Best of Dennis – Inflation And Common Sense

Best of Dennis…

Dennis is taking a short break but will be back next week. In the meantime, we’re revisiting this August 8, 2024, article on the fundamental mechanics of inflation. With the Federal Reserve meeting this week to address persistent price volatility, this straightforward logic on protecting purchasing power is a timely reminder of how to stay grounded.

 

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Inflation continues to rise. The incumbent party tells us all is well. The opposition screams the opposite, throw the bums out, and we’ll fix it. Both are lying.

Congress passed the “Inflation Reduction Act.” Armstrong Economics explains:

“The Inflation Reduction Act (IRA) has only increased inflation. Secretary of the Treasury Janet L. Yellen…admitted the truth – the act’s entire premise is to push the climate change agenda forward.”

Ms. Yellen also lies. Subscriber Duane S. sent me this video saying, “If you think the IRA was for reducing inflation, better think again!” It’s vein-popping….

Maddening!

I’m fed up with highfalutin’ political double talk, special interest payoffs, fancy theories and band-aid remedies! I’m not an economist, I’m a senior citizen with an advanced degree from the School of Hard Knocks.

I taught problem-solving, which is really just common sense. If you don’t fix the cause, you don’t fix the problem!

The first challenge is determining the real, underlying problem, causes and effects.

An example…. Remember the days of “Friendly Bob Adams” flooding the airways with, “Consolidate all your debts into one small monthly payment!”

A loan agent friend explained many would consolidate their payments, then immediately go on a spending binge, soon to return for another debt consolidation loan. He made a lot of money originating loans, quickly selling them, and passing on the risk.

Reducing the monthly payments didn’t solve the underlying problem – an undisciplined consumer unable to live within their means.

Inflation is an effect of a much bigger problem. If you don’t fix the cause, the process will continue.

History

I looked for a common-sense way to understand what causes our inflation and possible ways to fix it.

I began with November 12, 1999; the day the Glass-Steagall Act was repealed.

The Cato Institute explains:

“The original Glass-Steagall Act (1933)…imposed the complete separation of commercial and investment banking.

…. Investment banks were no longer permitted to have any connection with commercial banks, such as overlapping directorships or common ownership.

…. Congress…(felt) commercial banks were suffering losses from extreme equity market volatility, and that bank credit should therefore not be used for speculation, but rather restricted to industry, commerce, and agriculture.”

The 1999 repeal set off a wave of big banks gobbling up smaller banks, merging with brokerage firms, creating casino banks, deemed, “Too Big To Fail!”

The Bank Policy Institute shows us the level of concentration:

The top ten banks now control 60% of total banking assets.

The behemoth casino banks went full throttle. Like “Friendly Bob Adams,” they lent trillions to high-risk borrowers, adding big origination fees to the loans. “No money down” and/or lending more than the value of the loan collateral, made no difference.

They didn’t care about the credit risk. They packaged the loans, with unrealistic credit ratings, and sold them through their brokerage operation to unsuspecting investors. The taxpayers, through Fannie Mae and Freddie Mac, bought many of them.

Famed investor, Michael Burry was ridiculed when he warned investors massive defaults were coming. Less than a decade after Glass-Steagall was repealed we had the 2008 banking crisis.

Choices and consequences

The blue line on the graph is the Fed funds rate and the red line is inflation. Leading up to 2008, inflation was around 3%, and interest rates around 5%. In 2008, they both dropped.

Congress introduced the Emergency Economic Stabilization Act, bailing out the “too big to fail” casino banks; despite massive public opposition. On September 29, the bill failed in the House of Representatives. Immense pressure was put on dissenters and the bill narrowly passed a few days later.

Overnight the Fed dropped to negative (inflation-adjusted) interest rates; holding them there for over a decade. The unpopular, knee-jerk reaction bailed out the banks. The Fed called the disastrous side effects on mainstream Americans, “collateral damage.”

While both political parties touted reinstating Glass-Steagall; it didn’t happen. It’s estimated that lobbyists spent $300 million getting Glass-Steagall repealed. I wonder how much is being spent to keep it from being reinstated. The “too big to fail” casino banks are politically well-represented.

Adverse consequences 2.0

The cheap money set off an unprecedented public and private sector borrowing spree. Consumer debt has more than doubled since 2008. Government borrowing/spending skyrocketed; government debt increased four-fold.

Unwilling to allow free market interest rates, the Fed created $9 trillion out of thin air (Fedspeak: “monetized”), to enable government spendaholics. The Fed’s balance sheet increases 9-fold.

Investopedia explains:

“An increase in the supply of money is the root of inflation, though this can play out through different mechanisms in the economy.

A country’s money supply can be increased by the monetary authorities by:

• Printing and giving away more money to citizens.
• Legally devaluing (reducing the value of) the legal tender currency.
• Loaning new money into existence as reserve account credits through the banking system by purchasing government bonds from banks on the secondary market.”

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Unlimited Political hypocrisy

Our current inflation is the result of many factors – “Printing and giving away fake money to citizens,” tax cuts, loaning trillions interest-free for casino-bank bailouts, and borrowing trillions from foreigners. The government spent all this fake money flooding the system, trying to buy votes, and inflating away debt that cannot be repaid.

Politicians have no limits with their maddening, hypocritical, political BS. Reason.com reports:

“The Senate unanimously approved a resolution calling the debt ‘a threat to the national security of the United States’ and calling expected future budget deficits ‘unsustainable, irresponsible, and dangerous.’

…. The passage of a nonbinding resolution…is several steps short of actually addressing the federal government’s addiction to borrowing….

…. Later, the Congressional Budget Office (CBO) published its latest long-term budget projections. The report shows that annual budget deficits are on pace to grow from an expected $1.6 trillion this year to $2.6 trillion in 2034, $4.4 trillion in 2044, and $7.3 trillion in 2054.”

Like reinstating Glass-Steagall, political flim-flam with no intention of doing anything.

Published inflation data is bogus. Shadowstats.com calculates inflation as it was done during the Clinton years. Real inflation is double what is being reported today.

In 2016, Fed Chair, and political hack, Janet Yellen proclaimed,

“Will I say there will never, ever be another financial crisis? No, probably that would be going too far. But I do think we’re much safer and I hope that it will not [happen] in our lifetimes and I don’t believe it will.”

Fedspeak: Bush broke it, Obama fixed it, and anything in the future is Trump’s problem. Fed Chairman Powell using the same playbook, claiming no political motive, hints at a rate cut coming soon.

Economic cycles rarely coincide with election cycles. The effect of government economic decisions have a mind of their own. Inflation continues on no matter who is in power, while each party blames the other.

If Powell cuts rates, he will likely repeat the Volcker error.

In 1979, with high inflation and fearing a total collapse of the US dollar, Paul Volcker raised rates to double digits; expecting a recession to follow. In January 1980, an election year, Volcker cut rates; inflation soared over 15%. A few months later he reversed course and raised rates over 17%, until inflation was stabilized.

Will the Fed hold firm, taking the necessary steps to avoid total collapse of the dollar, knowing it will cause a recession – or cut rates just before the election?

Common sense…

Politicos admit our debt is, “a threat to the national security of the United States” and …. future budget deficits (are) “unsustainable, irresponsible, and dangerous” but their behavior doesn’t change.

A government and/or currency collapses it brings about a major cultural shift, including what is expected from the government.

I don’t see any politicos proposing these solutions…

Congressional term limits. Our founding fathers envisioned “citizen legislators” temporarily serving the government and then going back to private life. Career politicians focus on satisfying donors, spending tax dollars to get reelected, and not doing what is right.

Return to the gold standard. Tying a currency to the amount of gold in the treasury forces spending restraint.  A balanced budget amendment was ignored, and Congress is incapable of policing itself. Politicos must be constrained.

Freeze spending at current levels. Irresponsible politicians allow automatic annual budget increases for the federal government. That has to stop, the government must stop growing….

Rethink the role of government. Thomas Jefferson said, “The policy of American government is to leave its citizens free, neither restraining them nor aiding them in their pursuits.”

Power-hungry politicians changed that policy and is bankrupting our nation. When the government tells moms what to pack in school lunches, we have too much government!

Reinstate Glass-Steagall. The Cato Institute concluded reinstating Glass-Steagall would not prevent a future banking crisis. It will sure help!

Which do you prefer? Use trillions of tax dollars to bail out “too big to fail” casino banks with terrible inflationary side effects. -OR – Allow smaller private businesses (banks) to fail, with the FDIC using money funded by insurance premiums levied on banks.

Reinstatement won’t prevent banks from making stupid decisions, but it has a great track record of preventing stupid government bailouts with inflationary, currency-destroying side effects.

Dump, or restrict the Fed.  The Fed is also incapable of policing itself. Congress must do their job overseeing the Fed, stop giving free rein to their huge campaign donors.

Out-of-control spending and using tax dollars to bail out casino banks is the cause. Inflation is the result. Common-sense politicians is an oxymoron!

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Quote(s) Of The Week…

I have 47 pages of famous quotes. I had a tough time picking only one this week. I combined some of the short ones….

“The advocates of public control cannot do without inflation. They need it in order to finance their policy of reckless spending and of lavishly subsidizing and bribing the voters.” — Ludwig von Mises

“Inflation makes the extension of socialism possible by providing the financial chaos in which it flourishes. …. Inflation tears apart the whole fabric of stable economic relationships. Its inexcusable injustices drive men toward desperate remedies. It plants the seeds of fascism and communism.” — Henry Hazlitt

And Finally…

My wife Jo found some more cool Facebook humor for our enjoyment:

• We’ll always be friends because you know too much.

• Damn right I’m good in bed. I can stay there all day.

• The secret to being happy is having a good sense of humor & a dirty mind.

• WARNING: Drinking alcoholic beverages before pregnancy can cause pregnancy.

• I wonder if I actually have free time on my hands or I’m just forgetting to do something.

• Middle age is when you still believe you’re gonna feel better in the morning.

• Don’t die a virgin, terrorists are up there waiting for you.

• Wouldn’t it be great if we could put ourselves in the dryer for ten minutes and come out wrinkle free, back to our original shape, three sizes smaller and smelling April fresh.

• Why is it after I push ONE for English, I still can’t understand the person on the other end?

• Today I’m wearing pink to raise awareness of people like me who forget to separate their red laundry from their whites.

• The Flat Earth Society has members all around the world.

And my favorite:

• My new car has a button for everything, including one that says “rear wiper.” I’m afraid to try it.

Until next time…

Dennis Miller

“Economic independence is the foundation of the only sort of freedom worth a damn.” – H. L. Mencken

 

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