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 mid-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.

Anyway, 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 that 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 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

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.

 

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, and 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 28, 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 28, 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.

THROWBACK: Part 1: Nixon, for Context

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-1.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.

 

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.

 

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 sleazebag 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 Republicans 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.

"Will Prices Drop?" -- 2½ pages from Irving Fisher

From Google Books, "Read free of charge". (I looked up temporary inflation.)

If it doesn't show up, click your "reload" button.