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There Is a Painless Way to Fix Inflation

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aAt the September meeting Federal Reserve again We have significantly increased our target interest rate by three-quarters of a percent. Asked what he thought about the impact of the tightening on the economy as a whole, Fed Chairman Jerome Powell said, “I wish there was a painless way…there isn’t.” Actually, there is a painless way. Stop raising interest rates.

The Fed is not alone in fixing inflation.Inflation for most voters top of the list of concern. The Fed’s move represents a broad consensus that high inflation jeopardizes systemic stability, lowers living standards, crushes growth, and must be brought down even at the risk of triggering a recession. Chairman Jerome Powell Said In a speech at Jackson Hole at the end of August, he said, “While higher interest rates, slower growth and a weaker labor market will lower inflation, they will also cause some pain to households and businesses… The unfortunate cost of falling rates…but failure to restore price stability would mean far greater pain.”

The lack of doubt now evidenced by the Fed, most economists, and many businesses about what the problem is and what to do about it is a troubling sign of economic groupthink. you are making a mistake. It shouldn’t do what it did, it shouldn’t do what it’s doing now, it shouldn’t do what it’s supposed to do. Past mistakes cannot be undone, but future mistakes can be avoided. Groupthink is getting in the way.

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Of course, we have inflation right now in the United States and most countries around the world. There is also widespread agreement about the cause of this inflation. As the pandemic began to subside in spring 2021, government spending was too high. Excessive demand due to explosive pandemic lockdowns after the summer of 2021 has created bottlenecks in supply chains and demand for labor. Too much easy money from global central banks kept assets like stocks and homes on the rise. He had too little action from the Fed until it was too late. Russia’s invasion of Ukraine has caused oil and gas prices to more than double, along with wheat and corn.

Given such a brew, as longtime inflated hawkish Larry Summers, the only remedy currently Saidsharp rises in interest rates, and even a combination of spending cuts and tax increases that could force a recession.

The belief that this period of inflation is so dangerous and worth the price of crushing the most powerful job and wage markets of a generation is ingrained in nearly every central bank and every government in the developed world.

The sense that inflation destroys wealth and creates conditions for political instability is deep-seated.The determination to combat rising prices belief Unchecked inflation in Germany and elsewhere gave rise to fascism and toxic nationalism. I’m staying. The experience of “stagflation” in the 1970s and the inability of US policymakers to contain it led to the appointment of Paul Volcker as chairman of his Fed.he is sharp Raise the target interest rate It paved the way for the epic economic expansion of the 1980s and 1990s.

Today’s proposition is that inflation must come down, and this is the culmination of nearly a century of central bank legitimacy. But that leaves him with one important question. Is that true? Should central banks take aggressive action as it cools the labor market, weakens financial markets and could trigger a recession? Is the fact that it will get out of hand and take hold? And a strong economic recovery after the global response to the unprecedented pandemic should be shattered as waiting only delays the ultimate pain. do you want?

read more: We are headed for a stagflation crisis

If you listened to the Fed and many economists, you would hardly notice that the last two years have been a unique period. Too much money today, too much demand, too high wages is the norm, and you would think it would be a shame. it’s not. Not this time.

In 2020 and 2021, the U.S. government will injected Between the two emergency COVID-19 stimulus packages in April 2020 and March 2021 and the expansion of the Federal Reserve’s balance sheet, as much as $5 trillion was pumped into the system. This has been matched around the world by trillions of stimulus packages from other countries. For the first time in memory, that money went directly not only to corporations and banks, but also to individuals and small businesses to keep them afloat when economic activity and liquidity were frozen by government-mandated shutdowns. I was. Spending at that level surpassed the entire New Deal.

Then, at about the same time, the world opened up as a vaccine rolled out in the summer of 2021, and any vestiges of closure had largely cleared by this spring. All the current high inflation started at that point and was exacerbated by Russia’s invasion of Ukraine in late February.

Inflation as a statistical indicator increases prices year-on-year. This means that all high inflation so far this month has been linked to lower economic activity caused by the shutdown of the pandemic. Inflation will start rising in May 2021 and hit 5%. It climbed to 7.5% and then accelerated to 9.1% as the market began to anticipate the devastating energy impact of the Ukraine war. moderate 8.2% in the last few months.

From now on, inflation will be measured on a much higher standard. This means inflation has peaked regardless of what the Fed has done or will do in the future.It is well known that jobs increase when interest rates rise. considerable lag, it would take many months for the effects of these increases to manifest in changes in spending patterns and price declines. Inflation is naturally easing as the effects of the pandemic stimulus and the shock to commodity prices from the invasion of Ukraine wear off and supply he chains slowly overcome bottlenecks.

In the fall of 2021, the Fed and Chairman Powell appeared willing to see if inflation was “temporary,” with the rational view that the pandemic had created an extraordinary situation, leading to rate hikes. We were happy to postpone. But what proved to be temporary was the Fed’s willingness to wait and see. It then reversed course and returned to the comforting script above, but received praise from economists and policy makers who realized they had been wagging their fingers at the error of their approach. waited Too long to act and I have allowed the ridiculously proverbial inflation genie out of the bottle.

The Federal Reserve is now poised to force a recession (although the White House categorically deny Even after 6 months of GDP stagnation, we are now united.) A recession means wages have stopped rising astonishingly, with the bottom quarter getting the biggest wage gains in decades, and everything from stocks (and thus retirement benefits) to housing. We believe that deflating asset prices is the drug we need. .

Plus, given the sheer weirdness of what happened in the last two years, the Fed could have waited longer before going back to the old script. He could and should have seen how that stimulus was digested before he gave in to public pressure and raised interest rates sharply in a way that suggested he panicked about his reputation. was. Surely an economy with wages rising for the first time in decades, unemployment at a very low level and demand at a high level should not be stopped or reversed?

The Federal Reserve is headed by bureaucrats who serve only the public interest. That’s commendable, but they can still make devastating mistakes.Rather than bowing to critic pressure to capitalize on the old storyline, the Fed will maintain the course it maintained in fall 2021, We should have waited to see what the temporary inflation would look like in the face of two strange and unusual years.We should have seen the Russian invasion of Ukraine as just another temporary distorter in oil and commodity prices. rice field. The fear that high inflation would be embedded and that inflation expectations would turn into a self-fulfilling inflationary spiral should have been real fear. I should have waited to take action instead of burning down the village to save it.

It wasn’t.There are now signs of a sharp economic slowdown, and the housing market is not just cooling, it’s getting closer frozen, if asset prices fall and public opinion turns bleak, the Fed could at least stop its current actions, stop rates from rising, and slow its attempts to shrink its balance sheet. As is often the case, we can say that new data suggests a different course. In doing so, we will stave off a future in which unemployment soars, wages stagnant, retirement benefits lose their value, and vast numbers of people become even more economically unstable to satisfy unconcerned economic legitimacy. can be

Institutions and policy makers like to take action. Sometimes inaction is the best course of action. There is still time to stop the rush of advance. At least more damage can be avoided by pulling back from outdated scripts. Otherwise, it is possible to achieve low inflation at unacceptable costs.

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