The Biden Inflation in Two Graphs

1. A Brief Timeline:

Key dates behind the Biden inflation

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

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

2. Following Milton Friedman:

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

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

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

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

It was most extremely unusual.

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

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

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

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

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

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

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

Adam Smith in The Wealth of Nations:

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

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

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

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

Adam Smith again:

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

Bezemer and Hudson:

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

Profit and the Cost of Interest since 1947:

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

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

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

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

//

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

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

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

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

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

In a follow-up search, I said:

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

Google Search responded promptly: 

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

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

//

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

I had it right.

It's not all bad news

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

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

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

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

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

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

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

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

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

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

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

That's an interesting statistic, I think.

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

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

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

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

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

If he understood the economy, he wouldn't have to lie.

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

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

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

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

Friedman's warning

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

  Milton Friedman in Free to Choose

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

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

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

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

River Birch

River birch trees are notable, not for their fall color, but for their perpetually peeling bark.

It seems river birch leaves fall as soon as they start turning yellow. What strikes me about them is the vein system, visible even in the green leaves. This one caught my eye while I was out with the dogs.

Milton Friedman and the Biden Inflation

Blue:  The Quantity of Money Relative to Output
Red:  The Consumer Price Index
This Graph at FRED:  https://fred.stlouisfed.org/graph/?g=1vFil

From Tim Doescher at Heritage:

Milton Friedman famously said: “Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”

From W. Lee Hoskins at Cato:

Friedman (1960) provided the well-known argument that attempting to stabilize the price level directly might in practice destabilize the economy because of the long and variable lag with which monetary policy acts on prices.

So I'm not quite sure how it got to be the Biden inflation.

From trumpwhitehouse.archives.gov

The opening sentence at this link:

"Before the Coronavirus spread from China across the globe, President Trump helped America build its strongest economy in history."

Not even close.

The Ptize Lecture

https://www.nobelprize.org/uploads/2018/06/lucas-lecture.pdf

Covid and Profit

This graph shows corporate profits in red, and in blue the same blue data we saw yesterday, the interest rate that the Fed uses to fight inflation. Last time the graph started in 2019. This time it starts in 2012:

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

Corporate profits ran pretty flat between 2012 and Covid -- the right-side scale shows profit running between 2000 and 2500 billion. Immediately after the Covid recession, profits jumped to almost 3000 billion. But not quite as immediately as the graph makes it seem. 

The Covid recession (gray bar) lasted through February and March 2020. It was over by April Fools' day. The red line -- corporate profit -- reaches a low at that point, which appears to be the first of April. But the data at that low point is for the second quarter of 2020, which includes April, May, and June. The total profit over those three months was low, and no doubt they knew it would be low, but they did not have that number until the end of June. 

The data is plotted at the start of April. There is a three-month lag that we do not see. (By the way, you can check dates and values by hovering over the graph at FRED.)

After that second-quarter low, corporate profit shot up to almost 3000 billion in the third quarter of 2020. It dropped just a little in the last three months of the year. And then it shot up again for six months, reaching almost 3500 billion dollars in the second quarter of 2021.

Now, back up. Come halfway down that last increase, to the dot on the high side of 3000 billion. This dot represents the data for the first quarter of 2021. The first quarter of 2021 ended with March. That March was the month when Jerome Powell warned us that inflation was on the way. At that point, near the end of the first quarter of 2021, we had not yet been hit by that inflation. This means that the profit increase from April 1, 2020 to mid-March, 2021 -- an increase of almost 1000 billion dollars -- was not caused by the inflation, surprising as that may be.

Apparently, it was mostly caused by the Covid shock putting people out of work. Compensation of employees fell by over 700 billion dollars in the second quarter of 2020 alone.

When I first noticed that profits increased in the Covid years, I figured it was because of the inflation. But profits shot up before inflation took off. When Covid lockdowns put people out of work, labor costs fell, so profit went up. Today, of course, the employment level is as high as it was before Covid, and more or less back to normal. A lot of people are working again -- and presumably getting paid -- but corporate profit did not go back down. How can that be?

The inflation, maybe? Inflation did not cause the sharp increase in profit in the first Covid year. But inflation did sustain high profits and boost them in the later Covid years. The data appears to support this view.

Thus the argument can be made that "corporate greed" was in part responsible for the inflation. Yes, the Q-of-M increased like crazy, and by keeping interest rates at zero the Fed put up no resistance to inflation. But the money had to go somewhere. Before Powell's inflation warning, the money went to profits instead of to employee compensation. When people started going back to work, the money to sustain high profits started coming from price increases. From the inflation.

This Graph at FRED: https://fred.stlouisfed.org/graph/?g=1v73y

The red line is faint on this graph, but it still shows corporate profit (using the same data as the first graph). The blue line again shows the interest rate the Federal Reserve uses to fight inflation. The black line on this graph is new. It shows inflation as measured by the Consumer Price Index (CPI).

The gray circle on the black line, the faint blue circle below it (on the blue line), and the faint gray vertical line through those two circles all identify the location of March 2021 on the graph. As the gray circle shows, until March 2021 inflation was still low, still close to the Fed's 2 percent inflation target. But, as you can see, corporate profit was shooting up like crazy.

After March 2021, inflation and rising prices sustained high profit and drove it higher. Unemployment was nearing 6 percent and more or less back to normal. Labor costs were up because more people were working. It was no longer the labor-cost savings that boosted corporate profits. It was inflation. That sounds like corporate greed to me. Corporate decency would have been better.

Hm, I wonder if the high cost of interest (at 4 percent and above, say) induced corporations to keep raising their prices. Now that the blue line is starting to come down, maybe we will see profit level off. And maybe the rate of inflation will drop back down, closer to that 2 percent target. Something to keep an eye on.

Always waiting too long

Interest rate data in the graph below. Red and green are 5-year rates. Blue is the Federal Reserve policy rate:

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

Everything fell in March 2020, because of Covid.

The five-year rates were increasing by October 2020. The Federal Funds rate didn't begin to increase until March 2022.

The increase of the five-year rates started decelerating by May of 2022. The Federal Funds rate did not begin to decelerate until December of that year.

The five-year rates started falling after October 2022, and after October 2023, and after April of 2024. The Federal Funds rate did not fall, at all, between March 2020 and September 2024.

The five-year rates were constantly exploring their options: going up a little, testing the water, going down a little, and down a little more, changing their mind and rising, always testing the water. The Federal Funds rate fell to zero and sat there for two years. When it started rising, it rose continuously for a year and a half. And when it peaked, it stayed at the peak rate for a full year.

Sure, the Fed has a different objective than private investors. But when you refuse to change your interest rate decisions for long periods of time, you paint yourself into a corner. And when you finally do decide to change the rate, you suddenly discover you are behind the curve and you need to make oversized changes rather than small, cautious, gentle ones.

It's not like the Fed is new at this. It's like somebody convinced them to create some crazy 9 percent inflation, and follow up with a recession. That's what it's like.

Unemployment before and after Covid

Yesterday we looked at the trend of unemployment based on the Obama years (but after the Great Recession), and based on the Trump years (but before the Covid shock). I wanted to show a third graph, with the trend based on the Biden years after the Covid shock, when unemployment appears to have returned to its normal behavior. But that graph didn't show anything useful. I don't know why.

Maybe there was not enough data between July 2022 and August 2024 to make a trend line that looked reasonable in the pre-Covid years. Or maybe the Fed's high interest rate started pushing unemployment up in early 2023 (as I said before) and put a "kink" in the trend line. And maybe the kink shows up as a massive mismatch between trend and data in those pre-Covid years. I dunno. But I couldn't use that graph.

So I went back to FRED's unemployment data. In red, I underlined two years of data before the Covid shock, and two years after it. I want to compare the two underlined periods:

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

By eye -- my eye, at least -- the post-Covid increase seems to be accelerating upward noticeably faster than the pre-Covid decrease was slowing. As I said a couple of weeks ago:

To my eye, unemployment started going up around January 2023 - more than a year and a half ago, now -- and started accelerating around January 2024. They waited too long before bringing rates down.

It still looks like that, to me. But I don't trust my eye more than I trust arithmetic. So in Excel, I sorted the March-2018-to-Feb-2020 data in reverse-date order, turning the decrease into an increase. Then I showed the two periods starting together on a graph. Here is the result:

Comparison of Pre-Covid data (reversed) and Post-Covid data

There's not much difference between the two lines. They start at 3.5 percent unemployment, both of them, and after two years they end up only 0.2 percent apart. On this graph, I don't see the recent accelerating increase of unemployment that I thought I saw on the underlined FRED graph.

But after sleeping on it, I notice that the left half of the graph shows the blue line mostly at-or-below the orange line. And the last seven or eight months show the blue line mostly at-or-above the orange. So the difference between the two lines may be more than the 0.2 percent difference we see between the August 2024 and March 2018 data.

I could take the blue line and move it up by 0.1, more or less centering the blue line on the orange in that first year. This might even be a reasonable manipulation of the data, given that I want to see the differences that arise in the second year.

Here's how the graph looks with the blue line values increased by 0.1:

By eye, at least, the blue line is roughly centered on the orange through 2022 and 2023. In December 2023 and January 2024, the two lines are identical at 3.8 percent unemployment. For the rest of 2024, blue gains on orange: The post-Covid increase in unemployment outpaces the (chronologically reversed) pre-Covid decline. This is the acceleration I was looking for! The arithmetic confirms the eye.

 

Is it reasonable to take a two-year decline in unemployment, put it in reverse chronological order, and compare it to a two-year increase? I dunno. It seemed reasonable, at the time.

Are we gonna have a recession? I dunno. I expect one, yeah, but I don't predict.

Does it matter if we get a recession when we could have avoided one?  Yes, definitely.

Does this post show that the Fed should have started lowering the interest rate during or before January 2024? Yes, definitely.

Recent Trends in Unemployment

First, the downtrend of unemployment after the financial crisis and the 2008-09 recession:

The gray line shows the rate of unemployment since January 2007. On today's graphs, the gray shows the FRED data from

https://fred.stlouisfed.org/series/UNRATE

The blue line on this graph shows that data for the Obama years, beginning about when the unemployment rate started falling. The red line, here a "linear" or straight-line trend, was calculated by Excel from the data indicated in blue on the graph. (For both graphs today, the blue line indicates the data Excel used to calculate the trend line.)

The change in unemployment, from  more or less above the trend line in 2012-2013 to more or less below the trend line in 2014-2015, is probably an indication that the economy was at last starting to do better by 2014. The change in the blue line to mostly horizontal in 2016, was due to other changes in the economy. Off the top of my head I'd say the Federal Reserve, increasing interest rates in late 2015 and after was the  cause of that relative-to-trend increase. (The Fed kept the interest rate at zero from late 2008 until December 2015.)

Not a linear trend, this time. Excel calls this one a second order polynomial.

I find it interesting that this Trump-years-sans-Covid trend line fits so well with the Obama-years data back to 2013 or before -- and also runs close to the gray data since early 2022. This suggests to me that, Covid shock aside, the rate of unemployment was all very much part of a pattern that had little or nothing to do with Donald Trump.

I note that the monthly unemployment rate hung in there at 3.6 percent from October 2019 to January 2020, then fell to 3.5 percent before skyrocketing in March as Covid made itself known. I figure the Covid shock to unemployment came to an end in March 2022 when unemployment again reached 3.6 percent.

That same month, March 2022, also happens to be when the Fed started raising the interest rate to fight the inflation that Jerome Powell had warned us about a year before, in March 2021. So it looks like the Fed was waiting for employment to get back to normal before they started raising interest rates. And in fact that is what they said they would do. In the transcript of the March 17, 2021 press conference, Powell said:

With regard to interest rates, we continue to expect it will be appropriate to maintain the current 0 to ¼ percent target range for the federal funds rate until labor market conditions have reached levels consistent with the Committee’s assessment of maximum employment...

(My bold.) But I'm not sure that decision was sound. Inflation went absolutely crazy between March 2021 and March 2022, while interest rates remained at zero. I think the Fed's "decision" was an excuse that Powell used because Trump had manipulated the Fed into agreeing to delay interest rate increases for a year, to let inflation go up to make Biden look bad. You know, election interference.