A guilty verdict by US voters last November on inflation mongers will have no follow-through in terms of monetary regime change. Problem: the verdict was not delivered in sharp and comprehensive form. Instead, communication was largely via exit polls and other such surveys. The propagandists of the present monetary regime have been able to manipulate this messaging to the advantage of themselves and their clients.
Yes, in principle a damning indictment well-founded in evidence could have been served on the actual monetary regime – the so-called 2 per cent inflation standard. It has presided over a near 20 per cent loss of the dollar’s internal purchasing power from the eve of the pandemic in 2019 to Election Day. Under a sound regime any initial loss would have been made good subsequently as the initial supply shock went into reverse.
The indictment should have included a key section on the regime’s responsibility for asset inflation. The evident goods and services price inflation had been accompanied by rampant asset inflation -first during the pandemic itself (2020-21) and then into the extended monetary inflation beyond (2022 to present). The Fed had gone easy on its so-called monetary tightening program, implemented in 2022H2, once the supply side of the US and global economy had started to re-expand.
The post-bubble adjustment in China through 2022 to the present has been an important source of downward pressure on global goods prices. Correspondingly the Fed has been in rate-cutting mode through 2024. That has been the catalyst to further asset inflation unlike what would have been the case if the Fed had allowed price declines to permeate throughout the US economy.
The Fed Turns Disinflation into Asset Price Inflation
This culpability for asset inflation stretches further back than the onset of the pandemic. There had been for example the Great Yellen monetary inflation during 2014-16. The Fed had responded to a period of virtually no consumer price inflation explained by powerful declines in global commodity prices (stemming from a China bust cycle starting in 2013) by keeping policy rates glued to near zero despite strong growth and much evidence of credit excess.
Cumulative asset inflation from the “great Bernanke experiments” onwards has brought about much mal investment. Capital spending including crucially that related to the pursuance and implementation of technological change has responded to distorted price signals whether in equity or credit markets or elsewhere. A dominating cause of distortion has been the “search for yield,” characterized by wild speculative narratives, unchecked by normal sober rationality. These narratives have included the scope for actual and future monopoly power as spawned by the digitalization revolution but also more generally. Undistorted price signals, greater competition, and sober rationality might well have gone along with slower and less extensive adoption of new technologies. That would be a good thing thing from viewpoint of overall economic well-being.
Our Stagnating Economy After 2007
The bad follow-throughs reveal themselves in the large buoyant areas of capital spending which fail at the level of the economy as a whole to impressively boost productivity. Never mind spectacular profits reflecting monopoly power or winner-take-all advantages. These are often related to changes in the everyday organization of production or consumption – outwardly stunning. Living standards in the period 2007-2023 have grown extraordinarily slowly by comparison with 1990-2007. The choice of 2007 as pivot for these comparisons is in line with that year being the peak of the long business cycle starting in 1991; there has not yet been another long cycle peak since then.
Real US GDP per capita is up 15% from 2007 to 2023, compared to 37.5% from 1990 – the previous business cycle peak to 2007; total factor productivity has grown 10% in the second period compared to 20% in the earlier period. In the double long cycle from peak to peak of 1973 to 90 – a period which included three powerful monetary disinflations albeit flawed both in implementation and follow-through – real US GDP per capital increased by 45%. For Germany a similar data comparison shows real GDP per capita up by 12.3% in the second period (2007-23) compared to by 30.3% in the first.
These estimated growths in living standards since 2007, as proxied by real GDP per capita, are subject to serious exaggeration. For example, the information technology revolution has been characterized by many flaws – including the scope for virus attack and more broadly insecurity of information. And so alongside there has been a huge growth of the digital security industry. In the GDP data this is all treated as positive output and ultimately contributes absurdly to the estimated growth in living standards.
Then there are the thorny data issues related to the present AI mega capital spending boom. As of now all this capital spending arithmetically adds to real GDP per capita. But what if this subsequently turns out to be giant mal investment? More broadly, in the US, there has been the growth of recorded health spending, especially as bloated by Obamacare – all treated as tautologically a rise in real GDP per capita. but this may just be fantasy. More than a decade of persistent monetary inflation including the “innovation” of quantitative easing and long-term interest rate manipulation spurred huge mal investment in the public sector activity.
No doubt many voters in the 2024 US election, who in exit polls expressed dissatisfaction with the present state of the economy, had some of these ill effects in mind. But there is no evidence to suggest that they were in the main conceptualizing a link with monetary inflation. When it came to specific questions on inflation the complaint was the cost of living and a related fall in living standards – the latter consistent with malinvestment. There was no direct questioning (in the polls) about dissatisfaction with inflation tax as levied on holdings of money and government bonds. Perhaps there were many offsetting gains whether from asset inflation or falls in the real value of debts.
The general dissatisfaction about the economy has not been sufficient to catalyze the political debate on to a promising monetary track. Rather the Republicans, whether in the Trump Campaign or in Congressional races, in responding to public resentment on inflation put great emphasis on how wasteful spending by the Biden Administration had been the culprit. Never mind that the historical evidence and theory suggests no monocausal link between wasteful spending and inflation, but rather the omnipresence of monetary malaise.
Expect No Revolution in the Monetary Status Quo
The Republican solution to inflation has been proposals to roll back Biden Administration spending most of all as it relates to the Inflation Reduction Act, alongside more oil drilling and de-regulation. President-elect Trump’s choice of economic cabinet officials and their purported programs confirm that popular dissatisfaction with monetary inflation and its pernicious effects has not pierced through even the outer walls of the current monetary regime.
No monetary revolution: instead, first plans to make the government sector more efficient and second (related) widespread deregulation. But how can this seriously impress anyone when there is no agenda which would end the monetary manipulations which made the government blow-out possible in the first place?
The nominated Treasury Secretary favors a plan where the President would nominate well ahead of the May 2026 retirement date the replacement to Fed Chair Powell, so that his shadow pronouncements could affect policy ahead of then. But why no mention of the obvious way to sideline Powell and tackle monetary inflation? This would be Congress passing a short bill made up of amendments to the Federal Reserve Act: first making illegal the 2 per cent inflation target. insisting that this is inconsistent with monetary stability as previously legislated by Congress; second, to prohibit the payment of interest on reserve deposits with the Fed, setting the stage for monetary base to again be an effective component of the monetary anchoring system.
President elect Trump’s nominated Treasury Secretary is said to have been a fan of Abe-economics. That should be an eye-opener for anyone still expecting any turn towards sound money. During the long span of Abe economics, the BoJ was in effect pursuing vast monetary inflation. The strong downward pressure on Japanese prices from integration with China and the huge gluts emerging there meant that BoJ monetary inflation did not show up in high CPI inflation. Instead this was a golden age for the profiters from asset inflation; and alongside there was the waving of the magical wand to calm anxiety about gigantic government spending which Abe’s promises of reform failed to dent.
Yes, the US voters who delivered the guilty verdict on inflation and more widely the economy in 2024 should be cautious about magicians taking up their cause. That includes a Treasury Secretary making budget projections based on long-run economic growth at 3% p.a.. We can expect the Treasury together with the Fed to dismiss as noise “transitory” bad news on consumer price inflation as explained by the supply shock of tariff war. They will resist the monetary tightening which any sound monetary system would empower in the context of such disturbance.
Originally Posted at https://mises.org/