Article 43

 

Friday, May 20, 2022

The Next Recession Part 29 - Rising Inflation

rdwolff-dw.jpg image: economist richard wolff border=0

“The Fed uses interest rates as either a gas pedal or a brake on the economy when needed,” said Greg McBride, chief financial analyst at Bankrate. “With inflation running high, they can raise interest rates and use that to pump the brakes on the economy in an effort to get inflation under control.”
- CNBC - Why the Federal Reserve raises interest rates to combat inflation

“Relentless high inflation is the culprit here: As the Federal Reserve attempts to tame it by rising interest rates, investors read depressed earnings ahead. We’re going to have high inflation throughout this year and into next year, and I dont really see a slowdown until 2024”
- Wharton’s Jeremy Siegel says that high inflation will last until 2024 and the Fed is playing catch-up with its late response.

The US Department of the Treasury recently announced that student loan interest rates will increase for the 2022-2023 school year. These new rates go into effect July 1, 2022, and you can’t take out any new student loans before that date.
- Student Loan Interest Rates Are About To Go Up, Business Insider, May 18, 2022

University of Florida economist Dr. Amanda Phalin said she also anticipates a recession to form over the next year or two despite efforts to avoid job losses.

“It is possible to raise the interest rates without increasing unemployment theoretically, but it has never been done before, Phalin explained.
- Anticipate Another Recession

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Economics 101: What rising interest rates, inflation mean for you

By Paul Guggenheimer
Tribune Total Media
May 20, 2022

The price of just about everything has gone up.

Inflation, the rate at which prices rise in the economy, is the worst its been in 40 years. The Federal Reserve, the central bank for the U.S. - more commonly known as the Fed - announced earlier this month that it was raising its benchmark interest rate by a half percent. That marked the largest rate hike since 2000 and came as a direct result of rising inflation.

Fed Chairman Jerome Powell said future interest rate hikes are likely.

But what does this all mean for you?

It means the cost of borrowing money has gone up. If you carry credit card debt, your rates are going to jump. Adjustable-rate mortgages and home-equity lines of credit also will be affected.

Risa Kumazawa, an associate professor of economics in Duquesne Universitys Palumbo Donahue School of Business, teaches the course “Economics 101 - Principles of Macro Economics.” She spoke with the Tribune-Review and explained what you need to know.

Question: What is inflation and what causes it?

Answer: Inflation simply means that there are higher prices. There is always inflation in the economy. Prices are always rising. But when it becomes a problem is when prices are so much higher than the year before. Were experiencing inflation that is not the typical norm. In the U.S., prices (usually) grow by about 2% to 3% per year. But (now) we’re suddenly faced with an 8.5% (increase) in March of this year compared with March of last year. So we’ve deviated from the norm, which is why this inflation is on everybody’s minds.

Q: How would you sum up what is currently happening with the economy and what were seeing with inflation?

A: This is the perfect storm - with Russia going to war with Ukraine, the supply chain issue, higher demand, stuff not being shipped quickly enough and prices rising for certain things in the economy. People are facing unexpected higher prices. The first place people are noticing this is at gas stations. The one thing that shot up in price is oil. Your gasoline now costs a lot more (per gallon) than it used to. Russia’s war with Ukraine has definitely played a role in this. Russia is one of the primary countries that supplies oil to the world. So this is a major blow to countries that were importing oil from Russia. That usually comes with higher food costs, and we’re definitely seeing that as well.

Q: So its like a domino effect? Do higher gas prices impact food prices?

A: They do because when truck drivers ship things, or if you’re flying things, gasoline costs are involved, so then the sellers of these products raise their prices as well to make a profit.

Q: How do you arrive at the figure of 8.5% to show how much prices have increased in the last year?

A: Were tracking multiple prices in the economy. You’re not just tracking the price of gasoline but food milk, bread, eggs - we track all these prices as well. We have a way of combining all of these individual prices together in whats called the (Labor Department’s) consumer price index, and then when we take the percentage change in that, we can figure out the inflation rate in the economy.

Q: So this is what our current inflation looks like, and its not good for consumers. The Federal Reserve is responding to inflation by raising interest rates. What is the Fed, what is it designed to do, and why is it raising interest rates?

A: The Fed is considered to be the central bank of the country. It conducts monetary policy, which includes lowering and raising of interest rates depending on how well the economy is doing. The Fed lowers the interest rate to stimulate a slowing economy. It impacts big-ticket purchases that people make - cars, homes, appliances. If there’s a lower interest rate that people are going to be paying, they’re going to spend more, and this is how the economy gets stimulated. The Fed also raises interest rates to combat an economy with high inflation. When interest rates are high, people aren’t going to be spending as much because you’re going to be paying (more money) for your car loan, your mortgage, credit cards. (Consumers) aren’t spending as much, so prices will come back down again. But by slowing down the economy, it could lead to a recession. The Fed has decided that the inflation issue is a big enough problem that they’re going to fight that one.

Q: When do we, as a collective economy, feel the pinch of this, and whats the worst thing that can happen?

A: The worst, I think, is because of these (higher) interest rates, the Fed actually pushes us into a recession. That’s the worst that could happen in this scenario.

About the author

Paul Guggenheimer is a Tribune-Review staff writer. You can contact Paul at 724-226-7706 or EMAIL

SOURCE

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“Is there anything the Biden administration can do to decrease the rate of inflation significantly, even though it is worldwide?  Is there any approach to price controls that could really work?”

By Richard Wolff
Democracy At Work
May 18, 2022

Transcript

Q. Is there anything the Biden administration can do to decrease the rate of inflation significantly even though it is worldwide?

A. There’s all kinds of things that Mr Biden can do. I’m going to go over several of them, but they’re not that’s not a complete list.

The tragedy in the United States is that we are dealing with the inflation by raising interest rates through the Federal Reserve and the public discussion is as if that’s it that’s our option. That’s what we’re going to do - that’s what we have to do.  As if there were not loads of other possibilities, which are all cut off by this conversation that is really a story of silencing.  And i want to unsilence so that we all understand it

First of all, the United States impacts global inflation because it is an outsized participant

Let me give you an example. The GDP, the gross domestic product of the United States is about 21 trillion dollars. The next biggest country, China, is only 15. And after that they’re very small.  Germany is about four, Russia’s about one and a half.

The United States is a huge outside player in the world economy, and if we bring down inflation here, everybody else confronted with the fact that prices aren’t rising here, they were wouldn’t dare raise their prices, because they priced themselves out of the world market. So put aside the question of direct control, we don’t need it.

In the united states what we do here impacts the rest of the world.  So let’s begin.

Here’s a way to stop an inflation.  I’m not going to speculate on a possible one, I’m going to describe it for you historically.

Richard Nixon, a conservative republican president on August 15 1971 declares a wage price freeze. He says “I’m speaking to you Americans on radio and television and as of tomorrow morning we will make it illegal for anyone to raise a price or a wage. If you do that we will arrest you and put you in jail.”

Is that an option?  Yes.  Was it done in the united states? Yup. Has it been done in other countries? Yes. Is it an alternative to raising interest rates to stop an inflation?  You bet. Is it being discussed in the United States?  Nowhere not at all.  It’s as if what i just said had never happened.

Here’s a second way to stop an inflation.  In World War II we had to do that. The democratic President Roosevelt understood that to fight world war II resources that used to be used to make consumer goods would be diverted to making uniforms - guns, planes, tanks, all of the apparatus of war - and that meant that the quantity of resources available to produce consumer goods would shrink and therefore consumer goods would be scarce.

The demand hadn’t changed, or people of America still wanted to eat and dress and live the way they had in the past, but there wouldn’t be the equivalent stuff, and the government decided. If we allow the market to handle this, the rich people will come in, see quickly that there’s a shortage, and make sure they get it by bidding up the price that’s how they make sure they get what is scarce.

Markets always distribute whatever is scarce to the richest people.

Do you find that offensive does it contradict your morality? Think about what you just agreed to.

Wow! And so the government didn’t allow it, It didn’t want an inflation. They didn’t want the prices of consumer goods to go up so that only the rich people could get it, and the mass of people couldn’t afford it who would then get angry and bitter and we would have disunity at a time of war when we needed unity, so that was out, and they issued ration books that had in them ration stamps and store keepers could not sell you a quart of milk, a gallon of gas, whatever it is that was in the rules of those days without you having a stamp, and the stamps were distributed to people according to their need not according to their wealth. Wow! We didn’t have an inflation for that reason we didn’t allow it to happen.

And here’s a third one that’s also a reality of American life, making it all the more amazing that there’s no conversation about it.

That the desperate government of Biden, and the political center republican and democrat determined to survive politically and rebuild their shattered hold on American society have to make us all unite in a war, and have us all unite in the Federal Reserve as if the raising of interest rates is the only way to deal with an inflation. 

Here’s one more that time allow. We already do in this country a very interesting thing with the prices of utilities, you know electricity, water, things like that, and the price of insurance policies, because they have been abused by the capitalists who own those businesses who raised their prices too high, who made a little personal inflation, we have what are called utility commissions in every one of the 50 states, and we have insurance commissions. And you know what?  Before an insurance company can raise a price, before a utility can raise a price, they have to go before the commission and demonstrate that it’s a reasonable thing to do, which the commission has the power to reject, and that happens all the time. Well if you don’t want an inflation, why don’t you do that for everything? Why don’t we set up a wage price control board - oh wait a minute - during world war II we had that.

One of the greatest economists at that time - John Kenneth Galbraith - wrote a book: A THEORY OF PRICE CONTROL - because he worked during the war on the board that controlled prices in this country.  So don’t tell us that there’s nothing you can do but interest rates.  That’s a lie. It’s just a lie.

I’ve just given you rationing, I’ve given wage price freeze mr dixon thing, and I’ve talked about using commissions to control prices.

There are others, but the important thing is to understand that if there were a political will to stop the inflation it could be done tomorrow, but instead it’s taking months and months, and it’ll be done by raising interest rates, which will mean it’s harder to afford a home, harder to pay for a car, harder to carry credit. It’ll hurt the mass of people as if that were the only way to go.

SOURCE

Posted by Elvis on 05/20/22 •
Section Dying America • Section Next Recession, Next Depression
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