Too Little Too Late?

I got on the scale. Yep, I weighed too much. So I got on the scale again in a few weeks and yikes -- I weighed even more. I swore then that I would change. I would only eat green beans and asparagus spears for a month, maybe longer. Well, I didn't really do that and soon my pants were so tight that I could hardly dance. Now it is even more painful. It's even harder to go on a diet when you are psychologically and physically hurting. What a mess!

That's my analogy for the Fed. The leader of the Fed, Mr Powell, and several of his directors have been quite public lately about their intention to reduce inflation. When inflation was building and possibly manageable, they said little. Like the common cold, they said that price increases were temporary. No need to worry our pretty little heads about a rising inflation rate. Let's keep interest rates near zero. 

Well, that was then and now we are reading just the opposite. Inflation is heading towards 7%. Inflation did not go away. It got much worse. Now workers want higher wages. Financial firms want higher interest rates. Business costs are rising and all that spells even higher inflation as firms pass along higher costs into higher prices. 

"Don't fire until you see the whites of their eyes!" That was bad advice then and is bad advice now. Waiting until the enemy is on top of you may save a little ammunition but it clearly makes the fight harder. In the 1970s we learned about the pernicious effects of something we called inflation expectations. Who cares what started the inflation rate rising -- as people expect higher inflation they act in ways that create even higher inflation. It becomes perpetually self-sustaining.

At this point we have two problems. First are the effects of the actual inflation. Second is that once inflation expectations are increasing -- how does the Fed reverse that psychology? If a person fails at life, that's a problem. If that causes the person to go into a depression, then that's a second and perhaps even more difficult problem. 

The Fed had plenty of chances to nip inflation in the bud. Now that they have waited so long to do something, they have to deal with inflation expectations. History suggests this can be a bloody process. How does the Fed wipe out a psychological expectation after they and their friends in Congress have created historically high government deficits and monetary increases? How? They can't. Period. 

Looking back at the 1970s when I was just a kid and Tuna was swimming in Tuna Pampers, they let inflation get going. It steadily increased for a whole decade in the 1960s before they decided to do something. Nixon got the brilliant idea to have wage and price controls -- government edicts over wages and prices. That didn't work. And damned if it didn't lead to smaller Hershey Bars. By the end of the 1960s with inflation soaring, the Fed finally cut back. Interest rates soared and the economy went into a recession. We ended up having two recessions by 1975 before all was said and done. 

Why don't these fools in Washington know about all that? Why do they insist on not learning from history? Why do they do nothing but talk? Still today they talk and do nothing. Sure they will finally do something but as in the 1970s it will be too little too late....and then they will find themselves in a no-win situation. Then they might get more aggressive as inflation soars. We called that no win situation back then "stagflation". It meant inflation kept rising during the recession. Ugh.

Here we go again.