The Fed is Raising Interest Rates

Sometimes I forget when reading articles about the Fed and monetary policy that I spent years figuring out Fedspeak. Lately the news has been about reports that the Fed will soon raise interest rates. I imagined the Fed telling each bank to raise its rate on savings accounts. But that's not really how it goes. So I decided I would put on my teacher hat and explain what I think all this means.

What is the Fed? Why do we expect them to raise interest rates? What are they doing? How are they doing it? Why are they doing it?  How will it work out? How does all this affect the stock market? Whew. Lots of questions. 

The Fed is short for Federal Reserve. The Fed is an organization that is part of the government's national policy making institutions. These policy decisions come out of the Fed's Open Market Committee. That policy making committee consists of the Governors of the Fed and the Presidents of the Fed district banks. Those folks meet regularly to decide on Fed policy.

Fed policy in the real world has two basic goals. The first is to keep the economy humming or at least keep it out of recessions. The second is to create a stable inflationary environment with the inflation rate of goods and services rising at around 2% per year. It has a hard time with these two goals because sometimes making progress on one automatically causes problems with the other. So they have to walk a fine path so as to make economic growth strong enough and inflation low and stable. 

Often the Fed's decisions and its goals are framed using words like money growth and interest rates. Notice I used the word "goals".  On a day to day basis, the Fed does not set interest rates. It is more proper to say that they try to influence interest rates. There is much confusion when people imagine the Fed moving a dial for interest rates. Or telling bankers what interest rate to charge.

This might sound crazy, but the Fed influences interest rates because they buy and sell government bonds. They do not write down an interest rate on a bond. The US Treasury does that. What the Fed really does is to trade government bonds in bond markets as a way to change the market value of these bonds.. 

When the Fed decides to buy a lot of government bonds, they buy the bonds with newly created money. Boring. Create money. Really? Yes they create it at will. Wowee -- makes me think of Scrooge McDuck playing in his vault.

Anyway, back at the vault. The Fed creates money and then uses it to buy bonds. If they create enough demand for bonds, this causes the price of the bonds to rise and the interest rate on those bonds to fall. Aha. The interest rate on the bonds is written in ink -- but if the market prices the bonds higher, then the rate expressed as a percent of the market price of bonds falls. Suppose the bond says 4% on it. The more you pay for that bond and for the stated 4%, the lower return you get. 

Don't moan. The Fed does not tell banks what interest rate to charge. But the Fed does influence a broad swatch of interest rates as it buys and sells government bonds. 

This gets us back to the Fed's goal. If they want a stronger economy they will buy bonds as a means to reduce interest rates and to persuade people to buy more goods and services at those lower rates. If the Fed wants to reduce the inflation rate, then it does the opposite. It will sell bonds as a means to raise interest rates and persuade people to purchase less goods and services. 

I see you are starting to nod off. I did my best to write about a tough topic. I hope it helped you understand the Fed and monetary policy a little better. If not, there is always a sweet walk by the lake with your honey.  

Janet and the Wizard of Oz

This stuff gets funnier all the time. Janet Yellen reminds me of the Wizard of Oz. 

Remember the good old days when words had meaning? For example, government policies could be of several kinds. 

Aggregate demand policy was all about stimulating people's desire to spend. Poverty policy was aimed at reducing poverty. Energy policy was all about promoting more energy while environmental policy attempted to undo harm to the environment. Supply-side policy attempted to shift the nation's supply curve, usually through lower tax rates that created more incentive for people to work and innovate. 

It was all pretty clear. And then the Wizard, I mean Janet Yellen comes along and obscures everything. The title of the article in the Wall Street Journal was Janet Yellen Views Biden Policies as Modernized Supply-Side Economics: In a Speech to the World Economic Forum, Treasury Secretary says the White House is aiming to increase labor supply and boost worker productivity. 

Modernized supply-side economics? What does "modernized" mean? Is it not enough to say they are trying supply-side policy? Maybe not. That would be misleading. The Biden/Yellen supply-side policies have as much to do with supply-side as I have to do with dancing tights. If what they are trying to say is that their supply-side policies are different than the past ones -- then for sure that fits. Their modern supply-side policies are a very long way from what we tried in the 1970s. 

Consider what they include under the umbrella of supply-side. 

    Social programs such as paid family leave, child care, education, and infrastructure.

    Programs for climate change. 

    A global corporate minimum tax. 

The common phrase employed by Yellen for these programs is that they increase labor supply, and or raise productivity while reducing inequality. 

Old style programs that reduced taxes on capital and/or deregulated industries are old fashioned and don't work, according to Yellen. What she really means is that if they worked they might have tilted the distribution of income and therefore they are not part of her modern approach. 

Clearly the bottom line for Yellen is not that they are supply-side policies. The bottom line is that they are part of a plan to redistribute income. I agree that some of the programs she mentions might have supply-side effects, but clearly they are not thought of in those terms and there is little to no historical data or experience to suggest that they do. 

Infrastructure sounds like typical supply-side policy. But even with that one -- she is very clear it has to be infrastructure that makes incomes more equal. Let's build a new subway. But make sure we build it in such a way that incomes are made more equal. No equality -- no subway! Maybe subway builders can't do that. After all, they succeed by making good subways. Not by making incomes more equal. 

It sounds good to say that subsidizing childcare is going to make it easier for the family to provide more labor hours to the economy. But why not tell the truth? We don't know. What Yellen does know is that this is a typical welfare transfer to help people at the low end of the income distribution. Maybe she thinks it sounds cool to pretend that she cares about the supply-side of the economy. But we all know the truth. She is what she always was. She is a part of the Biden administration whose goals are driven by global warming and income distribution. Tell it like it is Janet.

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. 

The Big Lie

End of Democracy?

A bunch of political hacks and thugs broke windows and doors and created a new page in the history books. It was horrible and scary and wrong. But did it really signal an end to democracy? Why can't politicians just say the truth? The end of democracy? A significant threat to democracy? I don't think so. 

Does anyone really think that even in the chaos that resided in our Congress, that the folks involved in the invasion were significant? Were organized? Had a plan to take over the government? We are now more than a year from that event and yet the same talking heads repeat louder and louder that democracy was in jeopardy. Even our President repeats this outright lie.

Why do I use the word lie? Because he and his buddies know that democracy was not in jeopardy. And I use the word here only because that's the word that they use. They say the big lie is the claim that the election was fraudulent. I agree. That was a whopper. But to retort and say that democracy was in jeopardy is a pretty big stretch of the imagination. 

Only a bunch of ideologues could have come to that conclusion. Or maybe what they really mean is that democracy only exists when Democrats have their way? 

Yes, people broke windows and scared the crap out of a bunch of elected officials. Did it look like they were going to stay and impose a new government? Did they plant a new flag in Pelosi's chair? Did they read aloud their new constitution? Did the government of the people disappear?

Nope none of that. What happened is that a bunch of angry and violent and lawless people tried to make a statement. The statement, I think, is that that there might have been voting irregularities. Voting irregularities do threaten democracy. Voting irregularities have happened before. It's possible. 

As I said above, I don't think there were significant irregularities. But what you saw vividly is that if the wrong party brings that point  up -- then those people are spreading the big lie. They screamed that democracy is threatened if someone talks about voting irregularities. I don't think so. What I think is that regardless of party, if someone believes there are voting problems -- then those people are standing up for democracy. They should stand up. They should accuse.

If they are wrong, then lets do what we used to do at Ponce de Leon Junior High School -- when they stand up then lets pull their pants off in front of everyone. A joking way to say it, but if someone alleges voting irregularities and they are wrong, then they should be punished severely. People should know in advance that we don't put up with those kinds of lies. We shouldn't be vigilantes. We should have laws and legal processes that can be enforced against this kind of despicable behavior. Give them an award if they are right. A jail term if wrong. 

What is democracy anyway? Is it really so fragile? Democracy means we have free elections. Democracy means we elect people who represent us. Those people enact laws to improve and safeguard our homeland. Democracy means all our votes are counted. It also means we have laws that govern who can vote and who cannot vote. Government should make sure we don't violate that trust and vote twice or somehow disturb the rights of others to freely vote once. 

We have a tradition of democracy. Nearly 250 years of democracy. I don't think it is too fragile. This is not Latvia or Cuba. Democracy was not threatened by a bunch of thugs in the streets. It was a lie to say that elections were rigged by Democrats. It was a lie to say that democracy was threatened by Republicans. 

Let's get together. Let's kiss and hug and be proud of the fact that we live in an incredibly terrific free nation. If you don't agree, then why not spend a little time in Ukraine or Cuba. Bon voyage. See how much you like those places. 

Covid and Employment -- Still off by 7 million workers

There have been many ways to measure the impacts of Covid on the US economy. We talk a lot about spending, supply chains, and inflation. But little has been said about employment. Employment is the basis of our economy and our feelings of wellbeing.  So I decided to take a look at employment at the national level. 

The Bureau of Labor Statistics publishes a lot of information on employment, I chose something they call total nonfarm employment. No offense to agricultural workers, but this measure seems to be the one most often cited. It comes out each month and tells you the number of people who are employed. The information comes from the business firms. 

I downloaded data from January of 2011 to November of 2021. In January of 2011 there were 131 million people employed in the US. By November of this year the number reached about 149 million. That's an increase of 18 million workers -- or about 14%. That amounts to increase of almost 2 million workers per year. Not bad. 

If you measure change from December to December of each year, it was typical for employment to grow by about 1.6%. In 2019 the growth was 1.3%. The highest growth rate before 2021 was 2.2%. Not a very exciting variable. We can count on employment to grow. Even the monthly growth rates are not very interesting. In the 8 years from 2011 to 2018 the lowest growth rate in one month was 0.3% -- this happened twice. The highest rate was 3.1%. That also happened twice. 

Snooze.

But then we hit 2020. In March, employment fell by 1.7 million jobs and then in April the decline was almost 20 million jobs. In one month there were 20 million less people employed.  Employment was at 130 million jobs on March of 2020. That's close to the employment level of 9 years before! Now that's news. 

By the end of 2020, employment crept back to 143 million and by the end of 2021 it was closing in on 149 million. That sounds pretty good. But at 149 million it was still 3 million below the peak rate of 152 million in December of 2019. 3 million is a lot of jobs lost. 

Clearly 2020 was a bad year for work. But notice that 2021 showed a lot of vigor. The increase in employment in the first half of 2020 was about 6% per month. The second half of 2021 has been good too but not as spectacular as the first six months. 

This numbers make me dizzy. But there is a story here. If we want to focus on employment, we see the very temporary effects that Covid has had on jobs. We are not yet back to previous peaks. But we aren't far off.  

That sounds pretty hopeful, but it doesn't hurt to think about where we might have been without Covid's interruptions. If employment had grown in 2020 and 2021 at previous rates -- say about 2 million jobs per year -- then the employment level at the end of 2021 might have been around 156 million. Todays' 149 million workers means we are off that mark by 7 million workers. 7 million workers as a percent of 156 million is about 5%. 

That sounds hopeful to me. But a lot depends on Delta, Omicron, and whatever comes next. 

The Glass is Mostly Empty, New York Times

I just read the daily poop (DP) from the New York Times. Each day the NYT writes a short news, but mostly opinion piece*. As a person who is pretty much politically neutral, I read it for fun and to support my belief that the NYT is one of several publications that profit from making us all a little less happy each day. In my case their goal is thwarted because it makes me happy to know that they are so transparent. Of course, they probably are pretty successful at stirring up a lot of pessimism. I guess pessimism sells papers. 

I read their DP on Friday, December 10th. Afterward I felt like stabbing myself in the eye with a bowl of oatmeal. I can't believe they get away with this stuff. 

The piece was motivated by a poll they quoted that found that only 35% of the population thinks the economy is good. Meanwhile 65% think their own finances are just corker dandy. Apparently most people think they are doing a lot better than their neighbors. Somehow, the NYT thinks that is horrible, so they wrote a whole piece about that. Seems to me that they should be happy. Would they rather take a poll and find out that most people think they are doing worse than their neighbors? 

The article is about Covid. I wonder how many negative articles they have written about Covid? The number infinity seems to be close to the reality. Remember the good old days when they used to write about murder and mayhem? 

In their attempt to make everything look horrible, they explain that Covid's impact on the economy is very broad and varied. In their own words, "

    Sure, some major statistics look good, and they reflect true economic strengths, including the state of families’ finances. But the economy is more than a household balance sheet; it is the combined experience of working, shopping and interacting in society.

With that bold statement, the NYT goes on and on about anything and everything they can think of that is bad or worse these days. And the implicit opinion is that while some macro statistics and personal finances are good, it is all that other stuff that matters the most. Gloom. The world is horrible. 

Whatever happened to Mary Poppins? What happened to the glass half-full? Nope. The NYT thinks the glass is pretty much empty. 

Of course, the NYT article never quotes a number to support their angst, except for the poll numbers described above. 

And worse than not quoting a number, they don't distinguish between trends of 2020 and those of 2021. They mention that social distancing makes us socially distant and makes us cry ourselves to sleep at night. While things were pretty uncomfortable in 2020, there have been some improvements in our discomforts and challenges. From this article you would never even guess that anything had improved since 2020. 

What is missing as well is some balanced view of human resilience. It doesn't help that the NYT constantly reminds us that things are always getting more horrible. But the truth is that we have been through horrible many times. The state of nature is that the lion is out there and it is going to eat us if we are not careful. And yes, Covid sucks dirty pond water. But World War II was pretty crappy too. 

As with Covid, we had different opinions about entering WWII (or WWI or Vietnam or Korea) and the effects it would have on us. But with WWII many supported the war effort and many communicated a positive and optimistic psychology. Let's win that war!

But we don't need to go to WWII to make this point. Take any given non-war day in the last 100 years and there is always a mixture of good and bad happening. Leave it to the NYT and you'd never know it because they will prefer to write about the bad stuff. 

Covid is terrible and we have made many sacrifices in our lives to try to win that war. I venture that the NYT is not helping in that regard. They would rather make money by stirring the pot than helping people adjust to an important and difficult challenge. They are a major part of the problem. If you tell people enough times that they are doing poorly -- pretty soon they will start to believe it and feel poorly. 

Poo on them and their DP. 

* nytdirect@nytimes.com

Alan Blinder Again

 

Alan Blinder (Princeton economics)* never gives up. He used to be a moderate -- that is, while he might have tended to the liberal side of macroeconomics, he was a good economist. One with a more conservative macro bent might disagree with Blinder, but finding the holes in his arguments was never easy. It was always very challenging to disagree with him.

But now, Blinder has crossed over to the far left side of the river and he makes it too easy to dismiss his articles. Since he is a famous Princeton economist, his words are published by the best periodicals. This time it was his nemesis the Wall Street Journal that published him. Why would they publish him? The New York Times yes. But the Wall Street Journal. Why? 

He is supposed to be an intelligent economist, yet he continues to spread the big lie that it will cost nothing to pass the latest liberal spending and taxation bonanza. You would think that he is on the Democratic Party payroll. Or maybe he is running for office with Biden. I have no idea why he writes this stuff. 

Since when do economists say that things cost nothing? One of the biggest increases in spending ever yes, but he says it will cost nothing. How can you say that? Trillions of dollars of spending will appear out of a hat? Of course it will cost something. 

Since when are higher taxes neutral to the economy? He admits that corporations and the rich will pay for all those trillions in extra spending. Okay, he doesn't like those folks and loves to add to their tax bills. But are those people so dumb that they will send the extra trillions to the government and not change any of their behaviors? Will firms continue to hire? Will they continue to expand their spending on equipment and other capital? Will they give the workforce a big pay increase? Or will they maybe find clever ways to not pay this huge tax bill? 

What macro course does Blinder teach at Princeton where he tells the students that you can raise taxes by trillions of dollars to afford that much more spending and it will have no impacts? In what economics course does he teach students that extra spending is free? I never taught those ideas but then I am not a rich and famous economist from the Ivy League. 

Okay put aside the free idea. What about his total acceptance that the extra government spending will be done wisely and will result in society's ills being addressed and solved? Sure it's a lot of money he admits, but in a few years from now we will have solved poverty, invested in a huge defense buildup to scare Russia and China, solved the puzzle of productivity, increased employment while reducing inflation, and basically solved all of our problems. 

If you believe all that, I have a very nice 2014 Hyundai Santa Fe I am willing to sell you. Those and other problems have been persistently stubborn over the decades. Have we really figured out how to solve problems associated with income inequality? Trust Alan Blinder -- this time, if you give Washington DC enough money, they will finally put all these negative trends to rest. Hurrah Alan. 

I hate to sound so mean and small. But this guy is whistling his way to the bank. I hate to spend our precious time even bringing up these points. But you gotta do what you gotta do. Folks, it has always made sense to watch your spending and debt. Nothing has changed. 

Read his article if you think I am exaggerating.  

* https://www.wsj.com/articles/look-at-build-back-betters-benefits-not-price-tag-federal-budget-bbb-reconciliation-debt-cbo-11638718325?mod=opinion_major_pos4

Fedspeak and Gobbledygook

Two scenarios. In each scenario, Pete told Charlie not to mess with his golf bag. Charlie then messed with Pete's bag.

    Scenario 1: Pete slugs Charlie

    Scenario 2: Pete tells Charlie that he is thinking about someday maybe retaliating in some way against Charlie. 

These scenarios remind me of the Fed and its current plans to retaliate against the hated onslaught of inflation. Keep in mind that inflation has already picked up. The rise in inflation is not probable nor off in the future. It is here and now. 

The Fed reminds me of the parent who threatens and threatens his child but never follows through. The Fed shows it true colors with gobbledygook. The Fed does NOT want to do anything about inflation until it is forced into it kicking and screaming. Meanwhile it resorts to gooledygook.

Below -- in italics below are quotes from an article* published in the WSJ on December 15. Following each quote I comment. The bottom line for all this nonsense is that the Fed cannot be trusted to do one damn thing about inflation. 

The Federal Reserve set the stage for a series of interest rate increases beginning next spring, completing a major policy pivot that showed much greater concern about the potential for inflation to stay high.

     Setting the stage for a future pivot is not an action, is not a date, and shows nothing about concern. A major policy pivot is a glittering generality and not a specific policy action.

The Fed penciled in at least three quarter-percentage-point rate increases next year. 

   Penciled in is not a decision. Notice that the policy changes are indicated for next year. Inflation is a problem now and they are talking about a policy "sometime next year". Are they going to let inflation get rolling for a few months and then get serious about it?

For months, Fed leaders had stuck to a view that higher price pressures this year were caused primarily by supply-chain bottlenecks and would ease on their own. But Fed Chairman Jerome Powell had in recent weeks signaled much less conviction about that forecast, and the projections Wednesday suggest most of his colleagues share his concern.

     Notice this speaks of projections at the meeting. Projections are not a policy or a policy change. Inflation is here and now. Projections underlie real policy changes when? His colleagues are concerned. What does that mean? I'm concerned about global warming but I don't do anything about it. 

They approved plans that will more quickly scale back their Covid-19 pandemic stimulus efforts, ending a program of asset purchases by March instead of June. That opens the door for them to start raising rates at their second scheduled meeting next year, in mid-March.

     Opens the door? Scaling back? This is like you saying that the doctor ordered you to lose weight to prevent a heart attack, so you have decided to schedule a gain of only 10 pounds next month instead of 15. In the old days, the policy would not have planned to scale back purchases. It would have instigated asset sales. That would be a real policy to fight inflation. 

“There’s a real risk now, I believe, that inflation may be more persistent and…the risk of higher inflation becoming entrenched has increased,” said Mr. Powell at a news conference Wednesday afternoon. “That’s part of the reason behind our move today, is to put ourselves in a position to be able to deal with that risk.”

     He clearly says there is a real inflation risk now. The risk is not next March. The risk is right now. Does he deal with it now? No. He wants to put himself in a position. Wow. Now that's action. Putting himself in a position. 

Fed officials in early November agreed to reduce their then-$120 billion-a-month in bond purchases by $15 billion a month, to $90 billion this month. On Wednesday, officials said they would accelerate that wind-down beginning next month, reducing purchases by $30 billion a month. As a result, they will purchase $60 billion in Treasury and mortgage securities in January, putting the program on track to end by March.

      Now Powell is getting specific. But note. The math says that monetary policy is going to keep injecting money. They should be removing money. There are mountains of money out there. Yet he is clear he wants even more.....by $90 million more this month and finally turning off the money hose in March of 2022. March! That's three months from now. If inflation is a real risk today, why does it take so long to get back into neutral? 

For the first time since the Fed slashed rates to near zero when the pandemic hit the U.S. in March 2020, Mr. Powell said nothing to dispel expectations that officials could be contemplating rate rises in the next few months.

“We’ll be in a position to raise interest rates as and when we think it’s appropriate,” he said. 

“And we will, to the extent that’s appropriate.”

      Those above three quotes are about the Fed's policy to raise interest rates. The first one says Powell said nothing to dispel rate rise expectations. Dispel? Why not say it? We are going to raise rates. The second two quotes add words -- "we will be in a position". What does that mean? Is he going to move from outfield to infield? What does "when appropriate" mean? 

Summary: Obfuscation. Gobbledygook. Stop inflation now before it is too late. 

https://www.wsj.com/articles/fed-officials-project-three-rate-rises-next-year-and-accelerate-wind-down-of-stimulus-11639594785?mod=hp_lead_pos1

Worst Inflation Ever?

The November 2021 CPI announcement created quite a stir. But as usual, the press had to shriek rather than analyze. What I witnessed was a press screaming that inflation in November reached a number so high that even Snoop Dog has never been that high. The press swooned that inflation had not been so high in decades and decades. 

The actual number for CPI inflation in November amounted to a change of 6.81% from November of 2020 to November of 2021. For those of you who remember or who have read about the 1970s, we would have appreciated a rate of 6.81% but that was then and this is now. 6.81% in November of 2021 is not what we want. 

What most of us don't know and we are still discussing is whether or not that number is temporary and fleeting or whether it is a bell weather of what is to come. My crystal ball is at the dry cleaners now so I won't be able to tell you which is which. I will take a guess below. 

But I can request that we back up a bit and examine what is really going on with the numbers. Should we be hysterical about this 6.81%? If you returned from a vacation to another planet recently you might be surprised by the increases in debt by our government and the extent to which the Fed has monetized all that debt. Inflation would not surprise you after all that. And then when you learned about the supply constraints caused by Mr. Covid, you would appreciate why inflation might be rising faster than Elon Musk in his newest rocket ship. 

The CPI is a number that represents the average price of the things we buy -- both goods and services. The BLS sends out a bunch of munchkins every month and they figure out how much all that crap costs in that month. Everything from lettuce to Lexus is counted. Pretty big task, eh. But they do it every month and they publish a number for that month. We call that the CPI value. We now have one for November of 2021.

Inflation is a word that defines how much that CPI level changes over time. We can calculate the percentage change of the CPI from October to November of 2021. That would represent inflation over the period of one month. We can also take the percentage change from November of 2020 to November of 2021. We call that the annual inflation rate. That is what came in at 6.81%. Wow. That's pretty impressive and the press is right to say that 6.81% for a whole year was a real zinger. 

But hold on. This way of calculating an inflation rate from November of one year to November of the next year only uses two months in the calculation. What about the other months? Don't they matter too? And doesn't this method emphasize those two months too much? 

Yep. that's very true. Luckily we have another way to calculate an ANNUAL inflation rate. If we average the one month rates for all 12 months between December of one year and November of the next one, we get an annual average that reflects all those months -- not just two months! If you do it this way., you find that the annual rate was about 4.5%. 

What can we compare that 4.5% to? You could compare it to the average over 2012 to 2019. That pre-Covid inflation rate amounted to about 1.6% per year. During those 8 years the annual inflation rate was as low as zero percent in 2015 and was mostly lingering around 2% in most years. 

What do you think about the average inflation rate of 4.5% over the past year? It is definitely higher than the Pre-Covid inflation rate of 1.6% and it is definitely higher than the 2% we saw in a lot of years recently. It is clearly not the 6.8% the press is swooning about. 

I suspect that given monetary and fiscal policy and given somewhat lingering supply shortages, inflation is not going to improve very much very soon. The supply shortages should dissipate but if our government does not remove the stimulus from their policies soon, 4.5% might herald a return to the 1970s. But today the 4.5% is more a warning than it is a tragedy. 

The Myth of Scarce Workers

Note: after publishing this post I found that the numbers I quoted were in error. I was lazy and got the numbers from a third-party data source I thought was reliable. While US employment is rising, it has not returned to levels reached before Covid. Before Covid employment was about 152 million. As of this November, the number was approximately 149 million or 3 million below the previous peak. 

I wanted to write something about productivity in the USA. Productivity -- or labor productivity -- is calculated using two national figures -- employment and output. Dividing output by employment tells you how much output we can get from a given amount of labor input. When that division increases, we interpret it to mean that a given amount of employment can now produce more output -- ie, we conclude that labor productivity has increased. 

But on the way to productivity I started looking harder at the employment numbers. They seemed to be  screaming at me for attention. So for now, I a going to focus on employment at the national level in USA. I acknowledge that Florida or New York or Port Townsend might deviate from the national figures. But today we focus only on the whole country. 

Why was the data screaming? Because, as often happens, the press or the politicians so misread the situation that it screams for myth correction. Watching your TV or the Internet you might think that firms cannot find workers. They fabricate this picture of firm after firm not being able to find workers. You will, therefore, have to wait in line a long time for your pizza or semi-conductor order to arrive. Covid-induced supply bottlenecks are often blamed but story after weepy story proclaims we have an enormous employment problem. 

Maybe the Bureau of Labor Statistics hates the press or maybe they are mistaken, but if you go to bls.com and download national employment numbers you will be blown away. It is true that employment was dragged down by Covid and interplanetary visitors in 2020, but we are almost to 2022 and we need to focus on post-Covid numbers.

In October of 2020, US payroll employment was 149.7 million jobs. In October of 2021, a year later,  the employment number increased by 4.4 million jobs to a total of 154 million people employed according to payroll statistics for the business sector. That was an increase of 2.9%. Hmm....it seems that firms were finding new employees. Hmm...maybe some firms were not finding employees but if you look at the nation, that's a lot of workers finding jobs. 

It is true that employment bottomed out in 2020 at 142.2 million jobs. But that was then. How does the current figure of 154 million compare to history?

Interesting, the 154 million figure for October of 2021 is the highest on record. It represents a snapback from the recession but it also represents the highest employment level on record for the USA.

2019  150.9 million

2009  131.3 million

1999  129.2 million

Should I go on? 

How is it possible that today's handwringers can know this data and still say the things they say and write the things they write about employment? 

My answer? They don't care about the data. They care about stories. They care about stories that make you want to cry and open your pocketbook or your rich friend's pocketbook to help solve a problem that doesn't really exist. 

Are some people unemployed? Are some companies not finding workers? Of course. Those people always exist. Is this problem huge or huger? I will let you convince me otherwise. But please, don't tell me about one grocery store that you personally know that can't find people to bag your groceries. 

Maybe next week I will turn to national productivity. 

Inflation Rolls On

Inflation continues to worry us. As usual, the press contributes to misinformation and paranoia. I guess you can't sell newspapers unless there is a crisis. One misleading practice is for the press to write lists of price changes. How could that be misleading? The reason is that they produce a very long list of things rising whose prices are rising fast. Food is a good example. Food is just one part of the price index. But if you list 20 different food items it is going to look like "everything" is rising. Yes, food prices are rising and that is impacting people. But as I wrote last week, the price of Medical Care was rising much slower. Why doesn't the press identify all the parts of Medical Care too? Not so much fun for them. 

I love the way the politicians are talking about this now. Geez -- Biden and his buddies have finally discovered inflation. As they walked and whistled and raised spending by amounts that would certainly cause much higher inflation, now they are riveted on solving the inflation problem. Of course, they still won't accept blame for causing it, finding it much easier to blame a guy named Covid. 

Yes, mom I was drinking and driving at an unsafe speed but Joey turned on the radio and that's why I drove into that Safeway fruit department. I am kinda bummed now that I can't buy bananas. Damn Safeway. They never have enough bananas. 

What is so ludicrous is that Biden and Buddies claim they are now focused on how to reduce inflation. Now they are riveted! They are going to save they day. He will ride in on his turtle and slay the inflation dragon. The last article I read said that he is going to resolve all those supply issues. That Covid thing caused a bunch of supply issues so he is going after Covid and Calvin or somebody. 

What does he or his band of budgetary bandits know about resolving supply issues? I recall so well when Ricardo Nixon was similarly befuddled by inflation and he created something called the Nixon Wage and Price Controls. As you might remember, his policies neither controlled wages nor prices but he did get into the history books through his folly. Recall that thanks to his brilliant leadership we endured several recessions in the 1970s. Go team Nixon. 

The government cannot even select a proper amount of money and spending for the economy -- and now we are supposed to believe they can use their unlimited powers to micro manage each sector of the economy? Only Bill Murray could be funnier than this. Biden is turning our country into a rerun of Caddy Shack! Biden has no control over Covid and he definitely cannot control individual prices and outputs. He does seem to be pretty good at staring into the camera with his mask on giving a moving if not tearful sermon. Maybe he should try preaching. 

Is there a lesson in this? Do I have any better ideas? I do. It's called learn from your mistakes. Don't play Superman if you don't have a cape. Don't replace common sense with wishful thinking. Elect politicians who don't smile so much and who don't wear perfect ties. That's a start. Do you have any good ideas? 

Happy Thanksgiving!

 Hope you enjoy your week off! 

Inflation on the Rise?

We seem preoccupied with inflation again. I am not convinced we should be. 

Maybe you remember or heard about the 1960s and 1970s. Inflation built from just about zero in 1960 to 5.7% is 1970. And then in the 1970s it jumped even more -- to 11.3% in 1979 and then rising to 13.5% in 1980. If you take two decades, we went from near zero to almost 14% per year. 

That's quite a change. No wonder we worry. From October of 2020 to October of 2021 inflation rose by 6.2%. When you compare that to the near 14% of 1980, the 6.2% looks small in comparison. But that's not the best comparison.

If you calculate the average inflation rate between 2011 and 2020 -- a ten year period -- the average rate was 1.8% per year. During those 10 years the inflation rate never got higher than 3.2%. It came in at 0.1% in 2015. 

If you compare the rate of 6.2% over the past year to any of the 10 years before it, the 6.2% looks pretty high. How did we get from 10 years of 1.8% per year to 6.2%? The highest rate in the past 5 years was the 2.4% in 2018. It was 1.2% in 2020.

What is going on here? Are we headed back to the 1970s? Or is the 6.2% over the last year going to go out as quickly as it came in. 

If you read the newspapers, you know there are several reasons why the inflation rate might have increased in the past year. The economy has strengthened and the unemployment rate is lower. Covid induced supply shortages could be the culprit. Or maybe it is the result of the Fed's excessive monetary stimulus or the government's incredibly large deficits. 

Or maybe it is none of those things. I took a look at the last year and wondered if the inflation was general or specific. I found some strange changes. Prices of energy services rose by 59%. Prices of energy commodities rose by 30%. Used cars were going for 26% more. Yet medical care rose by only 1.7% and transportation services were up 5%. Food prices up 5% and shelter up only 4%. 

To me that sounds less like general inflation and much more like specific pockets of shortages. If we were suffering through a typical macroeconomic or demand induced  inflation, wouldn't the prices of transportation, food, and shelter be rising faster? 

Putting 2 and 2 together -- this seems like a strange time. The abrupt transition from many years of low inflation to one year of higher inflation plus the absence of real inflation coming from basic needs seems to argue for something both unusual and not structural or lasting. 

Nevertheless, caution might suggest that the Fed and the government rethink their massive stimulus programs as we wait and watch to see how specific sectors recover from what ought to be short-term supply bottlenecks.  Over-regulation in energy and transportation might also be re-thought. 

Unemployment and Government Deficits

 In October of this year the unemployment rate got down to 4.6%. It had been below 6% since 2015 until Covid helped cause the rate to go back up to 8.1% for the year. So I started thinking about the unemployment rate. 

Before I start blabbing about the numbers let's admit one thing. The unemployment rate is a wild and crazy animal. I printed out the average annual unemployment rate for each year between 1961 and 2020. Those of you counting on your fingers and toes, that's close to 60 years. 

It is a wild and crazy number because its construction brings a lot into factors into the number. It is a rate because it takes the number for the labor force (employed people and those looking for work), subtracts the number of people who are employed, and then expresses that number of unemployed people as a percent of the labor force. Lots of things can cause that number to move around and it does. 

For example, the unemployment rate was 4.6% in 2006 and then by 2010 it had risen to to 9.6%. By 2017 it was back to 4.4%. Bouncy bouncy. 

Falling asleep yet? 

The unemployment rate catches a lot of attention. Perhaps it is the bad-boy (or girl) of the Bureau of Labor Statistics. When it rises, we get anxious or downright unhappy. A higher unemployment rate is taken to be a sign of weakness in the economy. When the unemployment rate rises enough, our government ears perk up and we wonder when and by how much we should stimulate the economy. The government often wants to spend more and tax less as a way to goose the economy along. Get it rolling. Thus we find that unemployment changes trigger changes in the government budget deficit. 

We see causality in the way of unemployment increases causing increases in government deficits. Of course, it isn't that simple because sometimes the causality is the opposite. For example there are times when a rise in government deficits are successful -- a rise in the government deficit causes a reduction in the unemployment rate. So we are left with two possibilities when we look at the data. 

A. Increases (decreases) in the unemployment rate cause increases (decreases) in the government deficit

B. Increases (decreases) in government deficits cause decreases in the unemployment rate.

Which is it? Do the two variables move together or do they move opposite to one another? 

The answer is -- BOTH are true. 

That's why I wanted to look at the numbers. 

From 1961 to 1969 the unemployment rate fell from 6.7% to 3.5%. How low can you go? The government deficit* bounced around but showed no real trend during those years. 

The unemployment rate did not stay at 3.5% for long. It kept rising from 3.5% in 1969,  peaking at 9.7% in 1982. You would think that the government would call in the fire trucks and they did. The government deficit which had been at less than $3 billion per year rose to $48 billion by 1983. The government was clearly using its financial tools to bring down the unemployment rate. 

It took a while to percolate. From 1983 to 2000 the unemployment rate behaved and kept falling until it bottomed at 4% in 2000. By around 1997 the government deficits began to fall as the government perceived less of a need to stimulate an economy that was doing better.** In 1998 we had a government surplus and that continued until 2002 when the government went back into the red. 

In 2002 the unemployment rate jumped to 5.8%, stayed high, peaked at 9.6% in 2010 until it returned to about 5.3% by 2015. As the unemployment rate was rising, the government jumped into action again. From a surplus of $24 billion in 2000, they moved us to a $100 billion deficit in in 2004 and by 2011 they had the deficit up to $313 billion. The deficit stayed in the hundreds of billions.

All that stimulus worked for a while -- the unemployment rate declined to 3.7% by 2019. 

Where are we now? Covid and resulting economic imbalances left us with an unemployment rate of 8.1% in 2020 but as of October of 2021 it had fallen to 4.6%. Records show that the government deficit was $837 billion in 2020.The largest previous deficit was $318 billion in 2010.  The government seems quite willing to continue the stimulus despite the dramatic improvement in the unemployment rate in 2021. 

The history of unemployment and government deficits suggests that the government is probably not finished yet. There is also the unpredictability of Covid and its impacts. I am guessing they are not done with large deficits. Large deficits with falling unemployment could spell higher inflation.

Perhaps I will try to being inflation into this discussion next week. 

*The government budget numbers quoted here are from the Bureau of Labor Statistics. They are nominal figures meaning that the effects of inflation have not been purged. There is some worry that relating nominal deficit figures with real unemployment figures is not the optimal approach. But I am not sure that deflating the government budget figures would produce a different result. 

** As the unemployment rate rises it may cause a policy response. As the unemployment rate rises, it may affect the deficit without legislation since it means less employment, less income, and less tax revenue. In either case a rise in the unemployment rate causes an increased government deficit. I don't split this hair in the text. 

 

The Sky is Falling

Judging from the trillions our leaders want to spend to revive our national economy, one would think that the sky has fallen. Covid was no slouch but a brief look at some data might suggest a different result. 

In 2018 and 2019 the economy* grew at a rate of about 2.3% per year. In 2020 the annual rate of change was -3.4%. Clearly Covid had a major effect. We don’t have full year data for 2021. But we do have three quarters and in those quarters the economy grew at an average of 5%.

Looking at those yearly figures makes one wonder why government is so worried about the economy.

Let’s look a little further. The downturn in 2020 was much more extreme than the annual figures show. In the first two quarters of 2020 the quarterly growth rates were -5.1% and -31.2%. That -31.2% figure is eye popping. It would worry anyone. But guess what? 2020 wasn’t over in the second quarter. The growth rate in the third quarter was 33.8%. What goes down must come up. Right? I don’t know but we had a two quarter swing downward and then a reversal the next two quarters. 2020 ended with growth at 4.5% in the fourth quarter. And so far in 2021 we are averaging 5% growth.

The patterns I discussed above for national output are also prevalent in the subcategories of output. The four columns in the table below are for the four quarters of 2020. Notice how we get similar down/up patterns in the outputs as the year progresses.

                                                 Table Real GDP

                                                        2020

                                              Q1       Q2    Q3    Q4

Consumer durables            -12.0     -1.5    89.0    1.1

Consumer services             -10.0  -42.4    37.5    5.3

Business equipment            -21.3  -36.2   55.9  26.4

Exports                                -16.3  -59.9   54.5  22.5

Residential Construction        3.8  -10.6     8.1   10.2

The exception to these down/up patterns was found in Business Structures. Business Structures did not return to growth in 2020 and remained in negative territory in 2021. 

                                            -0.9    -46.8   -15.3   -8.2

Joe and his government friends are today trying to decide how much stimulus to add to the economy. The amounts of stimulus are unprecedented.  Why? The figures I quoted above do not support the idea that the economy is struggling. The figures show a dip and then a return.

Or maybe the trillions of additional government spending being proposed represent an opportunity to install programs Biden and friends have been lusting after for decades. Nothing like an apparent emergency to sneak in lots of change. The nice thing is that it won't cost us a penny. I think I read that somewhere. 

*When I speak of the economy I am using figures for real Gross Domestic Product. Real means that inflation has been removed from the numbers – so changes represent changes in the underlying quantities of goods and services produced. These are official figures that come from bea.gov

All Bets Are Off

All bets are off (ABAO). What does that mean? It means that we don't know what is going to happen next and we often entertain extreme policies to deal with the unknowable. 

An extreme form of ABAO is what happens during wars. We turn society upside down when confronted by a war. 

World War II drafted our young people and sent them to be killed across both oceans. Japanese people who wanted to live in America were treated as enemies and imprisoned. In the Vietnam War, I had to register for the draft as soon as I finished high school and eventually volunteered for the Air Force rather than be drafted upon graduation from college. Nevertheless I got some lovely green fatigues to wear and an all-expenses paid trip to Saigon in 1972. 

Crazy times for sure. 

As crazy as any parts of the above, is how it turned most of us into liars. Kids, their parents, their coaches, and their teachers were part of this conspiracy of the young. What did we lie about? We lied about anything that had to do with deferments from military service. Some pretended to be in college to escape the draft for a while. I asked a doctor if he thought my feet were flat enough to make me unfit for soldiering. He said no. Psychologists said many of us had mental issues. If there was a deferment or exclusion, we knew about it. 

Local areas had draft boards who decided who got chosen for the draft. Some draft boards had big quotas; others did not. We all heard the rumors about which ones were the most active. Some draft boards included family friends. Not mine!

A giant sense of unfairness lay over the land. That's what we talked about. Who was getting out? Who was getting in? How many of our friends had already died in Vietnam. 

So what? I write about all this because War is a time when ABAO. We become amoral if not immoral. We get very selfish and do and say things we would never normally do. 

I write this because Covid is like a war. The line to get a Covid shot is like the line at the draft office. Deferments in 1968 were like vaccine eligibility in 2021. Who gets the shots? There is a nice list of priorities. Those with morbidities. Then who? Old people. Healthcare providers. Teachers and so on. How many stories have you heard about people trying to falsify or exaggerate their status in one of these priority lists?  

And it is not just people trying to get permission to take the shots. How many ways has Covid and the War on Covid changed work and life? How many of you don't wear a mask or don't distance? How many are tired of the boring life of Covid and go to Florida for spring break? Or how many go to a local bar that clearly lets too many people inside? How many "work" at home and misrepresent what we are doing during the workday?

You can add to the list. The point is that Covid is like another war and like another war, ABAO. We do the best we can for ourselves and that best is often not reflective of a lifetime of moral lessons. Each of us has to decide his own behavior. But make no mistake, when war is upon us, we are challenged and Covid is no exception.

Inflation

 At the bottom of this post is a table with monthly and annual inflation rates from February of 2011 to September of this year. Pretty boring. But there might be a story there. 

I get sick and tired of the press. We all know that Walter Cronkite is gone and with him is gone a rational and unemotional summary of the news. Recent studies say the press exaggerates every thing and mostly they prefer to report bad news. 

Whether the topic is Covid or inflation we get a lot of scary reports. The title of an article in the Wall Street Journal this week reads "Supply-Chain Bottlenecks, Elevated Inflation to Last Well into Next Year, Survey Finds." That's just one of many reports that claim we are stuck with an inflation problem.

I am not going to argue with that possibility but I will say that given today's environment, nobody knows squat about future inflation. Between Covid induced supply-chain disruptions, huge government deficits, and  a new waterfall of money from the Fed, we are in uncharted waters. 

So I decided I would spend a few minutes looking at the inflation numbers. I chose the Consumer Price Index. I downloaded the numbers from the Bureau of Labor Statistics, the government organization that creates and reports these numbers on a month basis. bls.org   I took the raw monthly numbers and created monthly and annual averages. I also took percentage changes so we could view inflation rates rather than CPI levels. The monthly numbers are annualized by applying a factor of 12 to any month's percentage change. 

If you just gaze at the whole table you come away with a notion that these monthly inflation rates look like a hare running from a hungry German Shepherd. For example, inflation was 11.7% on an annualized basis in March of 2011. In June, there was deflation of 1.3%. Wow, that's quite a change. Inflation one month; deflation a couple months later. Don't stare at the table too much or you might get dizzy. 

Covid is believed to have started getting serious in the second quarter of 2020.  Between March and August the inflation rate dives down and then swings up. The average for the full year of 2020 is, however, only 1.4%. It is not until 2021 that we see the inflation getting much higher, with rates between 5.1% and 11.1%. Clearly the chart has changed in 2021. 

But notice that the numbers are still a little higher than average but clearly lower by August and September, 2.5% and 3.3%. The average for 2020 is 1.4%, lower than the previous 4 years. Notice too that the average for 9 months of 2021 is 6.9%. That's much higher than any of the years before. 

We don't have October numbers yet but we shouldn't be too crazy about one month. Look at the table. The numbers swing all over the place. October won't prove a thing. But clearly, if October comes in at around 4%, that number will be lower than most of the months of 2021. 

We should expect a gradual decline anyway. We won't just automatically pop back to 2%. Why? First, thanks to a very loud press screaming and crying about rising inflation, this could easily cause inflationary expectations to rise. Already wages are heading upward. So are some interest rates. Expectations can be self-fulfilling. We expect more inflation and then we get it. 

The other reason why inflation might not drop back down to 2% quickly is government policy. Government is piling stimulus upon stimulus. Soon they will start to reverse engines. But until they do, its hard to imagine inflation coming down very quickly. Notice that now that some supply bottlenecks are easing, retail sales are starting to jump. With interest rates near zero and lots of government income subsidies, it's hard to imagine inflation falling very fast. 

Where is inflation heading? Probably to more of the same jack rabbit ups and downs. Will it get much worse. I don't know. It depends a lot on household expectations and future government policies. If you can forecast those things then you will be the expert. Good luck with that. 

Table. Consumer Price Index annualized monthly and yearly percentage changes.

Death and Taxes

Alan Blinder wants to solve the nation's deficit/debt issues by taxing the rich. It is interesting that in his Wall Street Journal article of September 26, 2021, he says nothing about raising the income tax rate on the rich but prefers to raise revenues with something called carried interest and constructive realization of capital gains at death. I will hold off on carried interest. Today is about capital gains at death. 

Apparently Blinder read something about the inevitability of death and taxes. More specifically he wants to tax rich people on unrealized capital gains but only after they die. It is common in economic models to make no distinction between family members. A family is often assumed to act like a single person. In such models, so long as there are heirs, there is no change in tax liability. It makes sense, your parents earned the money and now you get to enjoy the benefits after they croak. 

Blinder wants to change that. If they had sold assets before death, they would have had to pay a capital gain. Lots of us do that. But if they didn't sell, then they must have had a good reason not to sell. But Blinder does not care about that reason. To Blinder dying is tantamount to selling. You gave your assets to one of your brats. There was never a sale. So there is no capital gain. There is no tax. Blinder is envious. He wants some of the action on your money that you saved and left for your family. 

Maybe you don't agree. Y0u believe those rich devils should share their wealth. You might believe those bratty kids never did anything to deserve all those tax-free benefits. But it doesn't make sense. Blinder wants to tax a transaction that never existed. He looks at the price Daddy paid in 1946 and compares that to the assets' prices upon death. Sounds pretty cool until you realize that the asset was not sold upon death and never generated a penny for the brats. Not a penny. The heirs have some paper financial assets but nothing else. Of course, if they earn interest and dividends or they sell, they will pay taxes on that. 

Just for fun let's suppose the asset cost $100.00 in 1946, $1,000.00 at death, and then $99.00 a week after the death. Hmmm. If the child held the asset for one week, the asset would be worth $99.00 and would generate a capital loss. Why would you want to pay a huge capital gain at death when the value of the asset produced a loss? That doesn't seem correct or fair. True, a contrived example. But also true that death does not create a transaction and death distorts what the heir should pay. 

Why didn't Blinder require that the heirs sell the asset? In that way, we would have a real economic value for the capital gain/loss. In that way, the heir would actually have a capital gain/loss and the tax would make sense. Blinder must be assuming that the heir has a right to do as he/she pleases with inherited assets. He doesn't want to interfere with the heir's right to use the asset but he does want to take a capital gains tax on a fictional gain number. 

Which is it Mr Blinder? Does the heir own the asset or do you? 

Powell Must Be Jealous

As the government debt/debt ceiling issue gets all the headlines, poor Jerome Powell, the head of the Federal Reserve, must have been feeling left out. The Fed has nothing to do directly with national debt so Congress and the President are getting all the attention. Sort of like you getting jealous when your brother gets a spanking. 

Powell and his monetary genius friends told us last week that they can save the day. Reminds me of Micky Mouse flying in to save Minnie in the nick of time. Except in the case of these famous mice, it usually works. Mickey really is the Mouse!

Powell is no Micky Mouse. But he thinks he is. This may take a bit of explaining so please pour another gin & tonic.  Don't forget the lime. When the government has a deficit it means it has to borrow by printing up brand new shiny government bonds. Okay, they aren't shiny but they are new. 

This borrowing process usually works until the times when the government's debt gets so large that people lose trust in the government's ability to stand behind the bonds. That is, you get a nice new bond and a promise of two things -- each year you will get an interest check and when the bond matures you get the principal back. But what happens when you lose faith in the government's ability to pay back?

You wouldn't loan money to Uncle Charlie if you were pretty sure he was not going to pay you back. The same goes for loans to Uncle Sam. All this razzamatazz with government debt and debt ceilings calls into question the government's ability to pay us back. So, of course, we would be reluctant to buy government bonds. 

How do we get to the Fed and Jerome Powell from all this? The answer is that the Fed has a "money printing press." Wouldn't you love to have your own dollar printing press? Well, Powell has one. And that means he can play Micky Mouse saves the day. How?

Suppose none of us want to buy the government's bonds. We think they stink like seaweed. We think we won't get our money back. Well, guess what? If you had a printing press, you wouldn't care about being paid back. So the Fed and Mr Powell will crank the money machine a bit and buy some of those stinky government bonds. Mr Powell will go to Pelosi and say....are you having a nice day dear? How much money do you need? Just say the word and we will buy trillions of dollars of those nice new bonds you are cranking out. Don't worry about selling them to the suspicious and cranky private sector. Old Jerome will buy them all. No questions asked. 

Wow. That sounds really cool. The government incurs a debt and we don't have to worry a bit about it. Pelosi + Powell. Go team. 

What could go wrong? For one thing, it is pretty much illegal. The Fed is supposed to be an independent institution. It is not supposed to have financial handshakes with Congress. Of course, Jerome and friends are pretty sneaky and they can make it look innocent and legal. 

What else could go wrong? Let's think about the incentives created. Mom, I gambled away my allowance last night. Oh, don't worry honey, here's more money. Please don't gamble again. Okay mom, sure. Thanks. Right! If the Fed steps in and buys those government bonds this time -- what about next time? What's to stop the process?

And that leads us to the third problem with the Fed's bailing out the Congress. It means you get a double whammy of stimulus. You get the government spending stimulus and then you get a huge monetary stimulus. Wow. Wave after wave of stimulus when the economy already seems to be healing. That cannot spell anything good for inflation, interest rates, and whatever policy has to be enacted to offset all that.

Powell is not Micky Mouse. His rescue is fake. His rescue will make us all worse. We don't need Micky Mouse. What we need are leaders in Congress and at the Fed who understand economics. Perennial huge debt doesn't work for you, me, or our government.  Instead try reasonable debt. No debt ceilings. No monetizing the debt. No roller coaster economy. Simple.