TIPP Insights: Yellen utters the dreaded ‘S’ word — stagflation

 

By TIPPINSIGHTS EDITORIAL BOARD, TIPP Insights

If you were born after the 1970s, you have only read about stagflation in your Economics 101 class. That was when America went through ten years of tough medicine prescribed by the Paul Volcker Fed to fight raging inflation, oil price shocks from OPEC, and a stagnant economy.

Credit the Biden administration for bringing this term back to American lives – in 2022. According to the World Economic Forum, stagflation happens when slow economic growth and joblessness coincide with rising inflation.

Many parts of the world are already in this condition. Smaller countries like Sri Lanka and Peru struggled to revive economic growth after two years of the pandemic. When the West placed aggressive sanctions on Russia and Ukraine was forced to defend itself, the supply of critical commodities fell, and inflation spiked. Supply chain disruptions as China locked down its manufacturing to fight Covid made matters worse.

This week, the International Monetary Fund was bleak in its global assessment. “Russia’s invasion of Ukraine has created a crisis on top of a crisis around the globe with countries facing food shortages and sharply higher prices for food, energy, and fertilizers. These pressures occur when countries’ public finances are already stretched from the pandemic and debt burdens are high. With inflation reaching the highest levels seen in decades, vulnerable households in low- and middle-income countries are most at risk of acute food insecurity. And history has shown that hunger often triggers social unrest and violence.”

It is remarkable that an American Treasury Secretary uttered the S word in public, but wary of adverse public reactions at home, Janet Yellen was careful to do so abroad, in Bonn, Germany. The hope was that American media outlets, already providing wall-to-wall coverage on Tuesday’s primaries and President Biden’s Buffalo visit, would give Yellen’s comments a pass.

Even more remarkable was the Secretary’s arrogance when she insisted that America would come out well after all. Like the academic that she is, she boasted that America’s labor market was strong and household finances were healthy, ignoring facts on the ground.

While technically the unemployment rate is low, what matters is the labor participation rate or the willingness of people to seek work and work those jobs. As we noted recently, Americans are refusing to take up jobs that do not meet their expectations. April’s jobs report showed that there are now nearly two jobs for every unemployed worker. When people don’t work available jobs, the macroeconomic effect is similar to when unemployment rates are high – that is, when people want to work and do not find jobs.

Her second boast – that American household finances are healthy – is also dishonest. The American financial situation was healthy, but that was two years ago. The Kansas City Fed noted that savings as a percentage of disposable personal income increased to a record high of 33.7% in April 2020. But from March 2021, the rate has steadily decreased to just 6.2% in March 2022, about the average for the last ten years.

The real problem, of course, is that inflation in America is now at 40-year highs. When everything costs significantly more, especially food and gas, the American household’s finances are no longer healthy. With stock markets falling and the Fed raising interest rates to make borrowing dearer, the secretary’s claim is downright false.

So what brought us to this dreadful situation when America’s top finance official is carefully reintroducing the term ‘stagflation’?

It is the Left’s drumbeat policies of showering cash on every problem, money that America does not have. Egged on by the Bernie Sanders – Elizabeth Warren – AOC crowd of Leftists, the Biden administration has embarked on a remarkable degree of borrowing and spending. This was on top of President Trump’s nearly $3.1 trillion in Covid emergency expenditures, bringing the total to $4.5 trillion. Were it not for the brave NO vote by Sen. Joe Manchin, the Leftists were on track to spend $6.2 trillion more on their Build Back Better plan.

Manchin refused to support BBB for one reason alone – the spending would be inflationary. To his credit, he raised his objections in July 2021, when inflation was relatively moderate by today’s standards.

It is astonishing that the Left still does not get the dangerous condition in which the world finds itself. On Sunday, Bernie Sanders appeared on Meet the Press and castigated Manchin and Arizona senator Krysten Synema for not supporting BBB. “It should not be a head-scratcher. You’ve got two members of the Senate, Sen. Manchin and Sen. Sinema, who have sabotaged what the president has been fighting for.”

The Left has always taken its marching orders from John Maynard Keynes of King’s College, Cambridge. His theories, implemented by governments after emerging from two devastating World Wars and the Great Depression, are now established mantras in every Leftist government worldwide. Keynes argued that budget deficits and loose monetary policies do not matter.

The Biden administration has people who believe in an extreme version of macroeconomic policy – the Modern Monetary Theory – which effectively says that America can spend as much as it wants, without penalty.

Comment

We have no tolerance for comments containing violence, racism, profanity, vulgarity, doxing, or discourteous behavior. If a comment is spam, instead of replying to it please click the ∨ icon below and to the right of that comment. Thank you for partnering with us to maintain fruitful conversation.

Latest Articles