OPINION: “What if our inflation problem isn’t due to too much demand but to other forces? In that case, the Fed might be making a big mistake by slowing demand.” Columnist Rex Nutting goes over what he thinks the real causes of inflation are.
The most concerning thing about Thursday’s report on U.S. gross domestic product for the first quarter wasn’t that the first line of the first table showed that real GDP fell at a 1.4% annual rate. It was the little-noticed news on line 34 showing that real disposable incomes fell for a fourth straight quarter.Incomes are perhaps the least-appreciated factor in driving economic growth, because everything starts there.
This means that the Fed is chasing a shadow. Because if our current spike in inflation is all due to an overly generous federal government giving its people too much money, then our inflation problem is about to go away. Mission to destroy demand If consumer demand—fueled by free money from Washington—has overheated the economy, then our inflation problem is solved even before the Fed really gets going. “There is no excess income left to drive the economy beyond capacity,” say Nersisyan and Wray
Bears and birds The Fed has a real problem here: Consumer spending isn’t very sensitive to the level of interest rates, and neither is business investment. But the financial markets are quite sensitive to interest rates. The Fed might keep jacking up interest rates, only to find that the only thing they’ve accomplished is a bear market.
Mainstream economists love to make fun of liberals who put the blame on profit-maximizing companies, correctly pointing out that corporations have always been greedy. But these economists, wedded to unrealistic models of perfect markets, can’t see that lots of the price increases that have been announced are clearly opportunistic. Businesses admit as much on earnings calls and in anonymous surveys.
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