Too Bad the Fed Has Only a Hammer – Inflation Isn’t a Nail This Time, and We’re Flourishing

There is a real problem understanding our economy out there, even among people whose knowledge is supposed to be nuanced.  Here are titles of articles published on August 5^th, after that day’s tremendous jobs report:  “Unemployment Heads in the Wrong Direction for the Fed” (Jonathan Levin, Bloomberg.com); “Markets will be in for a ‘rude awakening’ following jobs report, economist warns” (Talia Kaplan, Fox Business); “Good News on Jobs May Mean Bad News Later as Hiring Spree Defies Fed” (Jeanna Smialek and Jim Tankersley, The New York Times); “The Fed will have to ‘break this economy’ to tame inflation after the strong jobs report, Mohamed El-Erian says” (Phil Rosen, Business Insider).  The wrong track was awfully crowded.  The only points go to Ben Casselman, for “How This Economic Moment Rewrites the Rules,” in the August 6^th New York Times. 

What’s really going on?  It’s simple, and not bewildering at all.  The root cause of our economy’s state is way-high demand, from people cooped up and accumulating money during peak pandemic time and often additionally unable to buy because of manufacturing and supply-chain problems.  These eager consumers, when things cost more but what they want is available, are taking the push and buying anyway.

All of that, along with higher world demand for oil, makes prices go up, and, as more and more labor has been needed to produce and sell things, it has vastly increased the number of jobs.  We have too much money chasing too few goods and services, and too much demand for labor chasing too few workers, not to mention too many businesses refusing to pay what are now market rates for it – both classically inflationary.  The economy is excellent – the only thing out of whack is supply and demand.

So what about interest rate increases?  Because demand is so much less elastic now, they won’t be as effective as usual.  Instead of cooling the economy, they will be most successful at pushing stock prices down, multiplying the interest we pay on our over $30 trillion national debt, and perhaps even creating as much inflation as they eliminate by increasing corporate costs, which can be passed along.  The best thing we can do with inflation is to leave it alone – it will drop by itself when consumers get sated.  With reduced oil prices, down from $122 per barrel to $88 at one point, and falling food costs, that is happening already, as shown by July’s 8.5% reading, the lowest since April. 

Players of the game of bridge value their hands with “high card points,” assigning four to each ace, three to each king, and so on.  It is the best single evaluation tool there today.  But, although most advancing participants learn the need to use additional factors, many do not, and their games suffer.  That is the same way our otherwise eminent observers are now failing.  If we have inflation, they always seem to want to solve it with higher interest rates.  If we have clearly short-term Gross Domestic Product shrinkage due to not enough goods and services, even amidst a mass of other favorable numbers, it must be a recession.  If our job gains have blown away our population increase all year, there is work for practically anyone who wants it, and there is so much demand for travel that airports are putting limits on how many passengers they can handle, it must be “bad news.”

All of that is thinking for novices.  We can do better.  It is time for us to not only realize what is happening, but to adjust our attitudes and policy actions accordingly.  We don’t need to break anything.  That will help us, and is not too much to ask.