How To Escape A Stagflationary Quagmire

What happens when the FERAL Reserve uses raising interest rates in an attempt to quash inflation?  You guessed it:  STAGFLATION. That is, a combination of economic stagnation (or even recession, if they keep raising it "until something breaks") and persistently high inflation.  But if the only tool that have is a hammer, everything looks like a nail to them.  And a quagmire thus results when tight monetary policy is kept in place well beyond its (very short) shelf life.

Contrary to Milton Friedman, the godfather of neoliberalism (who literally coined the term "neoliberalism" himself, along with the term "stagflation"), who claimed that "inflation is always and everywhere a monetary phenomenon", it is more accurately described as being (almost) always and everywhere a supply-side problem of goods and services, as Rodger Malcolm Mitchell notes.  And the only way to cure it is to cure the shortages, which counterintuitively often requires increasing (and better targeting) federal spending to incentivize production of scarce goods and services, especially energy.  There is clearly an extremely strong correlation (almost perfect, in fact) between energy prices (especially oil) and the general price level (CPI) of goods and services overall.  While there is, contrary to popular opinion, very little to no correlation between inflation and federal deficit spending, or even the general money supply itself.  (The general money supply consists of deficit spending of new money into existence plus banks lending new money into existence, though the latter is of course inflationary albeit only due to interest.)

(And let's not forget greedflation as well!)

At best, as a "break glass in case of emergency" measure, raising interest rates, especially to above the inflation rate, has a weak, very short-term benefit on fighting inflation, followed by a longer-term exacerbation and prolonging of inflation that seems to be unrelated but is in fact caused by it.  After all, hiking interest rates is effectively a blunt and regressive tax that increases costs across the board, which are then passed onto the consumer in the form of...higher prices.  And so on.  That is, MORE INFLATION, in a vicious cycle like a yo-yo.  The "cure" is in fact far worse than the disease, like applying leeches to cure anemia, as Mitchell would put it.

The plandemic-induced supply-chain issues have been resolved, and even the global geopolitical issues would should by now have less effect in the domestic oil and gas powerhouse that is the USA.  Oil and gas prices are now down significantly stateside.  The money supply and federal spending have shrank since then as well.  And yet inflation, though much lower than its 9% peak in 2022, remains stubbornly above than 3% today.  Could it be that keeping interest rates well above the current inflation rate is actually not only part of the problem, but now THE problem?

BINGO.  So the FERAL Reserve would be wise to end Quantitative Tightening and cut interest rates yesterday from the current 5.25% to 3%, then to below 3% very shortly thereafter (within days or weeks).  Then when inflation falls, cut it again to below the new inflation rate, and so on. All the way to zero if necessary.  Failing that, the only thing that would end this quagmire is a severe enough recession to kill demand across the board, which will clearly do more harm than good.  History certainly bears that out.

(It explains not only today's quagmire, but also the 1970s and 1980s in the USA and a fortiori in Canada.  And it even at least partially explains the phenomenon of "chronic inflation" in various Latin American countries in the 1990s and beyond.)

Then, Congress must increase, not decrease, federal spending to cure the stagnation part, which is the other half of the stagflation.  Yesterday. 

And while we are at it, we should also phase out the scam known as "fractional reserve banking" (or more accurately, "fractional capital lending") by increasing the reserve requirement for private banks from the current 0% to 10% immediately, as it was before March 15, 2020, then very gradually raising it all the way to 100% over a number of years.  (The only reason to do it gradually is to prevent markets from suddenly seizing up and causing a financial crisis.)  And also either break up, nationalize, or tax heavily any banks that are "too big to fail" as well.

So what are we waiting for?

P.S.  This argument does NOT apply to "creeping inflation" (i.e. consistently below 3%), as that level of inflation is easily controlled and adjusted for, promotes economic growth, and is actually beneficial on balance.  Such low to moderate inflation is far better tolerated than risking even a small amount of deflation (negative inflation), which, at best, is VERY difficult to control and can all too easily become a vicious cycle and downward spiral into a full-blown depression or long-term "stagpression".  In contrast, inflation only becomes net harmful on balance when it greatly exceeds 3%.  Again, history bears this out.

The Real Cause of "Secular Stagnation": Extreme Inequality

Much has been made of the concept of "secular stagnation", namely, that the current and future long-term potential for economic growth has slowed dramatically compared with the not-too-distant past.  Larry Summers defines it as "a prolonged period in which satisfactory growth can only be acheived by unsustainable financial conditions".  And at least since the Great Recession, the data do indeed seem to bear this out.  Most notably, for decades now the American economy has been requiring lower and lower interest rates to get the same effect in terms of boosting aggregate demand, the sine qua non of economic growth.  One can even argue that, relatively speaking, the United States will have had a whopping "lost two decades" of growth from 2000-2020.  We are "turning Japanese", and not in a good way either.

But why is this happening, exactly?  Some blame demographic changes, particularly population aging, as one of the causes.  But while this theory is interesting, it only seems to explain, at most, a tiny portion of the overall trend of secular stagnation.  In fact, a recent study by the American  Economic Association found that there is essentially no robust correlation between population aging and economic growth (or lack thereof).  Why?  Advances in automation and robotics seem to offset the putative adverse effects of an aging workforce to the point where the effect of aging is practically negligible.

In fact, another recent study finds the ideal total fertility rate (TFR) in terms of standards of living overall is in fact in the 1.5-2.0 range, basically the same as what the TSAP has long advocated since our founding nearly a decade ago in 2009.  Yes, really.  Take that, birth dearthers!

Others blame the decline in EROEI (Energy Returned on Energy Invested) as cheap and easy fossil fuels are increasingly less readily available than in the past, as well as the planetary limits to growth.  That is indeed true in the very long run at least, and all the more reason to end our inane and insane addiction to growth for the sake of growth, the ideology of the cancer cell which eventually kills its host, by the way.  Though meanwhile, renewable energy technologies are making massives strides, which again looks like it will offset such trends at least partially.

But in the relatively near term at least, the biggest elephant in the room by far in terms of the causes of secular stagnation would be the extreme level of economic inequality in this country that is now back at Gilded Age levels.  Or should we say, at banana republic levels these days.  The top 1% controls roughly 40% of the nation's wealth, the top 20% controls roughly 90%, and the bottom 80% is left to fight over crumbs.  Wages have lagged behind the cost of living for decades despite exponential increases in technological progress and resulting increases in labor productivity.   The oligarchs at the top took nearly all of the gains.  And the rest of us simply cannot afford to keep spending enough to keep the economy going without digging ourselves deeper and deeper in debt.  Eventually, something has to give, since there is not enough aggregate demand, and increasing debt clearly cannot be sustained forever.

Thus, a more accurate definition of "secular stagnation", would be, in the words of the Economic Policy Institute, "a chronic shortage of aggregate demand constraining economic growth".  They really hit the nail right on the head here.  After all, one person's spending is another person's income, by definition, and any business without enough customers will clearly not stay in business for long.

Which, by the way, was also one of the causes of the Great Depression and the long period of secular stagnation that followed until WWII.  The Roaring Twenties also had similarly extreme inequality as well, along with a wildly unregulated financial system.  And we also had a trade war from 1930-1934, which further deepened the Depression.  The only real difference now (aside from the levels of debt today) is the Feral Reserve's monetary policy, but even that will run out of ammo very fast (as interest rates are already low) unless their methods are truly overhauled to accomodate today's realities.

But what about in the long run?  Well, the Keynesian punch line to that is, "in the long run, we are all dead".  Seriously, though, an inequality-induced chronic shortage of aggregate demand not only reduces actual economic growth in the short run, but also reduces potential growth well in the future as well.  That is because less demand today leads to less business investment tomorrow, degrading the economy's productive capacity over time and thus leading to significantly less growth in the long run as well as the short run, creating a vicious cycle and downward spiral.  Hoarding such ludicrous amounts of wealth at the top of the pyramid clearly has serious consequences for the economy and society, and with much larger effect sizes than originally thought.

Thus, policies designed to tackle economic inequality would be beneficial in this regard.  In addition to more progressive taxation of both individuals and corporations (like it was before Reagan) and/or the Universal Exchange Tax and/or Georgist taxation on natural resources, that would also include things like Universal Basic Income (UBI) as well.  And nationalizing the Feral Reserve to make it a truly public national bank that creates money interest-free would be even better still, since usury (interest) and debt-based currency are essentially the biggest weapons of the oligarchy.  Problem solved.

In fact, in our Monetarily Sovereign federal government, Congress can simply spend new money into existence without the strings of interest attached, and without any corresponding increase in tax revenue either.  Rodger Malcolm Mitchell notes this in his Ten Steps to Prosperity, which includes, among other things, Medicare For All, free college for all, and a form of UBI as well.  Interest rates can still be used by the central bank as an inflation-fighting tool, but the creation of money will be decoupled from it.

(Note to Japan:  You should do the same thing as well, especially the helicopter money (QE for the People) and UBI.  Then you will finally get out of your 30 year funk, and possibly even raise your birthrates a bit.)

At the very least, in the meantime, we need to raise the minimum wage to $15/hour to give the lowest-paid workers a boost, which will also have a positive spillover higher up the wage scale.  Also, macroeconomic policy (both fiscal and monetary) should seriously prioritize very low unemployment over very low inflation, since tight labor markets have long been known to give workers much more bargaining power relative to employers. And labor unions also need to be revitalized as well.  Yesterday.

So what are we waiting for?

What "Give People Money" Gets Right--And Wrong at the Same Time

One of our favorite journalists, Annie Lowrey, recently wrote a book called Give People Money:  How a Universal Basic Income Would End Poverty, Revolutionize Work, and Remake the World.  As its self-explanatory title suggests, she is clearly in favor of the idea, at least in principle, and notes all of the many benefits to society that a Universal Basic Income (UBI) would have.  She does a great job of delineating such benefits and thoroughly debunks numerous myths about this big idea.  So overall, it is a good book.

That said, while her thesis starts out practically on fire in terms of ambition, it really starts to coast towards the end when the practical issue of cost starts to seep in.  Then, her proposals start to get significantly less ambitious than a true UBI, namely a negative income tax (like the kind Nixon once proposed and was ultimately weakened into what became the Earned Income Tax Credit) and/or a smaller UBI-style payment for children only.  True, those weaker versions would indeed be cheaper, and far better than doing nothing at all.  And it would certainly be more likely to pass through Congress, no doubt about that.  But the larger point is still being missed in terms of the nature of the cost issue.

And that larger point is that since the United States federal government is Monetarily Sovereign, the whole cost issue is really a non-issue when you think about it.  It is a Big Lie that federal taxes actually pay for federal spending, and that the federal government can somehow run short of dollars.  They can literally create infinite money, thus money is literally no object in that regard, if only they would act like it and dispense with the Big Lie once and for all.

In fact, Rodger Malcolm Mitchell himself advocates a form of UBI that he calls the Economic Bonus (EB), which is Step #3 of his recommended Ten Steps to Prosperity.  It is similar to Social Security for all, but without the FICA tax (which he believes should be abolished), and paid for entirely via money creation (i.e. spending it into existence).  Though the figures he provides are not set in stone, he advocates that we start with $1000/month for everyone over the age of 21 and $500/month for everyone below that age.  The TSAP fully agrees, except that we think the age threshold for the full amount should be 18 instead.  Or perhaps give the same amount (say, $500) to everyone regardless of age to start with.  Either way, once it is started, the numbers can be easily adjusted.  And $1000/$500 is a very handy number since that is roughly the amount that would be enough to eliminate poverty as well as give workers much more bargaining power than they have currently, while still not being so ludicrously high as to trigger runaway inflation or other adverse effects.  And best of all, it wouldn't cost the taxpayer one penny.

And Presto!  The square has thus been circled--or is that the other way around?

Oh, and about that inflation thingy, keep in mind that despite three rounds of QE, nearly $30 trillion in secret bailouts for the banks, $21+ trillion in national debt, and the Pentagon "losing" another $21 trillion despite putting two (or four) wars on the proverbial credit card, all of this money created out of thin air in fact, and economic growth finally roaring back to life (for now), we are still nowhere near the point of runaway inflation.  Not by a long shot.  If anything, we are still under the shadow of what Larry Summers calls "secular stagnation" thanks to chronic, extreme economic inequality and related socioeconomic ills.  And if ever we did get anywhere near that point, we know now exactly how to prevent and cure such inflation via interest rate control, and failing that, simply create less new money going forward.

So what are we waiting for?

The Real Cause of "Secular Stagnation": Extreme Inequality

Much has been made of the concept of "secular stagnation", namely, that the current and future long-term potential for economic growth has slowed dramatically compared with the not-too-distant past.  Larry Summers defines it as "a prolonged period in which satisfactory growth can only be acheived by unsustainable financial conditions".  And at least since the Great Recession, the data do indeed seem to bear this out.  Most notably, for decades now the American economy has been requiring lower and lower interest rates to get the same effect in terms of boosting aggregate demand, the sine qua non of economic growth.  One can even argue that, relatively speaking, the United States will have had a whopping "lost two decades" of growth from 2000-2020.

But why is this happening, exactly?  Some blame demographic changes, particularly population aging, as one of the causes.  But while this theory may be at least partially true, it only seems to explain, at most, one-third of the trend of secular stagnation.  Others blame the decline in EROEI (Energy Returned on Energy Invested) as cheap and easy fossil fuels are increasingly less readily available than in the past, as well as the planetary limits to growth.  That is indeed true in the very long run at least, and all the more reason to end our inane and insane addiction to growth for the sake of growth, the ideology of the cancer cell which eventually kills its host, by the way.

But in the relatively near term at least, the biggest elephant in the room by far in terms of the causes of secular stagnation would be the extreme level of economic inequality in this country that is now back at Gilded Age levels.  Or should we say, at banana republic levels these days.  The top 1% controls roughly 40% of the nation's wealth, the top 20% controls roughly 90%, and the bottom 80% is left to fight over crumbs.  Wages have lagged behind the cost of living for decades despite exponential increases in technological progress and resulting increases in labor productivity.   The oligarchs at the top took nearly all of the gains.  And the rest of us simply cannot afford to keep spending enough to keep the economy going without digging ourselves deeper and deeper in debt.  Eventually, something has to give, since there is not enough aggregate demand, and increasing debt clearly cannot be sustained forever.

Thus, a more accurate definition of "secular stagnation", would be, in the words of the Economic Policy Institute, "a chronic shortage of aggregate demand constraining economic growth".  They really hit the nail right on the head here.  After all, one person's spending is another person's income, by definition, and any business without enough customers will clearly not stay in business for long.

Which, by the way, was also one of the causes of the Great Depression and the long period of secular stagnation that followed until WWII.  The Roaring Twenties also had similarly extreme inequality as well, along with a wildly unregulated financial system.  And we also had a trade war from 1930-1934, which further deepened the Depression.  The only real difference now (aside from the levels of debt today) is the Feral Reserve's monetary policy, but even that will run out of ammo very fast (as interest rates are already low) unless their methods are truly overhauled to accomodate today's realities.

But what about in the long run?  Well, the Keynesian punch line to that is, "in the long run, we are all dead".  Seriously, though, an inequality-induced chronic shortage of aggregate demand not only reduces actual economic growth in the short run, but also reduces potential growth well in the future as well.  That is because less demand today leads to less business investment tomorrow, degrading the economy's productive capacity over time and thus leading to significantly less growth in the long run as well as the short run, creating a vicious cycle and downward spiral.  Hoarding such ludicrous amounts of wealth at the top of the pyramid clearly has serious consequences for the economy and society, and with much larger effect sizes than originally thought.

Thus, policies designed to tackle economic inequality would be beneficial in this regard.  In addition to more progressive taxation of both individuals and corporations (like it was before Reagan) and/or the Universal Exchange Tax and/or Georgist taxation on natural resources, that would also include things like Universal Basic Income (UBI) as well.  And nationalizing the Feral Reserve to make it a truly public national bank that creates money interest-free would be even better still, since usury (interest) and debt-based currency are essentially the biggest weapons of the oligarchy.  Problem solved.

At the very least, in the meantime, we need to raise the minimum wage to $15/hour to give the lowest-paid workers a boost, which will also have a positive spillover higher up the wage scale.  Also, macroeconomic policy (both fiscal and monetary) should seriously prioritize very low unemployment over very low inflation, since tight labor markets have long been known to give workers much more bargaining power relative to employers. And labor unions also need to be revitalized as well.  Yesterday.

So what are we waiting for?