Economics is to reality as astrology is to astronomy

This is what passes for “science” in the world of economics:

1. Raising interest rates increases the prices of everything. Therefore, raise interest rates to cure inflation.
2. Inflation happens when the economy grows too much (“overheated”). Therefore, to cure inflation, cause a recession or depression.

Any normal scientist would scoff at these beliefs, but economists are neither normal nor scientists.  They are believers. They are cultish followers of the standard thinking, as exhibited in the following article.

Inflation Won’t Go Away Until Congress Gets the Deficit Under Control
The Federal Reserve’s higher interest rates were supposed to trigger changes to fiscal policy. So far, that hasn’t happened.
ERIC BOEHM | 10.12.2023 12:30 PM

When a hypothesis doesn’t work, a scientist uses that information to develop a new hypothesis. In economics, when a hypothesis doesn’t work, the economist merely shrugs and continues to claim it works.

Before COVID, the economy was growing massively, with interest rates near zero, massive deficits, and without inflation? Then, during and after COVID, we had inflation, with interest rates at elevated levels.

Did the economists learn anything from these events?

Hmmm. Now, let me think. Why did we have no inflation before COVID and elevated inflation during and after COVID? What changed? Two things”

1. We had shortages of oil, food, shipping, computer chips, metals, lumber, labor, and almost every other important good and service
2. The Fed raised interest rates, instantly making every product more expensive.

What didn’t change?

1. The government still is spending massively with huge deficits.

Analyze the following graph:

The red line is Inflation, i.e., the year-to-year changes in prices. The blue line is the year-to-year changes in federal deficits.

If federal deficit spending caused inflation, you might expect these lines to be essentially parallel. If deficit spending did not cause inflation, you would expect the lines to look exactly like they look.

If you were a real scientist whose hypothesis was that federal deficit spending causes inflation, you immediately would discard that hypothesis and look for something else, perhaps something like this:

The green line is the year-to-year change in oil prices. Because oil is a fungible product, its price changes are based on supply changes. The price goes up when oil is scarce and goes down when oil is plentiful.

A real scientist would notice that although there seems to be no relationship between federal deficits and inflation, there is a robust relationship between oil scarcity and inflation.

Sadly, despite having massive data available, economists are not scientists. They are believers in a religion where dogma cannot be questioned.

Look at any inflation in world history, from Germany to Argentina to Zimbabwe, etc. Every inflation has been caused by scarcity of critical products or services, especially oil and food.

When supply cannot meet demand, prices go up. That’s basic.

What changed suddenly in 2020 to cause inflation to go from an average below 2% to zoom above 8%? Did demand suddenly rise in that year?

No, it was COVID-related scarcities. Like all inflations worldwide and throughout history, our current inflation is caused by shortages.

The current inflation rightfully could be called the “COVID inflation.” Because of COVID, we had shortages of oil (exacerbated by the Saudis), food, etc.

Inflation has fallen from the shocking highs reached last year, but the Federal Reserve’s efforts have not successfully returned the beast to its cage.

The problem is supply, so what does the Fed do? It tries to control demand.

Why? Because that is the only tool it has. Because Congress is so inept, it has tasked the Fed with preventing and curing inflation. But the Fed can’t do it.

Who can control inflation? Congress and the president can control inflation by controlling shortages.

1. Oil shortage: Financial rewards to oil companies to find more, pump more, hire more, and lower prices
2. Food shortage: Financial rewards to farmers, wholesalers, and retailers to reduce risk, reward growth and lower prices
3. Labor shortage: Eliminate FICA plus Medicare for All to make employment less expensive and to encourage higher net salaries.
4. Federal rewards to all other industries involved with scarce goods and services.

Do you notice a commonality among the solutions? They all require more deficit spending, not less.

If rising prices are to be fully tamed, it increasingly looks like Congress will have to get the deficit under control first.

Rather than attacking the cause of inflation, scarcity, Boehm attacks the cure for inflation, federal deficit spending to cure shortages.

Prices are up 3.7 percent over the past year, according to new inflation data released by the Bureau of Labor Statistics on Thursday morning. But so-called “core inflation,” which filters out the more volatile categories like food and fuel prices, rang in at 4.1 percent in the newest report.

Oil and food are the “core inflation” goods. Their shortages and resultant price increases cause most inflations, worldwide.

Typical for the pseudo-science of economics, economists filter out the two most common causes of inflation — oil and food scarcity — when measuring inflation.

It’s like a sports team filtering out points scored and allowed when analyzing the team’s won/lost record. Senseless.

To control inflation, the Federal Reserve raised interest rates at 11 consecutive meetings starting in March last year.

Every one of those interest rate increases raised the prices of goods and services. So, surprise! Inflation increased.

Since July, the central bank has left interest rates unchanged—the Fed’s current base rate is 5.5 percent, up from 3.25 percent a year ago.

Higher interest rates seem to have brought inflation down, but prices are rising nearly twice as fast as the Federal Reserve’s target of 2 percent annually.

No, oil, food, labor, metals, shipping, etc. scarcities moderated, so inflation moderated despite continuing interest rate increases.

We may have reached the limit of what the Federal Reserve can accomplish regarding taming inflation through monetary policy.

We reached that limit on the first day. Raising interest rates is inflationary. Period.

The federal government’s $33 trillion national debt and rising budget deficits are creating inflationary pressure in ways that remain underappreciated.

Economists ignore when the national “debt” and deficits rise without inflation (as often happens). But when we have inflation, the “debt” and deficit (which we have almost yearly) are blamed.

The big problem is that higher interest rates are helping curb inflation but worsening the federal government’s deficit.

No, the big problem is that while higher interest rates exacerbate inflation, the federal deficit can be directed toward inflation-curing programs, like Medicare for All and the elimination of FICA — both costs of doing business.

Writing at CNBC, Kelly Evans gets at the heart of this conundrum: “If we don’t quickly close the gap between spending and revenues, the debt load will keep growing, and interest costs will keep on rising, and the deficit will thus stay elevated, which grows the debt load even more.”

There is no debt load. It isn’t even debt. It’s deposits. They are not any sort of burden on the federal government or on the economy.

Those dollars are not owed by the federal government. The creditors all have been paid.

The deposits are owned by the depositors, who are paid off when deposits are returned to them.

So, what does that have to do with inflation?

As Reason contributor Veronique de Rugy, an economist at George Mason University, explains at National Review, there is an assumption built into monetary theory that says fiscal contraction—that is, smaller deficits—will necessarily follow a monetary contraction like the rising interest rates of the past year.

In other words, when central banks make it more expensive to borrow, they assume the politicians in charge of fiscal policy will respond by borrowing less. 

But that hasn’t happened, and there is little indication that it will in the near future.

This assumption relies on federal politicians not understanding that spending by our Monetarily Sovereign federal government is not dollar-constrained. The government has the infinite ability to create and spend dollars on interest or anything else.

For that reason, the federal government does not borrow dollars. It does not need to obtain dollars from anyone.

The assumption also relies on the federal government spending less, which is recessionary. It is the false belief that recession is the cure for inflation when there is zero supporting evidence.

The federal budget deficit nearly doubled in the fiscal year that ended on September 30, and bigger deficits are expected in the next few years—in significant part because of the feedback loop between higher interest rates and rising debt costs.

That is not a “feedback loop” it is a tautology. The feedback loop is: Raise interest rates -> inflation –> raise interest rates again –> still higher inflation endlessly.

To fully get inflation under control, de Rugy says the country must experience a period of negative wealth effects—that is, a decline in demand driven by consumers choosing to rein in spending due to declining wealth.

Without her word salad, she says, “The country must experience a recession.” The Libertarians believe recessions cure inflation. Have they never heard of “stagflation”?

That’s hardly something worth cheering for, but it might be the only way to truly tame inflation—and it probably won’t happen until Congress curbs spending, too.

“The only way to get a reduction of total demand, which will ultimately rein in inflation, is for the fiscal authority to implement fiscal consolidation, hence creating a negative wealth effect,” writes de Rugy. “Absent that fiscal contraction, inflation will rise.”

Increased demand did not cause the sudden inflation of 2020. Demand didn’t suddenly appear overnight. But COVID made shortages occur overnight.

Changes to monetary policy have brought inflation down from last year’s near-record highs. Still, the monetary theory upon which that policy is built assumes that fiscal policy will finish the job by reducing deficits.

Congress, so far, doesn’t seem interested in cooperating—so expect prices to keep rising at an annoyingly fast rate.

You have just read the Libertarians’ false excuse for their cure not working. They claim the government’s massive spending (which has been in force for many years) suddenly decided to cause our inflation.

In short, because bleeding the patient with leeches didn’t cure his anemia, it must be that the patient is eating too much good food. Such is the nonsense that permeates economics today.

Rodger Malcolm Mitchell
Monetary Sovereignty

Twitter: @rodgermitchell Search #monetarysovereignty
Facebook: Rodger Malcolm Mitchell

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The Sole Purpose of Government Is to Improve and Protect the Lives of the People.

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