Economists Are Roasting Biden’s ‘Incoherent’ Inflation Tweet—and for Good Reason

President Joe Biden’s approval rating is tanking, and he’s now trailing former President Donald Trump in national polls, as well as in some key swing states .

Vox blames the economy for Biden’s plunging popularity — or at least voters’ perception of the economy. A new Gallup poll shows that just 32% of people approve of Biden’s handling of the economy.

To combat the narrative that Biden’s policies are to blame, the White House has gone on the offensive, attacking billionaires and blaming corporations for the economic pain the public is experiencing.

“Let me be clear to any corporation that hasn’t brought their prices back down even as inflation has come down: It’s time to stop the price gouging,” Biden tweeted . “Give American consumers a break.”

It’s a strange line of attack for several reasons, but the most glaring one is that it’s entirely devoid of economic sense, something University of Michigan economics professor Justin Wolfers observed on X.

“This is not only incoherent; it’s unhelpful,” Wolfers, a senior fellow at the left-leaning Brookings Institution, said of Biden’s tweet. “It’s incoherent because lower inflation is cause for firms to moderate their price hikes, rather than cut prices. It’s unhelpful because the only path back to earlier price levels is deflation, which comes with massive economic pain.”

Melissa S. Kearney, an economics professor at the University of Maryland, responded with a face-palm emoji.

“I’m guessing the economists weren’t consulted on this one,” Kearney deadpanned.

The obvious fact the Biden White House missed is that while inflation might be slowing, it’s still positive, which means prices are still increasing — and at a clip much faster than the Federal Reserve’s target of 2%. That companies would cut prices amid a general rise in consumer prices defies economic sense.

A second problem with Biden’s tweet is that he points the finger at companies for inflation that stems from the government’s policies. In one of his most famous lectures, the Austrian economist Ludwig von Mises pointed out that inflation is just that: a policy .

And if we look at recent U.S. monetary policy, it’s clear why people are suffering from inflation.

Over a four-year period, the Fed increased the M2 money supply from $14 trillion to $22 trillion at its height in the summer of 2022, an increase of more than 50% in just four years.

The M2 money supply has fallen slightly, to $21 trillion, due to tighter Fed policy, but it is still significantly above pre-pandemic levels.

This is the cause of price inflation, and one need only look at the Fed’s description of what causes inflation to confirm this.

“Inflation is caused when the money supply in an economy grows at a faster rate than the economy’s ability to produce goods and services,” the Federal Reserve Bank of St. Louis states on its “ Money and Inflation ” resource page.

The obvious question is: If printing money causes inflation, why are we doing it?

The Fed has long claimed that inflation is just the price we must pay to keep unemployment low, but using monetary policy to fight unemployment has always been problematic. It’s true that there is, generally, an inverse relationship between unemployment and inflation, as demonstrated by the Phillips curve . When inflation rises, unemployment falls and vice versa — at first.

This relationship weakens over time , however, which is why some astute economists, including the Nobel Prize-winner F. A. Hayek , believed that using monetary policy to curb unemployment would inevitably result in higher and higher inflation, as central banks would have to print more and more money to maintain low unemployment.

We’ve seen this phenomenon play out in numerous countries in recent history, including Argentina , where inflation is above 140%. Despite Argentina’s high inflation, its unemployment rate has averaged about 8.5% over the last decade. In other words, Argentina has high inflation and high unemployment, just as the United States did in the 1970s.

Managing unemployment might be the stated reason for inflationary policy, but the actual reason seems to be something else: It facilitates government spending. As the Nobel Prize-winning economist Milton Friedman and others have pointed out, inflation is a tax.

Taxes are what facilitate government spending, and once one grasps that inflation is a tax, the inflation picture becomes clear. Inflation is caused by expanding the money supply, but the impetus behind the money printing is government spending.

Politicians can’t admit this, of course. So they concoct ridiculous economic arguments that blame companies for the very inflation their policies cause.

This article originally appeared on The Washington Examiner. 

Jon Miltimore

Jonathan Miltimore is the Editor at Large of FEE.org at FEE.

This article was originally published on FEE.org. Read the original article.

Economists Are Roasting Biden’s ‘Incoherent’ Inflation Tweet—and for Good Reason

Why Justin Trudeau Is Blaming Grocers for Surging Food Prices in Canada

New government data emerged this week showing that food prices in Canada continue to climb.

Though year-over-year inflation of consumer prices overall cooled to 3.8% in September, food prices increased 5.8% from a year ago, driven by surging prices of bakery products (up 8%), fresh vegetables (7.6%), pasta products (10.8%), and poultry (6.5%).

Food prices have long been a sore spot for Canadians. Even prior to 2023, statistics showed that some 7 million Canadians, including 1.8 million children, were in households struggling to put food on the table.

As inflation continued to drive food prices upward in 2023, consumer outrage quickly mounted.

“If I’m paying that much, I hope there’s gold in that chicken,” one user responded to a viral tweet in January showing a $37 price tag on a package of chicken breasts.

The episode prompted accusations of price gouging and a high-profile story in the New York Times — but the paper reported that outrage at grocers was misplaced.

“While it’s easy to get angry at the grocer, there’s very little evidence that the grocers are actually taking advantage of the situation,” said Mike von Massow, a food economics professor at the University of Guelph in Ontario.

Food prices have only gotten worse since then, and Prime Minister Justin Trudeau, apparently not a reader of the New York Times, has found the same scapegoat as many others unversed in basic economics: grocers.

Last month, Trudeau threatened to slap grocery stores with new taxes if they don’t find a way to lower food prices.

“Large grocery chains are making record profits. Those profits should not be made on the backs of people who are struggling to feed their families,” Trudeau told an Ontario crowd.

By taking aim at grocers and “record profits,” Trudeau is parroting the rhetoric of some U.S. politicians, including Sen. Elizabeth Warren (D-MA), who has argued that inflation is being driven by “corporate greed.”

The idea that corporations suddenly became greedy in the aftermath of the pandemic never passed the economic smell test, and it was recently rebutted in a Federal Reserve paper.

“Corporate profit margins were not abnormally high in the aftermath of the COVID-19 pandemic, once fiscal and monetary interventions are accounted for,” noted Dino Palazzo, senior economist at the Federal Reserve Board.

Yet politicians such as Trudeau, who less than a year ago criticized the idea of using a windfall tax on grocery companies to lower food prices, have repeated the claim over and over again that greedy corporations are the root cause of inflation. Why?

The answer is simple: the true blame for inflation lies with them.

Pierre Poilievre, leader of Canada’s Conservative Party, hit the nail on the head in a recent interview when he pointed out that the Canadian government’s policies are to blame for inflation — as are those who lead it.

“[Trudeau] prints $600 billion, grows our money supply by 32% in three years,” Poilievre said. “That’s growing the money eight times faster than the economy. No wonder we have the worst inflation in four decades.”

This is the mystery of inflation. (It’s not really a mystery.) Politicians and central banks flooded the economy with money, which devalued the currency.

Basic economics teaches that increasing the money supply faster than an economy can provide new goods and services will result in price inflation, and that is precisely what we’ve witnessed. Indeed, for much of modern history, inflation was defined as expansion of the money supply, not an increase in prices (which is the consequence of expanding the money supply). Henry Hazlitt famously explained the difference in Economics in One Lesson.

“Inflation is an increase in the quantity of money and credit. Its chief consequence is soaring prices,” Hazlitt explained. “Therefore inflation — if we misuse the term to mean the rising prices themselves — is caused solely by printing more money.”

Politicians such as Trudeau cannot, of course, admit it’s their own policies and money printing that are to blame for high food prices. So they hold speeches blaming grocery stores and food producers for the inflation they caused and threaten them with new taxes.

Whether Canadians will see through Trudeau’s crude charade is unclear. What is clear is that Canadian grocers are not responsible for the skyrocketing price of food in Canada. Justin Trudeau and the Bank of Canada are.

This article originally appeared on The Washington Examiner. 

Jon Miltimore

Jonathan Miltimore is the Editor at Large of FEE.org at the Foundation for Economic Education.

This article was originally published on FEE.org. Read the original article.

Why Justin Trudeau Is Blaming Grocers for Surging Food Prices in Canada

Online Encyclopedia Declares Inflation a ‘Right-Wing Talking Point’ in Response to Hit Song

A new folk song with edgy lyrics is causing quite a stir in America, and it’s not “Try That in a Small Town.” 

Oliver Anthony's blue-collar anthem "Rich Men North of Richmond" exploded across the internet, racking up 66 million views on YouTube since debuting last month. 

Anthony’s mournful ballad has an almost Depression-era feel. Sporting a bushy red beard and a twangy guitar, the Virginia native channels the struggles of working-class Americans while strumming away in the woods in front of what appears to be a hunting blind. 

I've been sellin' my soul, workin' all day / Overtime hours for bulls*it pay / So I can sit out here and waste my life away / Drag back home and drown my troubles away. 

It's a damn shame what the world's gotten to / For people like me and people like you / Wish I could just wake up and it not be true / But it is, oh, it is. 

Livin' in the new world / With an old soul / These rich men north of Richmond / Lord knows they all just wanna have total control / Wanna know what you think, wanna know what you do / And they don't think you know, but I know that you do / 'Cause your dollar ain't sh*t and it's taxed to no end / 'Cause of rich men north of Richmond

The song has resonated broadly with listeners, but it has also become a sort of political bellwether with lyrics that take aim at taxes, inflation, and welfare. 

The Los Angeles Times notes Anthony’s song has been criticized by leftists, who’ve dubbed the tune an "alt-right anthem" that's "offensive" and "fatphobic." The Guardian, meanwhile, accused Anthony of “punching down” and mocking the poor. 

Right wing pundits have seen things differently, including Matt Walsh who called the song “raw and authentic.”

“One interesting thing about ‘Rich Men North Of Richmond’ is that he (rightly) attacks the welfare state,” tweeted Walsh. “Many conservatives think that it isn’t populist to criticize entitlements but in reality blue collar Americans are sick of having their money stolen to prop up a system that functions as nothing more than a vote buying scheme for Democrats.”

It’s not exactly a surprise that Anthony's hit song would be received differently by the left and the right, which increasingly operate in different cultural ecosystems with totally different values.

But some are getting a bit carried away in the effort to turn Anthony's blue-collar tune into a right-wing screed.

Wikipedia’s page on ‘Rich Men North Of Richmond’ initially claimed that “the song’s lyrics revolve around common right-wing themes such as inflation (the dollar ain’t sh*t)... .”

Did you catch that? Inflation apparently is now “a right-wing talking point” instead of an economic phenomenon broadly defined today as a general and sustained increase in consumer prices and a decline in the value of money.

Wikipedia’s claim, which is now slightly reworded (following my tweet), is bizarre. There is nothing partisan about inflation, after all. It affects everyone. Rich and poor. Republican, Democrat, and Independent. People of every sex, race, and creed.  

For decades, the term "silent killer" has been used by scholars, economists, and financial asset managers to describe inflation because of the gradual and often unnoticed erosion in purchasing power it causes. 

Inflation has destroyed civilizations (Rome) and ushered in totalitarian regimes (Mao in China), which is why it has been decried by an array of intellectuals who were hardly “right-wingers.” 

The writer Ernest Hemingway, who moved to Spain during the Spanish Civil War to oppose Franco and wrote for Pravda because he hated fascism so much, called inflation “the first panacea for a mismanaged nation.” (The second, he added, was war.)

John Maynard Keynes, the staunch anti-conservative English economist who became arguably the most influential macroeconomic thinker in history, warned in 1919 that Vladmir Lenin “is said to have declared that the best way to destroy the capitalist system was to debauch the currency.” 

“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens,” wrote Keynes. “The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.” (emphasis added)

More recently Lawrence Summers, the former President of Harvard and an economist that served in both the Clinton and Obama administrations, warned that inflation is undermining confidence in the American political system. 

“It’s clear that inflation is significantly contributing to distrust in the institutions and to pessimism about the future,” Summers recently told The Harvard Gazette. 

Clearly, one needn’t be a right-winger to be concerned about inflation. Anyone who goes to McDonald’s and is stunned to see a $50 receipt after ordering a few burgers, fries, and drinks has a right to be concerned over the erosion of their money.

None of this is to say that there are no political undertones to Anthony's song. There clearly are, and this fits snuggly in the long tradition of country music. 

Anyone who has ever listened to Hank Williams Jr. or David Allan Coe or any number of artists can tell you weaving poverty and politics into songs is hardly out of the ordinary in the country music genre. Consider these lyrics from a popular song from Alabama tune, “Song of the South”:

Cotton on the roadside, cotton in the ditch 

We all picked the cotton but we never got rich

Daddy was a veteran, a southern democrat  

They oughta get a rich man to vote like that

…

Well somebody told us Wall Street fell 

But we were so poor that we couldn't tell 

Cotton was short and the weeds were tall 

But Mr. Roosevelt's a gonna save us all

Alabama’s song is more overtly political than Oliver Anthony's—it mentions a political party and president—but you’ll find no mention of it being left-wing on Wikipedia’s page of the song. 

The primary difference, of course, is that Alabama’s song praised government anti-poverty programs, whereas Anthony's song attacks them. 

Sadly, it’s quite possible that we’ve reached a point where any kind of criticism of the federal system is considered “right wing” by many. (After all, even everyday activities such as working out to getting up early have been described as such.) 

But adding inflation to this list of partisan topics is not just unwise, but dangerous. There is, I suppose, one silver lining. 

Wikipedia’s labeling of inflation as a right-wing talking point is tacit admission that the real cause of inflation is not corporate greed or Taylor Swift. Inflation is a policy of the powers in Washington, D.C. who are printing trillions of dollars.

If pointing out basic economic realities makes one “right wing,” I’m not sure what that says about the left. 

A version of this article first appeared in The Epoch Times. 

Jon Miltimore

Jonathan Miltimore is the Editor at Large of FEE.org at the Foundation for Economic Education.

This article was originally published on FEE.org. Read the original article.

Online Encyclopedia Declares Inflation a ‘Right-Wing Talking Point’ in Response to Hit Song

Kevin O’Leary on Inflation: You Printed $7 Trillion in 30 Months. What Did you Think Would Happen?

Americans are facing 40-year high inflation and there’s been no shortage of discussion on the topic. It’s the number one issue on the mind of Americans heading into midterms, and every day on TV and in newspapers pundits are debating how long it will last and deciding who is to blame.

What’s most astonishing amid the flurry of news is just how badly the commentary misses. While there is broad agreement that the US is experiencing dangerously high inflation, partisanship and ideology have polluted basic economics.

Progressive politicians like Robert Reich and Sen. Elizabeth Warren tweet incessantly that “corporate greed” is to blame, an idea even Democratic economists have summarily dismissed. President Joe Biden, meanwhile, has blamed Vladmir Putin. Republicans, on the other hand, have consistently made the case that Joe Biden is the inflation culprit.

All of these explanations are entirely or mostly wrong.

While it’s true that Putin and Biden deserve some blame—particularly in terms of high energy prices—there seems to be an unspoken bipartisan consensus to ignore the elephant in the room: the Federal Reserve’s unprecedented money printing.

One person not playing the game is Kevin O’Leary, the Canadian entrepreneur and investor who regularly appears on ABC’s Shark Tank. While speaking to journalist Daniela Cambone, O’Leary bluntly explained why Americans are experiencing the highest inflation in generations.

“The printing presses have gone insane,” O’Leary said. “That’s why we have inflation in the first place.”

By printing presses, O’Leary is talking about the Federal Reserve. The central bank has been expanding the supply of money for decades, and the clip has picked up in recent years. Nothing, however, has compared to the monetary expansion that occurred during the pandemic, something Fed Chairman Jerome Powell recently admitted in a 60 Minutes interview with Scott Pelley.

"You flooded the system with money," the CBS journalist said.

"Yes, we did," Powell responded.

This is what O’Leary is getting at. “Flooding the system with money” is what drove inflation to historic highs, and the result was always an obvious one.

“For all the talk of inflation, you print $6.72 trillion in thirty months, what the hell did you think was going to happen?” O’Leary says. “Of course there’s going to be inflation.”

O’Leary’s figures are not wrong. Federal Reserve data show that in August 2019 there was $14.9 trillion total in circulation. By January 2022, there was $21.6 trillion.

In other words, more than 30 percent of dollars in circulation in January 2022 had been created in the previous 30 months.

What Is Inflation?

Money creation is the obvious driver of price inflation, a concept that most Americans have at least a vague understanding of because we see it all around us today. Prices are up for almost everything, and up a lot.

But are higher prices alone evidence of inflation? Prices are always changing, after all. Sometimes they go up and sometimes they fall; oftentimes it has nothing to do with money printing, but is simply a reflection of changes in supply and demand.

This is what makes inflation challenging to define, and in fact there are two definitions for it.

For centuries, inflation was defined essentially as an increase in the money supply. Basic economics holds that if you expand the money supply without expanding goods and services, prices will rise. So that was the definition of inflation: an increase in the supply of money.

Economists in the twentieth century added a second definition, however, calling inflation “a general and sustained increase in prices.” We can see from this definition that what separates inflation from simple price increases is that they are broad and sustained.

Some economists prefer the older definition of inflation, and Henry Hazlitt, author of Economics in One Lesson, can help us see why.

“Inflation is an increase in the quantity of money and credit. Its chief consequence is soaring prices,” Hazlitt explained. “Therefore inflation—if we misuse the term to mean the rising prices themselves—is caused solely by printing more money. For this the government’s monetary policies are entirely responsible.”

Hazlitt argues that rising prices are the consequence of inflation, which is an increase in the money supply. This is why some economists don’t like the new definition of inflation.

“I prefer the older definition,” Pace University economist Joseph Salerno explained in a lecture on hyperinflation. “I think it’s more useful.”

It’s not difficult to see why some economists see the traditional definition of inflation as superior. It gets right to the cause of price increases (an expansion of the money supply), while the new definition focuses on a symptom of inflation (“a general and sustained increase in prices”).

This second definition is far less clear, which might be precisely why some people like it.

Nobody wants to be blamed for inflation, after all, and under the first definition blame will always return to one spot: the people who control the money supply, and to a lesser extent the politicians, big banks, and bureaucrats who support the Fed and directly benefit from its largesse.

That’s a lot of pressure for central bankers and politicians. It’s far easier to say Vladmir Putin is primarily responsible for high prices, or the ”greedy corporations,” or Joe Biden’s Build Back Better policies.

Inflation: A Silent Killer

Now, some will tell you that if you’re under 60 this is probably the first time you’ve experienced inflation, but this is not true. Usually inflation is just small enough that people don’t notice it as much.

For example, government data show a dollar printed in 1990 had already lost 50 percent of its purchasing power by 2021. This is why inflation is often called a “silent killer.”

Yet history shows inflation often does not remain silent. It persists and grows, and over time it becomes a destroyer of civilizations.

“I do not think it is an exaggeration to say history is largely a history of inflation, usually inflations engineered by governments for the gain of governments,” the Nobel Prize-winning economist F.A. Hayek once observed.

This is why Hayek believed the only way to have sound money was to take control of it out of the hands of central bankers and planners.

“I don't believe we shall ever have a good money again before we take the thing out of the hands of government,” Hayek said.

This is precisely why there has been such enthusiasm around decentralized currencies like Bitcoin and Ethereum.

Whether cryptocurrencies can supplant the dollar remains to be seen, but one thing is clear: the primary cause of inflation is not a boogeyman. It’s not a Russian dictator, corporate greed, or bad legislation. 1

The primary cause of inflation is the printing presses, exactly like Kevin O’Leary says.

A version of this article was published at The Epoch Times.

Jon Miltimore

Jonathan Miltimore is the Managing Editor of FEE.org. (Follow him on Substack.)

His writing/reporting has been the subject of articles in TIME magazine, The Wall Street Journal, CNN, Forbes, Fox News, and the Star Tribune.

Bylines: Newsweek, The Washington Times, MSN.com, The Washington Examiner, The Daily Caller, The Federalist, the Epoch Times. 

This article was originally published on FEE.org. Read the original article.

Kevin O’Leary on Inflation: You Printed $7 Trillion in 30 Months. What Did you Think Would Happen?

How Does the Federal Reserve Create Money?

A few weeks ago, I solicited FEE daily readers for their questions about economics. Pretty quickly I got a question I was pretty certain I’d get eventually. It comes from a man named Warren from Chicago who asks:

“what are the levers used by the Federal Reserve Bank to increase or decrease the money supply?

I know it has something to do with interest rates and bank reserves, but how does it actually take place and who receives all the extra money in circulation to cause the inflation?”

There are several channels that the Federal Reserve can use to create money, but I’m going to focus on the two most relevant ones: open market operations and interest on reserves.

'Printing' Money

The first way the Federal Reserve can increase the money supply is by creating more dollars. It’s not as simple as them printing dollar bills then throwing them out of a helicopter, though.

Instead, when the Federal Reserve wants to create money and put it into the system, it does so through banks. Banks hold several types of assets including treasury bonds. Treasury bonds are IOUs that the government issues in exchange for a loan. You buy a bond with cash today and the government promises to pay you back with interest in the future.

Banks like to hold treasury bonds because they’re viewed as low risk—it’s unlikely the US government will default on debt (any time soon at least). Treasury bonds also have the advantage that they’re relatively easy to sell to someone else to get cash. Economists call this ease of converting an asset into money liquidity.

The Federal Reserve offers to buy these bonds from banks. When the Federal Reserve buys bonds, they have an advantage you and I don’t. They are allowed to print new money to buy the bonds. It’s more likely that the money will be digitally created than literally printed, but the form of the money doesn’t make a difference.

The Federal Reserve acquires government bonds and banks acquire newly created money. The process doesn’t stop there, however. Banks don’t generally like to sit on large piles of money because money doesn’t earn interest (unlike the bonds they just sold to the central bank). So what do banks do with their money?

One thing they can do is make more loans to businesses. The increased supply of funds available to lend out means that there will be more loans available for the same number of businesses. Everything else held constant, this means the price of borrowing (the interest rate) will fall.

Banks can also turn around and buy more treasury bonds if they want to replace some of the bonds sold. This higher bond demand means the government will be able to take on more debt to finance its spending.

Economists call this process of the Federal Reserve using newly created money to buy bonds from private banks an open market purchase.

So how much has the Federal Reserve utilized this tool as of late? Look at this graph:

Figure 1: Treasury Securities Balances Held Outright

Since January 2020, The Federal Reserve has increased its treasury securities from $2.3 trillion to around $5.6 trillion today, an increase of around $3.3 trillion.

The Fed Moves into Housing

A more recent move by the Federal Reserve has been to purchase other types of assets as well. Before 2008, the Federal Reserve owned $0 in Mortgage-Backed Securities (MBSs). Today is a different story.

I won’t go into detail about MBSs (you can read more about them here) except to say they’re another type of financial asset banks hold which are a good bit riskier than treasury bonds. Here is a graph showing how Federal Reserve MBS holdings exploded in 2008 (in an attempt to alleviate the housing crisis) and again in 2020 (in an attempt to curb the negative effects of COVID policies).

Figure 2: Mortgage Backed Securities Held Outright

As you can see, the Federal Reserve acquired around $1.3 trillion worth of mortgage backed securities from January 2020 to today.

As economist Jim Gwartney pointed out for AIER,

“[the] $4.2 trillion increase in federal spending over the two [COVID] years was financed entirely by borrowing from the Fed. Fed holdings of financial assets, mostly Treasury bonds and mortgage-backed securities of federal housing authorities, increased from $4.2 trillion in February 2020 to $8.8 trillion in December 2021.”

So now we understand how the Federal Reserve creates new money, and who it goes to. Banks are the first recipient, and borrowers or those who sell financial assets banks demand (including the government itself) are the second recipients. And as Warren alluded in his question, this policy indirectly influences the interest rate.

Interest on Reserves

There’s one other important tool for how the Federal Reserve can influence the creation of money. It’s a relatively new policy lever called interest on reserve balances (IORB).

To understand how the Federal Reserve impacts the money supply through IORB, you need to have a basic understanding of our banking system.

Let’s say Warren deposits $1,000 in his bank, FEEbank. What happens to the money then? In the United States, it’s unlikely that the money will sit in a vault. Instead, FEEbank will likely try to make a return on that money by lending some of it out to someone else.

So let’s say Jim comes and asks for a loan of $800 from FEEbank. FEEbank lends out $800 of Warren’s $1000. So how much money does Warren have? Well, when the bank lends out your money, your balance doesn’t go down. Warren can still go withdraw his money so long as the bank can give him deposits they’ve kept from other customers.

If everyone came to get their money at once, the bank would run out of money, but so long as that doesn’t happen, FEEbank doesn’t have a problem.

So now Warren has $1,000 and Jim has $800. There is now $1,800 in the economy compared to $1,000 before. FEEbank created more money!

The process doesn’t even have to end there. Jim can deposit the $800 in another bank, which can lend out a portion to someone else.

This system of banking is called fractional reserve banking because banks only keep a fraction of your deposits as reserves, and they loan out the rest.

So private banks in this system can create money by lending deposits, but what does this have to do with the Federal Reserve?

In 2008, the Federal Reserve adopted a policy of paying banks interest for the money they kept in reserves. So, instead of FEEbank loaning out Warren’s money, the Federal Reserve could offer to pay FEEbank to keep the money in the vault.

The higher the interest the Federal Reserve offers to pay FEEBank, the less likely it is to lend out the money. Why make a risky loan at a 3.5% interest rate if the Federal Reserve will pay you 3.5% for keeping it in the vault? The Federal Reserve is essentially paying banks to not make loans.

Notice, too, this also allows the Federal Reserve to more directly control the interest rate. If the Federal Reserve wants loans to have a 4% interest rate, all the agency has to do is promise to pay 3.9% IORB to not make the loan. In that case, a private borrower would have to offer at least 4% to beat the Federal Reserve.

So if the Federal Reserve wants banks to lend more of their deposits thereby creating more money, all they need to do is lower the IORB. And that’s exactly what they did during COVID.

In January 2020, the interest rate on reserves was 1.55%. By mid-March 2020, the Federal Reserve had dropped the rate to 0.1%.

This policy made it relatively more lucrative for banks to increase lending and, everything else held constant, when the benefits of an action goes up, people will do more of that action.

The result of these policies has been a large increase in the supply of money. Economists measure what counts as money a few different ways, but one of the most commonly used and accepted measures is called M2.

From January 2020 to January 2022, the M2 money supply increased from $15.4 trillion to $21.6 trillion.

That’s a 40% increase in the money supply— unprecedented in recent US history.

Figure 3: M2 Money Supply

More Money, More Problems

As I’ve explained since May of last year, this increase in money supply inevitably led to higher prices across the board (aka inflation). FEE’s Dan Sanchez has explained this in depth as well.

Unfortunately, the Federal Reserve seems to have printed itself into a corner.

Utilizing open market purchases and lowering IORB may have propped up the economy by stimulating lending and investment in 2020, but the chickens are coming to roost. At this point, if the Federal Reserve wants to use its levers to bring inflation down, it’s going to do so by hurting investment opportunities.

As of this month, the IORB has been raised to 3.15%. This means less funds will be available to borrowers. Whether we’re in a technical recession or not right now, it seems unlikely to me the Federal Reserve will be able to bring inflation down without allowing an economic correction to take place.

There’s no such thing as a free lunch. Printing dollars does not mean there are more sandwiches to go around. And although the Federal Reserve can affect the economy with their levers, they cannot print prosperity.

Peter Jacobsen

Peter Jacobsen teaches economics and holds the position of Gwartney Professor of Economics. He received his graduate education at George Mason University.

This article was originally published on FEE.org. Read the original article.

How Does the Federal Reserve Create Money?

How the Government is Causing a Credit Card Debt Crisis

Inflation still isn’t letting up, and it’s a top concern for Americans right now. But we just learned of yet another way surging prices are hurting families—leading them into huge amounts of credit card debt.

“More Americans are racking up credit card debt as inflation pushes up the cost of food, utilities and other staples,” CBS News reports. “60% of credit card holders have been carrying balances on their cards for at least a year, up 10% from 2021.” 

“59% of Americans who earn less than $50,000 a year carry a credit card balance from month to month,” the reporting notes. “The percentage drops slightly to 49% for those who earn between $50,000 and $80,000 and dips again to 46% for people making $80,000 to $100,000 a year.” 

This is a serious problem for many families. 

"It's even harder to get out of debt when it's spending on necessities that got you into that position in the first place," Creditcards.com analyst Ted Rossman told CBS. "These expenses aren't easily avoided."

Americans now owe $887 billion in credit card debt, according to the Federal Reserve Bank of New York. That’s up 13% from 2021! 

Credit card debt is nothing to sneeze at. Because of the way it’s structured, it can quickly become exorbitantly expensive and ultimately cost much more than the original purchases. 

“Credit card debt accumulates when you don’t pay off your credit card in full by the end of each billing cycle,” NationalDebtRelief.com explains. “When the balance is carried over to the next billing period, interest accrues in the form of the annual percentage rate (APR). APR is the percent of interest charged on purchases, cash advances, and balance transfers, and it compounds. This means that interest grows on top of interest and the longer you take to pay off a debt, the more you’ll owe.”

The website offers one illustrative example that shows how quickly credit card debt can spiral out of control. If you borrow $10,000 on a card with a 25% rate and only make the minimum payments, you will ultimately have to pay back more than $30,000—and it’ll take almost 30 years!

Thanks to inflation eroding their paychecks and sending their expenses skyrocketing, many American families are finding themselves facing this potential scenario. And it’s important to remember that this isn’t some abstract economic phenomenon. The federal government caused inflation through its reckless fiscal and monetary policies during the pandemic. 

It printed trillions of new dollars out of thin air and ran up multi-trillion-dollar deficits on wasteful “stimulus” spending. The inevitable result of this flood of dollars chasing the same number of goods (or even a smaller number) was always going to be higher prices. And that’s exactly what has happened.

But, as the credit card debt problem shows, the second-order consequences of the government’s bull-in-a-china-shop interventions are playing out far beyond just price hikes. It will take many years of study for us to fully understand all the different ways these reckless policies are hurting American families, but one thing is clear: the bill that ultimately comes due is going to be a big one. 

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Brad Polumbo

Brad Polumbo (@Brad_Polumbo) is a libertarian-conservative journalist and Policy Correspondent at the Foundation for Economic Education.

This article was originally published on FEE.org. Read the original article.

How the Government is Causing a Credit Card Debt Crisis

More Alarming Inflation Data Undercut the Progressive ‘Greedflation’ Narrative

Another day, another disturbing price inflation metric.

The federal government just released the latest Producer Price Index (PPI), an index that tracks the prices of a basket of the typical inputs businesses rely on, like energy, warehousing, etc. It finds that prices rose 0.8% from April to May, and a whopping 10.8% from May 2021 to May 2022. The PPI is the Federal Reserve’s preferred metric of price inflation, and this latest update keeps it near a 40-year high.

To see just how extreme this trend continues to be, just check out this graph from Fox Business:

Of course, this latest update comes just one day after another alarming inflation update. Released Monday, the latest Consumer Price Index (CPI) showed an 8.6% year-over-year increase in consumer prices. That metric imperfectly measures prices for a basket of consumer goods a typical US household might buy, and it too remains near 40-year highs. 

What’s the significance?

Well, these updates offer more proof that rising prices are hurting American families, eroding paychecks, and bursting budgets. But we already knew that. 

The really interesting insight here comes from comparing the producer price data to the consumer price data. Contrasting the two undercuts the progressive “greedflation” narrative that argues rising prices are in large part due to corporate greed.

“Inflation first rose because of other factors, like Covid and economic stimulus bills,” the New York Times writes in an article explaining what “greedflation” advocates believe. “But companies raised prices more than necessary to net higher profits. They knew they could get away with it because consumers no longer had a benchmark for what prices should be. And they did not face enough competition to keep prices down.”

Or, as Senator Elizabeth Warren argues, “profiteering” and “price-gouging” have driven higher prices because “they [can] get away with it because our markets lack competition.”

But this narrative has never made any sense. For one thing, corporations are no more “greedy,” aka profit-seeking, than they were 5 years ago or 10 years ago, when inflation wasn’t surging. What’s more, some sectors have seen much bigger price hikes than others. Are companies in some industries just less greedy than in other sectors?

“Greedflation” conspiracy theorists cite market concentration, i.e. monopoly power, as why companies can supposedly be what’s driving this. But, as MIT economist David Autor notes, market concentration hasn’t meaningfully shifted in the last two years… while inflation most certainly has!

That’s why a survey of top economists found that the vast majority reject the “greedflation” narrative out of hand. 

What’s this have to do with PPI, CPI, and other inflation metrics? 

The new data set put the nail in the coffin for the “greedflation” narrative.

Why?

Well, if companies were truly being greedy and just jacking up prices to make money, we would expect them to be hiking prices for consumers at a rate higher than their own production costs are going up. But these data sets actually reveal the opposite: consumer prices rose 8.6% while producer prices rose 10.8%—suggesting that, roughly estimating, companies haven’t jacked up prices to even fully match the increase in their costs, let alone exceed them.

Where’s the evidence of this rampant special surge in “greed” we keep hearing about? 

It’s nowhere to be seen, of course, because the “greedflation” narrative was always a political talking point simply meant to deflect blame away from the federal government and onto Big Business, a popular boogeyman. 

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Brad Polumbo

Brad Polumbo (@Brad_Polumbo) is a libertarian-conservative journalist and Policy Correspondent at the Foundation for Economic Education.

This article was originally published on FEE.org. Read the original article.

More Alarming Inflation Data Undercut the Progressive ‘Greedflation’ Narrative

Government Greed Caused Inflation, For the Record

Government policies fail and create problems in the real world every day. But most Americans are so busy in their daily lives and so detached from the political system that they do not notice…or at least they don’t know enough to point to the root of the problem.

Such is not the case with the current skyrocketing inflation, which has gotten everyone’s attention. Gas is topping $7 per gallon in some regions. Beef prices are up 20 percent since last year. Meanwhile, rent jumped an average of 14 percent across the nation. Americans of all political persuasions rank inflation as the most pressing problem they face, and many are demanding answers for why they are suddenly unable to afford rent or buy meat. Rightfully so.

While there’s a shortage of basic necessities in the country, there’s also a shortage of actual leaders in DC who will take responsibility for the failure of their ideas. Instead, we see a bunch of elderly representatives essentially trying to say that their dog ate their homework. While Democrats have tried to blame Putin, “ultra-MAGA” supporters, and other random strawmen for the inflation, it seems most are beginning to coalesce around the weakest scapegoat of all: corporate greed.

This is a convenient narrative for a party whose ideas rely on the demonization of success and class warfare. But there is absolutely nothing to back up such claims.

As Senator Rand Paul (R, KY) and many others recently pointed out, companies and business leaders did not just all of a sudden become greedy in the past two years.

The persistence of this line of attack reveals a few things. First, it shows these people are not interested in getting to the root cause of inflation or preventing it from occurring again.

For those unfamiliar with the real causes of inflation, there’s actually a basic recipe that tends to repeat in cycles in the US. The government gets greedy and wants to live beyond its means, promising all manner of special favors and services in exchange for votes that enshrine the political power of politicians. They pass spending bills we don’t have the money to afford. And then, in response, the Federal Reserve prints new dollars. This leads to more dollars chasing fewer goods—fewer goods, in this case, thanks to lockdowns, trade wars, and tariffs that have stagnated the economy. Boom, inflation.

It is unsurprising that the left and many on the right do not want to cop to this fact and discuss the true causes of inflation. It is, after all, their pet projects that created the problem. Instead, they’re still trying to convince Americans that legislation like the $1.9 trillion “American Rescue Plan” helped Americans. (It actually kicked inflation into high gear).

Besides being a flagrant attempt at hoodwinking the American people, the narrative that corporate greed led to inflation also reveals an even deeper problem with the left’s ideology: these people have no idea how markets work or what conditions actually create prosperity.

Corporations and individuals should be driven to make money, that’s a positive incentive under capitalism. Profit-seeking ensures companies stay afloat, are able to provide goods and services people need, and provide consistent employment. It ensures our GDP continues to grow, that we see more innovation and competition, and ultimately, as a result, we continue to see our quality of life improve.

As Adam Smith famously pointed out in The Wealth of Nations, “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.” Capitalism mandates that in order to make a profit, corporations and entrepreneurs must provide a valuable service or commodity to society in order to succeed.

This is what ultimately makes capitalism the most moral system. It recognizes that human nature is self-interested. And it finds a way to wrangle that reality and direct it in a way that actually benefits everyone.

It is silly to be mad at corporations for wanting to make a profit. But in this case, it’s actually demagoguery meant to convince the masses to carry their pitchforks to the wrong castle.

The blame for inflation should be laid directly at the feet of the federal government. Don’t let them distract you from that.

Hannah Cox

Hannah Cox is the Content Manager and Brand Ambassador for the Foundation for Economic Education.

This article was originally published on FEE.org. Read the original article.

Government Greed Caused Inflation, For the Record