inflation rise to 9 percent, and except for the current delay that has unemployment going up. 

First the inflation. Now the unemployment. The dual mandate is in shambles.This didn't happen by chance.

Don't let anyone get away with election interference. Don't let the Fed create a recession to fight 3% inflation. And don't forget that inflation, which peaked at 9% in June 2022, was created by the Fed holding interest rates at zero for 24 months -- a policy that can only be explained as the work of idiots, or the result of election interference.

Summary

In March of 2020, to support our economy and keep it growing, the Federal Reserve reduced interest rates in response to Covid. One year later, in March of 2021, Jerome Powell issued a warning: Inflation is coming!

Another year went by, and during that year the predicted inflation came to pass. In March of 2022, after a full year of rising inflation, the Fed at last started to raise interest rates. Within three months of that first increase, inflation peaked and started to fall. Within three months.

The economy has been responding in a timely manner; the Federal Reserve has not.

This is why the inflation was as bad as it turned out to be: because the Fed chose not to respond until inflation had been rising for a year. The Fed could have nipped inflation in the bud, but chose not to do so. The Fed failed to respond in a timely manner.

If that's not bad enough, we now have a follow-up problem: Interest rates remain high, even though inflation is far below the 9% peak. Once again, the economy responded promptly, and the Fed did not. Interest rates must come down so recession can be avoided. But the Fed appears prepared to wait until the recession is upon us in full force, and only then will it be willing to reduce interest rates.

Since the Biden inauguration, Fed policy has been nothing but election interference. It is as if the whole plan was designed and orchestrated by Donald Trump -- the delays before implementation of policy, the impending recession, the raging inflation, all of it. Did Trump orchestrate these economic problems?

Who benefited from the raging inflation? Not the woke nor LGBTQ. Not the Black nor Latino. Not women nor the left-handed. Not even the MAGA benefited by the inflation. And not Joe Biden. Only Donald Trump stands to gain by it.

THROWBACK: Part 2: The Biden Inflation: What Happened?

Hi. Art here.

I renamed this series of posts from "Throwback" to "The Plan".

I'm keeping the 'throwback" link for this message,

and moving the content to a new link. The new link is

https://econcrit.blogspot.com/2024/06/the-plan-part-2.html

If you share the link, please share the new one!

 

After a day or two, I will keep the above message and delete the content below.

 

 

"The central bank's rate policies over the next several months could also have consequences for the presidential race."

MoneyWatch, 12 June 2024

We begin with a picture of the Biden inflation -- the blue line in the image below:

Figure 2.1: The Biden Inflation

The blue line shows the Consumer Price Index (CPI) since June 2019. On the right, the plot window extends out to 2025 so the rise-and-fall of the Biden inflation is more or less centered on the graph. Dots on the blue line indicate monthly values for the CPI. Bigger gaps between dots indicate bigger changes in the rate of inflation.

The gray line that runs low from early 2020 to early 2022, and then rises, is the Federal Funds rate, the interest rate used by the Federal Reserve to keep inflation under control. The Fed raises the interest rate to slow the economy when prices start increasing at an unacceptable rate. The Fed lowers the interest rate when it wants the economy to grow faster.

The red line at the 2% level on the graph shows the Fed's 2% inflation target. The target is the maximum "acceptable" level of inflation. The rate of inflation varies, of course, but until 2021 inflation varied around the 2% level and was not seen as a problem by the Fed or in the news.

I stopped the red line short to make the graph less cluttered. The Fed still reveres the 2% target.

The dashed red line shows that since June 2023 the rate of inflation has "stabilized" at a 3.3% annual rate. That could change tomorrow; I don't predict. But the past 11 months -- and as of 12 June, the past 12 months -- show inflation running near the 3.3% rate consistently. That is not something we hear in news reports and such:

• CNN's "Facts First" of 14 May 2024 makes it sound as if inflation is still on the increase:

  The March 2024 inflation rate ... was about 3.5%, up from about 3.2% the month prior.

• On 15 May 2024, Andrew Ross Sorkin showed up at Morning Joe to talk about inflation. The April data was just out. Sorkin said the monthly rate of inflation was 0.3%.[2]

  "This is only one month's data," Sorkin warned. "We should not assume that it represents a trend."

Sorkin is right, of course: We should not assume that one month's data represents a trend. And yet his statement is nonsense. It was Sorkin who gave us one month's data. The BLS comes out with a new number every month. If Sorkin looked at the numbers instead of ignoring them, maybe he would see a trend. 

To me, the recent trend -- the dashed red line -- looks flat and stable at something over 3% annual. That's higher than the Fed's 2% target. But the monthly numbers indicate that inflation has been stable for a year now, with prices rising about 3.3% a month, give or take.

3.3% per month is a lot. But it's less than the inflation that we had from April of 2021 to May of 2023. And it is not really a lot more than 2%.

NOTE 2: The 0.3% number sounds low because it represents change-from-previous-month data. It is more common to speak of the change-from-year-ago rate, based on twelve monthly rates compounded. For example, the 3.5% and 3.2% noted by First Facts are change-from year-ago values.

On Raising Rates the Fed Was Behind the Curve

There are three dates to remember: March 2020, March 2021, and March 2022.

March 2020: Covid. The Fed lowered the interest rate to zero because Covid was upon us.

March 2021: Powell warned that inflation "moderately above 2 percent" was coming.

March 2022: One year after Powell warned of inflation, and with the annual rate of inflation at 8.5%, the Fed decided it was time to start raising the interest rate.

Consider that whole two-year period, from March of 2020 to March of 2022. We had two straight years with interest rates at zero, stimulating the economy out of a pandemic stupor. At the one-year mark, the Fed chairman warned that inflation was on the way. Then -- a year after that warning, and with inflation at an outrageous 8.5% -- the Fed decided it was time to begin raising interest rates, to fight inflation.

 

Two more dates to remember: June 2022 and June 2023.

June 2022: The Fed finally decided to start raising interest rates in March 2022. Three months later, in June 2022, inflation peaked. By July it was coming down. The economy did not wait. The economy responded within three months. It was the Fed that dragged its feet.

June 2023: Exactly one year after it peaked in June 2022, inflation hit a hard bottom at 3.0% in June of 2023. It bounced back up to 3.7% in August of that year, then settled down to around 3.3%. It is almost as if the economy found a "natural" inflation target, to go along with the natural rate of unemployment.

Since June 2023: The average of the 12 annual rates of inflation, from June 2023 to May 2024, is 3.3%. The highest of the 12 annual rates is 3.7%; the lowest is 3.0%. And Excel shows a linear trend line that slopes ever so slightly downward, suggesting that future rates will be lower. But I don't predict.

On Lowering Rates the Fed Is Behind the Curve

There is one more date worth noting.

August 2023: For two months after inflation hit the hard bottom in June 2023, the Fed continued to raise interest rates. Since August, the interest rate has remained unchanged at 5.33%. The most recent reading, for May 2024, is still unchanged at 5.33% -- high enough that inflation is trending ever so slightly down.

Low interest rates encourage economic growth but can stimulate inflation. Raising rates reduces inflation but can slow the economy. The unemployment graph at FRED shows gradual increase in 2023 and 2024. Unemployment is rising. That being the case, interest rates are probably too high.

It is difficult to see much detail in the FRED graph because of the Covid recession and 2020's monster increase in unemployment. To get a closer look, I brought the data since 2022 into Excel, and looked at the trend since January 2023:

Figure 2.2:  The Rate of Unemployment, Detail View, Jan 2022 to April 2024
Linear Trend Line based on Jan 2023 to April 2024
Trend Line extended to December 2024
The small red dots indicate the data used to calculate the trend.
Source Data: https://fred.stlouisfed.org/graph/?g=1oeJn
View the Excel File at DropBox

The detail view makes it clear: The rate of unemployment shows increase since early 2023. As I figured it, if the trend continued, the rate of unemployment would reach 4% in September 2024 (before the November elections) and likely go above 4.1% in December. But FRED came out with updated data before I came out with this post. FRED now shows unemployment already at 4% as of May 2024, after the 7 June data release. 

The one area where the Fed has not stalled economic progress is in letting unemployment go up. But of course that means it has dragged its feet when it comes to reducing interest rates to prevent recession.

MoneyWatch of 12 June 2024 reports:

The central bank's rate policies over the next several months could also have consequences for the presidential race. Though the unemployment rate is a low 4%, hiring is robust and consumers continue to spend, many voters have taken a dour view of the economy under President Joe Biden. In large part, that's because prices remain much higher than they were before the pandemic struck in 2020.

It's good they bring up "consequences for the presidential race" but at this point we are late in the election interference game. It was the Fed's refusal to raise interest rates above zero for a year that allowed inflation to rise to 9% and did such damage to Biden's shot at re-election. And when you look at how the Fed dragged its feet for so long before without raising interest rates at all, it becomes obvious that the delay was almost certainly a scheme of planned election interference.

Now, when interest rates should be coming down, the Fed is dragging its feet again as unemployment rises. At some point, it will be too late to prevent the approaching recession. Don't let this happen, and don't let anyone get away with it.

Summary

In March of 2020, to support our economy and keep it growing, the Federal Reserve reduced interest rates in response to Covid. One year later, in March of 2021, Jerome Powell issued a warning: Inflation is coming!

Another year passed, and during that year the predicted inflation came to pass. After a full year of rising inflation, the Fed at last started to raise interest rates in March of 2022. Within three months of that first increase, inflation peaked and started to fall. Within three months.

The economy has been responding in a timely manner; the Federal Reserve has not.

This is why the inflation was as bad as it turned out to be: because the Fed chose not to respond until inflation had been rising for a year. The Fed could have nipped inflation in the bud, but failed to do so. It failed to respond in a timely manner.

If that's not bad enough, we now have a follow-up problem: Interest rates are high, and they remain high even though inflation is far down from the peak. Once again, the economy has responded promptly, and the Fed has not.

The economy responded promptly, with inflation falling to 3% by June of 2023, and settling down since that time to a trend that is comparable to a 3.3% inflation target -- as the graph up top shows. But the Federal Reserve has not responded by reducing interest rates, not even once in the year since June 2023. The Fed is again dragging its feet.

Interest rates must come down so that a recession can be avoided. But the Fed appears to be prepared to wait until the recession is upon us in full force, and only then will it be ready to reduce interest rates.

Jerome Powell has said over and over again in the past year that the Fed is waiting for inflation to come all the way down to where it fits the 2% target. So far, inflation has continued to behave as if the target is 3.3%. But the Fed continues to hold out for 2%, so our economy continues to move toward recession.

The Plan: Part 1: Nixon, for Context

Download 12-page PDF: "The Plan, Parts 1 and 2" (June 29, 2024)

Rule of thumb: If a first-term president's term ends with a good, strong economy, he gets a second term. 

 

In "How Richard Nixon Pressured Arthur Burns: Evidence From the Nixon Tapes" Burton A. Abrams writes: 

In Nixon’s 1962 book, Six Crises, he recounts that Arthur Burns called on him in March 1960 to warn him that the economy was likely to dip before the November election. Nixon writes that Burns “urged strongly that everything possible be done to avert this development. He urgently recommended that two steps be taken immediately...”

Their idea was to improve the economy enough that Vice President Nixon would win the election and take his turn as President when Eisenhower's second term was up. Today this would be called "election interference." No steps were taken. 

Abrams continues:

Herbert Stein, who was a member of the Council of Economic Advisers from the start of Nixon’s [first] term and became chairman at the start of 1972, confirms that Nixon blamed a modest rise in the unemployment rate as one of the reasons he lost the 1960 election.

Thus our rule of thumb. Again, Abrams: 

Evidence from the Nixon tapes, now available to researchers, shows that President Richard Nixon pressured the chairman of the Federal Reserve, Arthur Burns, to engage in expansionary monetary policies in the run-up to the 1972 election.

Here, the election interference appears to be driven by Nixon. In their 1960 encounter, it seems to have been Burns's idea. At least, that's how Nixon remembered it for Six Crises.

In both cases, 1960 and 1972, the plan was to improve the economy enough to keep the incumbent (or his party) in power. There is something almost heartwarming about Nixon's interference, because in both cases the idea was to improve the economy. Both times, however, the interference was conceived as a way to assure the election (or re-election) of Nixon. Both times, Nixon was engaged in election interference intended to benefit Nixon. What happened to the economy was of secondary importance.

 

From "Nixonomics: How the Game Plan Went Wrong" by Rowland Evans, Jr. and Robert D. Novak, in Atlantic Monthly, July 1971^[1]:

During that difficult decade after his defeat in 1960, aides and close friends had heard Nixon say privately time after time that had President Eisenhower only taken his and Arthur Burns's advice early in 1960 and moved rapidly toward stimulating the economy, he -- not Jack Kennedy -- would have been elected President. The implication, not quite stated flatly, was that Richard Nixon, if he had the power, would never again go into a presidential election with the economy in a state of deflation.

Note 1: As reprinted in Stabilizing America's Economy (The Reference Shelf, Vol. 44 No. 2); edited by George A. Nikolaieff.

Evans and Novak show Nixon fully committed to election interference.

More dirt on Nixon, this from the "Federal Reserve Chairman" section of Wikipedia's article on Arthur Burns:

Nixon later blamed his defeat in 1960 in part on Fed policy and the resulting tight credit conditions and slow growth. After finally winning the presidential election of 1968, Nixon named Burns to the Fed Chair in 1970 with instructions to ensure easy access to credit when Nixon was running for reelection in 1972.

Later, when Burns resisted, negative press about him was planted in newspapers and, under the threat of legislation to dilute the Fed's influence, Burns and other Governors succumbed. Burns's relationship with Nixon was often rocky. Reflecting in his diary about a 1971 meeting attended by himself, Nixon, Treasury Secretary John Connally, the Chairman of the Council of Economic Advisors, and the Director of the Bureau of the Budget, Burns wrote:

The President looked wild; talked like a desperate man; fulminated with hatred against the press; took some of us to task – apparently meaning me or [chairman of the Council of Economic Advisors, Paul] McCracken or both – for not putting a gay and optimistic face on every piece of economic news, however discouraging; propounded the theory that confidence can be best generated by appearing confident and coloring, if need be, the news.

Wikipedia also includes a detail which seems to have been omitted from All the President's Men, the great Alan J. Pakula movie starring Robert Redford and Dustin Hoffman:

At the Watergate break-in of 1972, the burglars were found carrying $6300 of sequentially numbered $100 bills. The Fed lied to reporter Bob Woodward as to the source of the bills. Burns stonewalled Congressional investigations about them and issued a directive to all Fed offices prohibiting any discussion of the subject.

Watergate was just one more example of Nixon tampering with elections. That time, however, it did not include improving the economy. Watch the movie. Watch All the President's Men. 

Improving the economy as a form of election interference might seem by comparison a good idea. But when winning the election intrudes on economic policy, the economy will lose every time. And the incidental considerations, like lying to Bob Woodward, stonewalling Congress, and prohibiting discussion are but a Nixon Sampler of the damage created by such manipulations.

By the way, Richard Nixon and Donald Trump were pen pals.

 

 

In The Emerging Republican Majority (1969), Kevin P. Phillips identifies "the two principal architects" of the emerging Republican majority: Richard Nixon and John Mitchell. Among that emerged group, then, Nixon's behavior is apparently seen as worthy of emulation.

 

 

From Wikipedia's "Arthur F. Burns" article:

Burns served as Fed Chairman from February 1970 until the end of January 1978. He has a reputation of having been overly influenced by political pressure in his monetary policy decisions during his time as Chairman^[13]...

Footnote 13 reads:

Bartlett, Bruce (2004-04-28) "(More) Politics at the Fed?", National Review

There is this link:

http://www.nationalreview.com/articles/210446/more-politics-fed/bruce-bartlett

That link is broken. This one works:

https://www.nationalreview.com/2004/04/more-politics-fed-ridhancock/

The link turns up "(More) Politics At The Fed?" at National Review,  attributed to RIDHancock. (Bruce Bartlett is acknowledged in a note below the article. I will refer to the article as the Bartlett article.)

The Bartlett article says:

Nixon wanted to keep monetary policy loose in order to make sure the economy was robust going into the election. This led to the imposition of wage and price controls in August 1971.

That paragraph concludes: 

While everyone knew they would not work for long, the controls reduced inflation enough to keep monetary policy expansive through November 1972, which was all that mattered.

Now, that sounds like Nixon: Getting elected was be-all and end-all.

 

The Bartlett article (dated April 28, 2004) opens with this paragraph:

Rising inflation and interest rates, although still low by historical standards, are starting to get the attention of economists. It is becoming harder and harder to find an economist who doesn’t think the Federal Reserve needs to tighten monetary policy soon. However, Fed officials continue to say that unemployment, low capacity utilization, and strong productivity growth argue against tightening at this time. They may be right. But one cannot help but suspect that politics is also playing a role.

Once you see election interference in Nixon, it is easy to see elsewhere.

The article concludes with these thoughts:

The reason this [Nixon/Burns] history is relevant today [2004] is because the Fed is under increasing pressure to tighten monetary policy. While there is no evidence of White House pressure to keep monetary policy easy, one can assume that it will not be displeased if the Fed avoids tightening before Election Day.

Fed Chairman Alan Greenspan is well respected and no one believes he would knowingly use monetary policy for political purposes. However, the longer he waits to tighten monetary policy, the more people are going to ask whether politics is playing a role.

Once you see it in Nixon, you see it everywhere.

Bartlett (or RIDHancock) was aware of Nixon's willingness to use economic policy for political gain. Because of rising inflation and an unresponsive Fed, Bartlett grew concerned about election interference in the era of George W. Bush and Alan Greenspan. Not that there was evidence of interference. But inflation was rising, and interest rates were not. Bartlett saw the possibility of election interference, and he couldn't look away. 

I can respect that.

 

If you go looking, you can find tales of Nixon and Burns in many places. The other day I came upon three that I had not seen before. They broaden the picture substantially. Here is a quick look:

At AP News, 12 May 2022:

The chronically high inflation of the 1970s has been attributed, in part, to political pressure that led the Fed to forgo steep rate hikes under Presidents Lyndon Johnson and Richard Nixon.

At AP News, 31 May 2022:

In the early 1970s, President Richard Nixon pressured Fed chair Arthur Burns to lower interest rates to spur the economy before Nixon’s 1972 reelection campaign. Nixon’s interference is now widely seen as a key contributor to runaway inflation, which remained high until the early 1980s.

At Business Insider, 11 March 2024:

Richard Nixon pressured the Fed to keep interest rates low before his reelection, which helped cement the disastrous inflation of the 1970s. Ronald Reagan got the message to the central bank on his wants during his presidency, getting his chief of staff to tell then-Fed Chair Paul Volcker not to raise rates ahead of his reelection campaign. Volcker wasn't planning to raise rates anyway. In recent decades, however, most presidents shied away from saying much, until Trump.

Good article, that last. 

This all leaves me wondering about Donald Trump, Fed Chairman Jerome Powell, and the Biden inflation. 

I have no evidence that Trump and Powell talk the way Nixon and Burns talked. I have no evidence that Powell's March 2021 announcement (inflation is coming) was a coded message to administered-price setters to start raising prices. I have no evidence that the Fed's year-long delay before raising interest rates (March 2021 to March 2022) was somehow part of a Republican plan to take Biden down. I have no evidence. That doesn't mean it didn't happen.

Was the post-pandemic inflation created, weaponized, and used by Donald Trump in an attempt to defeat Joe Biden? Even if this question is spread only by rumor and innuendo, it could still have powerful consequences for the November election: The rumor shows the 2021-2024 inflation to be Trump's fault rather than Biden's. And the inflation has hit Trump supporters -- has hit us all, really -- hard in the pocketbook.