Raising Interest Rates Is Not The Way To Fight This Inflation

 Inflation is slowly coming down, but is still far too high (7.1% for November). The only tool the federal government is using is for the Fed to raise interest rates. That punishes workers and consumers without really getting to the core problem -- corporate greed. 

Here's what former Labor Secretary Robert Reich thinks:

The Fed’s failure to stem inflation is partly due to events outside the United States — Putin’s war in Ukraine, China’s lockdown, and post-COVID demand worldwide exceeding worldwide supplies of all sorts of materials and components.

But it’s also because domestic inflation is being driven by profits, not wages. And interest rate hikes don’t reduce profit-driven inflation — at least not directly. Instead, workers and consumers take the hit.

Labor costs increased 5.3 percent over the past year. But prices rose 7.3 percent. This means the real purchasing power of American workers continues to drop.

Forget the 1970s wage-price spiral when real average earnings continued to rise for much of the decade. Now, workers are taking it on the chin.

Profits have grown faster than labor costs for seven of the past eight quarters. As Paul Donovan, chief economist for UBS’s Global Wealth Management, wrote last week, “today’s price inflation is more a product of profits than wages.”

Corporate profits surged to a record high of $2.08 trillion in the third quarter of this year, even as inflation continued to squeeze workers and consumers. Over the last two years, quarterly profits have ballooned more than 80 percent, from around $1.2 trillion to more than $2 trillion.

Executives of big companies across America continue to tell Wall Street they can keep prices high or raise them even higher. As Pepsi Co. financial chief Hugh Johnston saidon his company’s third quarter earnings call, “ [we’re] capable of taking whatever pricing we need.”

Not every business is raking it in, to be sure. Most small businesses aren’t sharing in the profit bonanza because everything they need for putting stuff on the shelves has gone up in price.

But the big ones have never done as well. 

In fact, rather than slowing corporate price increases, the Fed’s rate hikes seem to be having the opposite effect.

It’s not hard to see why. If I run a big corporation, I’m not going to lower my prices and profits in the face of a pending economic slowdown. I’ll do everything I can to keep them as high as possible for as long as I can.

I’ll reduce my prices and profits only when the Fed’s higher rates begin hurting consumers enough that they stop buying stuff at my high prices because they can find better deals elsewhere.

Yet if I have a monopoly or near-monopoly — as is increasingly the case with big American corporations — my consumers won’t have much choice. If they want and need my stuff, they’ll continue to buy at the higher prices.

Of course, I’ll keep telling them I have no choice but to keep raising my prices because my costs keep increasing — even though that’s bunk because I’m increasing my profit margins.

Eventually, the Fed could raise interest rates so high that the cost of borrowing makes it impossible for consumers — whose wages, remember, are already dropping, adjusted for inflation — to afford what I’m selling, thereby forcing me to stop raising my prices.

But by this time, people will be hurting. Many will have lost economic ground. Some will have become impoverished. A large number of jobs will have been lost.

The Fed should stop believing it can easily stop profit-price inflation by hiking interest rates. It should pause interest-rate hikes long enough to see — and allow the nation to see — they’re harming workers and consumers more than corporations that continue to rake in record profits. 

 

The government should use other means to tame inflation. Like what?

Like windfall profits taxes as California’s governor Gavin Newsom has proposed for oil companies there, and Representative Ro Khanna and Senator Sheldon Whitehouse have proposed nationally (taxing the difference between the current price of oil per barrel and the average cost between 2015 and 2019).

Like tough antitrust enforcement aimed at reducing the pricing power of big corporations (as Lina Kahn is attempting at the Federal Trade Commission and Jonathan Kanter is trying at the Antitrust Division of the Justice Department).

Like a new antitrust law that allows enforcers to bust up big corporations (and prevent them from buying other businesses) when they’re powerful enough to continue raising their prices higher than their costs are rising. (Could Republicans in Congress be coaxed into supporting this? I believe so.)

It’s important that Americans know the truth. Seven Fed rate hikes in just nine months have barely dented corporate power to raise prices and profit margins. 

Which is why the Fed is putting the onus of fighting inflation on workers and consumers rather than on the corporations responsible for it.

This is wrong. It’s bad economics. It’s insane politics. And it’s profoundly unfair. 

Fed Indicator Predicts Possible Recession In Next 12 Months

In his bid for re-election, Donald Trump has only one thing in his favor -- the economy seems to be doing well (at least for the rich). But if the Federal Reserve is right, that could disappear before the 2020 election. The most reliable indicator of a coming recession the Fed has is predicting a recession within the next 12 months.

Here's part of how Carmen Reinicke at Business Insider reports it:

A key recession tracker just hit its highest level since 2009, sending a signal that an economic downturn may be looming on the horizon.

The New York Federal Reserve's probability model, which predicts the probability of a US recession in the next 12 months, delivered a reading of 32.9% for June.

That's could mean tough times ahead, considering the measure has breached the 30% threshold before every recession since 1960. It sat at a precarious 28% in May.

This development comes on the heels of the US's 10-year economic expansion recently becoming the longest on record. While duration is not what ends expansions, lengthy ones can make investors nervous. Recession watch has been on high alert, especially since the yield curve between the 10-year and 3-month Treasurys inverted in March, and then again in May.

To calculate recession probability, the New York Fed's tracker uses treasury spreads, specifically the difference between the 10-year and 3-month Treasury rates. A negative spread between the two has preceded all post-war downturns, and it's been negative since May. 

Huge Wealth/Income Gap Between Whites & Minorities

I have posted many times about the huge gap in wealth and income between the richest Americans and the rest of America. And it is a big problem, made only worse by the recent tax cuts for the rich passed by the Republicans. It must be rectified.

But that is not the only gap posing a problem for our economy. There is also a significantly large gap in wealth and income between Whites and minorities. The median income for Whites is $61,200 and the mean (average) income is $123,400. For Blacks, the median income is $35,400 and the mean is $54,000. For Hispanics, the median is $38,500 and the mean is $57,300.

The difference between Whites and minorities is even greater when it comes to wealth (see the chart above).

Conservatives don't want to admit it, but we still live in an unfair economy, and it's caused by continuing discrimination against minorities. We have not solved our society's racism, and it continues to affect our economy.

NOTE -- The chart above is from the Federal Reserve Board of Governors. The numbers are from 2016 -- the last year for which numbers are known. They do a survey every three years. I doubt the 2019 numbers will look any different when published.

Trump Tries To Blame Fed Chairman For His Own Mistakes

From The New York Times:

President Trump has unabashedly hitched his political fortunes to a rising stock market. Now, with stock prices in retreat, he has become increasingly fixated on the idea that one man is to blame for the recent rout: Jerome H. Powell, chairman of the Federal Reserve.

After the Fed raised its benchmark interest rate on Wednesday, the fifth consecutive quarterly increase, Mr. Trump fretted to aides that Mr. Powell would “turn me into Hoover,” a reference to the man who was president in the early years of the Great Depression.

Mr. Trump has said choosing Mr. Powell for the Fed job last year was the worst mistake of his presidency, and he has asked aides whether he has the power to fire him.

Donald Trump is talking about the Stock Market. He has bragged about the Stock Market since taking office, using it as his only predictor of how good the economy is doing. It's not that good an indicator of economic well-being, but it does show what the investor class thinks of the economy -- and a crash of the market can affect the entire economy (as it did in 1929 and 2007).

While Trump was happy to take credit when the Stock Market was doing well, now that it's going down he wants to put all the blame on Federal Reserve Chairman Jerome H. Powell. Powell did raise interest rates slightly to ward off inflation. That raise would likely just have caused a temporary and small blip on the market, and things would have quickly returned to normal (just as it has many times in the past when the rate was raised).

On December 24th, the Stock Market closed at 21,792 for the Dow Jones average. It dropped 653 points -- the biggest Christmas Eve drop in this nation's history. Currently, it is 3,032 points below where it was on January 2 of 2018 -- and 5,036 points below the market's high for 2018.

Could Trump wind up looking as bad as Hoover? I think it's a distinct possibility, but it won't be caused by anything done by the Federal Reserve. The real problem with the market right now is because of Trump. The market likes stability, and that's something the Trump administration seems incapable of providing.

Far more worrying for Wall Street than the small interest rate hike is the tariff/trade war initiated by Trump, the ballooning deficit and national debt caused by his tax cuts, his attacks on our allies and coddling of our enemies, and the continuing chaos reigning in the White House.

Trump may indeed be looked at as the new Hoover in another year or two, but it won't be because of the Federal Reserve. It will be because of the ridiculous mistakes and policy blunders of Trump himself. He is his own worst enemy.

Wealth Distribution In The United States Growing Worse

These charts show the distribution of wealth in the United States in 2013 (the last full year for which figures are known). The figures are from the Federal Reserve Survey of Consumer Finances. As you can see, the figures are way out of whack -- with the top 10% of richest Americans owning 75.3% of all wealth in the nation (more than 3 out of every 4 dollars that exists in this country).

And it keeps getting worse -- with the top 10% increasing their share, while the bottom 90% has a share that is decreasing. The last time this survey was done was in 2010, and since then the share for the top 10% has increased by 0.8%. Meanwhile, the share for the bottom 50% has decreased by 0.1% and the share for the 50-90% has decreased by 0.7%. In short, the rich are getting richer and the rest of America is getting poorer.

It doesn't have to be this way. The only reason it is this way is because the congressional Republicans have obstructed every single attempt to make the country's economy fairer for everyone. The only constituencies they really care about are the rich and the corporations -- the two groups that their "trickle-down" policy of economics was designed to help. They instituted that policy to give an unfair advantage to the rich (and corporations), and they refuse to let the president or Democrats change it to a policy that would be more equitable for all Americans.

This inequitable distribution doesn't just favor the rich -- it favors the White rich. Note that 90% of the nation's wealth is owned by Whites (9 out of every 10 dollars), even though Whites don't make up near 90% of the population. But it is not all Whites who benefit from the Republican policies. Note that the bottom 50% of Whites control only 2.2% of the nation's wealth while the top 10% of Whites control about 72.3% of the nation's wealth.

This should give you a clue as to why the Republicans not only want to continue unfair economic policies, but also unfair racial and ethnic policies. They aren't just acting on behalf of the rich. They are acting on the behalf of the White rich.

It's no surprise why rich Whites (like the Koch brothers) support the Republican Party. They are benefitting financially from the party's policies. But I have to wonder why the other 90% of Whites have a lot of Republican voters, because they are voting against their own economic well-being when they vote for the GOP. Is racism, ethnic and religious bigotry, and fear of the rest of the world that powerful -- powerful enough to make people vote against their own economic interests?

NOTE -- The mean distribution is an average of all the people in that group. The median distribution is the point at which half of the group will have more and half will have less.

Green Party Says Nomination Of Yellen Means More Of Same Failed Policy

On Wednesday, President Obama nominated Janet Yellen to be the next Federal Reserve Chairman. She will replace Ben Bernanke when he retires at the end of the year. This may or may not turn out to be a good thing. I was opposed to Larry Summers getting the job, and I was happy (like most other liberals) when he withdrew his name from consideration. But is Yellen any better?

I honestly don't know. I simply don't know enough about her. I have to admit that it bothers me a bit that most on Wall Street are happy about her nomination. They think the nomination means the corporate-friendly and Wall Street-friendly policies of the Federal Reserve will continue, and they could well be right. That is also what the Green Party thinks. Here is the Green Party's reaction to the nomination, as written by Jack Rasmus (member of the Green Party Shadow Cabinet):

On October 9, 2013, President Obama announced his nomination of Janet Yellen, current vice-chair of the Federal Reserve, as the new Fed chair, to replace Ben Bernanke expected to retire at year’s end. Obama’s appointment, subject to Senate confirmation that is likely, comes after a general consensus in recent weeks that Yellen would be the President's choice. That followed weeks of heated public debate and maneuvering, identifying Yellen as the favorite of liberals in and out of Congress, and Larry Summers the prefered choice of Obama administration staffers and insiders. Summers withdrew his candidacy several weeks ago, however, under pressure from conservative elements, who viewed his role as former Obama adviser, as too liberal on fiscal spending in Obama’s administration, and liberal elements, who viewed his role as former Clinton administration Secretary of the Treasury as too accommodating to bankers and financial deregulation.

It has been interesting to watch how liberals, within and without the Obama administration in recent weeks organized aggressively on behalf of Yellen. Yellen was the ‘Fed Dove’, willing to continue Ben Bernanke’s generous free money policies of QE (quantitative easing) and near zero interest rates. In contrast, Summers was the monetary ‘hawk’ that would likely accelerate a withdrawal from QE faster. Of course, both profiles were mostly spin.

Noted liberal economists, like Paul Krugman of the New York Times, fell completely into the Yellen camp, praising her policies and more liberal credentials. Even progressives of the moderate persuasion fell for the ‘Yellen as Fed Dove’ fiction. But a closer inspection would have revealed that neither Summers nor Yellen would have departed much, if at all, from current chair Bernanke’s policies.

Those policies, in the form of QE and ‘zero bound interest rates’, since 2009 have had little if any impact or effect on the real economy—and therefore on housing recovery, jobs, or middle class incomes.

In the course of four years of both QE and zero rates, the Federal Reserve has pumped more than $13 trillion in liquidity (money) into the US and global banking system (and shadow banking system) to bailout the banks. In terms of QE alone, this occurred in at least three versions—QE1, QE2, and now currently QE3—which together will have provided by year end 2013 (along with QE 2.5—called ‘operation twist’), nearly $4 trillion of liquidity injections to bankers as well as individual wealthy investors seeking to dump their collapse subprime mortgage bonds on the Federal Reserve.

QE and the $13 trillion resulted in record booms in the stock and bond markets in the US and globally. Much of that likely flowed out of the US into the global economy, serving to stimulate real growth in emerging markets and generating financial asset speculative bubbles around the world. There is in fact a very high correlation between the announcement, introduction, and conclusion of QE programs and stock-bond, derivative, and other financial asset booms and declines since 2009. Conversely, there is virtually no such connection between housing, jobs, and other real sectors of the US economy.

Bernanke Fed monetary policies have thus boosted financial capital gains and in turn the incomes of the wealthiest in the US and globally, as real disposable income for US households has consistently declined for four consecutive years. As recent data on income distribution from studies of economists at the University of California have shown this past summer: The wealthiest US 1% households have accrued for themselves no less than 95% of all the income gains in the US since 2009.

Yellen has been perhaps the strongest supporter of out-going Fed Chair, Ben Bernanke’s policies of QE and zero bound rates, which have directly resulted in this lopsided income inequality. So why were liberals so impressed with her as the preferred choice for next Fed chair? It certainly wasn’t for her policies. Or was it?

Perhaps some still labor under the false notion that, in the world of 21st century global finance capitalism, low interest rates create jobs. But that academic economics fiction no longer has evidence in reality. It belongs in the same trash bin with other fictions, like business tax cuts create jobs. Or that more free trade agreements , like the pending Trans-Pacific Partnership, pushed by the Obama administration and liberals, will create jobs. Here again, the empirical track record shows that neither have, or will, create jobs. Liberals nonetheless adhere to these false notions, in essence believing in the various forms of ‘trickle down’ economics. Regardless, Yellen was given the ‘dove’ tag, and therefore the liberal endorsement.

Yellen as Fed Chair will continue policies no different in content than has Ben Bernanke. Yellen will continue to pump QE into bankers and investors, stocks and bond markets, global speculators and offshore investors, as had Bernanke. If she really were liberal, she’d take the $1 trillion given them in just the past year of QE3 liquidity injections and use it to fund a government direct job creation program. That would create 20 million $50k a year jobs, and jump start the economic recovery overnight.

But the Bernanke-Yellen policy of giving that $1 trillion (and $12 trillion more) to bankers and investors will instead continue to prop up the stock, bond and other speculative financial markets. Just as Bernanke ‘chickened out’ this past summer when he rapidly backed off suggesting the $85 billion a month QE3 injections might be reduced by modest $5 billion, so too will Yellen.

There will be no fundamental change, in other words, from a Bernanke Fed to a Yellen Fed. The US Federal Reserve under its current structure and leadership is an institution serving bankers and wealthy investors. Before the Fed can ever begin serving the rest of the economy, the country and its citizens, it will have to be radically restructured.

The Federal Reserve will have to be democratized and become an institution that functions as a ‘public banking entity’, not a private banking conduit. It will then provide low money cost loans to households, small businesses, students, and workers—instead of wealthy investors, bankers, and speculators.

Instead of issuing QE for the 1%, the Fed could issue QE designed to create jobs, raise incomes, and generate a sustained economic recovery for all. But that won’t happen under a Yellen Fed. The false ‘hawk/dove’ options for leadership in the Fed Reserve reflects the U.S. political system - a dual one-party system with corporate interest at its heart. It will take a new, grassroots movement calling for real choice, and real democracy to fix our government, and institutions like the Federal Reserve.

Bernie Sanders And Elizabeth Warren Have 4 Questions For Federal Reserve Candidates

The second term of Ben Bernanke as Federal Reserve Chairman will end this coming January. President Obama has said he is considering three candidates -- Fed Vice Chairman Janet Yellen, economic advisor Lawrence Summers, and former Fed Vice Chairman Donald Kohn. The president is expected to announce his choice this Fall, and then the nomination will go to the Senate for confirmation.

My two favorite senators, Bernie Sanders (I-Vermont) and Elizabeth Warren (D-Massachusetts), believe the next Fed Chairman should support a monetary and economic policy that benefits consumers and workers rather than Wall Street. And they have come up with four vital questions they want the next candidate to answer before they commit to vote for his/her confirmation. Here are those questions, as Warren and Sanders put them in an article for The Huffington Post:

The decisions made by the next chair of the Federal Reserve will have a powerful impact on the economic well-being of every person in America.

While the largest financial institutions and corporations in this country have been bailed out and are now back to making enormous profits and rewarding their executives with outsized compensation packages, recovery hasn't gone so well for the rest of America. Middle class families have continued to lose ground economically, the number of Americans living in poverty is near an all-time high, and the gap between the very rich and everyone else is growing wider.

The next Fed chair will have enormous power and influence over our entire financial system and the direction of the economy. The Fed is responsible not only for our country's monetary policy, but it is also a key regulator of financial institutions. In our view, the president's nominee for Fed chair must be committed to improving the lives of working Americans who are still struggling through the worst economic crisis since the Great Depression.

To that end, we think any Fed chair nominee should be able to answer the following four questions:

Question 1: Do you believe that the Fed's top priority should be to fulfill its full employment mandate?

The U.S. continues to face a major crisis in unemployment. When Wall Street was on the verge of collapse, the Fed acted aggressively and with a fierce sense of urgency to save the financial system. Will you act with the same sense of urgency to combat the unemployment crisis in America today, and will you make clear what specific actions you will take? What rate do you think is acceptable and should be the Fed's target?

Question 2: If you were to be confirmed as chair of the Fed, would you work to break up "too-big-to-fail" financial institutions so that they could no longer pose a catastrophic risk to the economy?

The financial institutions that are too-big-to-fail played a major role in undermining the American economy and driving our country into a severe recession in 2008. Yet today the four biggest banks are 30 percent bigger than they were then, and the six largest financial institutions now have assets equivalent to two-thirds of our GDP. By any measure, "Too Big" has gotten bigger. The risk they pose is clear. As Richard Fisher, President of the Federal Reserve Bank of Dallas, said last year, "institutions that amplified and prolonged the recent financial crisis remain a hindrance to full economic recovery and to the very ideal of American capitalism ... Achieving an economy relatively free from financial crises requires us to have the fortitude to break up the giant banks."

Question 3: Do you believe that the deregulation of Wall Street, including the repeal of the Glass-Steagall Act and exempting derivatives from regulation, significantly contributed to the worst financial crisis since the Great Depression?

The next chair of the Federal Reserve will play an important leadership role in dealing with too-big-to-fail banks and in shaping the rules that govern them, so it is important to assess the Fed chair's views toward deregulation, particularly toward the massive deregulations of the 1980's and 1990's that permitted the TBTF banks to take on huge risks. There is a lot more work to do in implementation of the Dodd-Frank Act and to minimize the risk of future crises, and the Fed will play a critical leadership role.

Question 4: What would you do to divert the $2 trillion in excess reserves that financial institutions have parked at the Fed into more productive purposes, such as helping small- and medium-sized businesses create jobs?

Five years ago, the Fed bailed out the largest financial institutions in the country but put no restrictions on the funds to make sure that lending increased for small businesses. At the same time, the Fed began paying interest on excess reserves, and the excess reserves parked at the Fed have skyrocketed as a result rather than going into productive lending. The reality is that, despite promises and intentions that the Fed's efforts would help support small businesses, much more work needs to get done to move money from Wall Street to Main Street.

The next Fed chair will have an opportunity to get our economy back on track and to help rebuild America's middle class. But that will require the right temperament and a willingness to take on Wall Street CEOs when necessary. It is critical that the next Fed chair make a genuine, long-term commitment to supporting those who don't have armies of lobbyists and lawyers to advance their interests in Washington -- working and middle-class families.