What’s Really Causing Inflation?

Sometimes a good graph tells a good story. So it is with the front-page interest-rate graph in today’s New York Times (NYT, page A1, July 28, 2022). Labeled “Federal Funds Target Rate,” it tells a story that no pundit or economist has yet told, to my knowledge, in all the ceaseless hand-wringing about recently rising prices.

(Unfortunately, the graph doesn’t appear in the online version of the New York Times. Apparently it derived from this Fed graph, which appears less dramatic with an extended time scale and a shorter vertical scale.)

The NYT graph covers Fed target rates from 1970 to the present, or 52 years. That’s over half a century. As appropriate for the New York Times, it looks a bit like the Manhattan skyline. The seventies through the nineties look like downtown/Wall-Street skyscrapers, while later years level off to what look like shorter uptown buildings.

But that “uptown” area is unique. Except for a short rise from 2016 to 2020, and except for a pandemic-recovery rise since late 2021, it looks like total demolition. As near as I can eyeball it, the Federal Funds Target Rate was a mere one-quarter point for over two-thirds the thirteen years from fall 2009 to the present. And it fell to and stayed at that rate from late 2009 to early 2016.

Even during the “peaks” in that demolished interval, including the recent pandemic-recovery rise, the rate never got above 2.5%. But the eyeball average (i.e., normal) rate over the preceding thirty-some years was between 5% and 6%.

So here’s the astonishing thing. Since 2009, apparently in response to the Crash of 2008, our Fed has held its target rate to 0.25% for all but a handful of years.

That’s about as close to “free money” as you’ll ever see in this imperfect world. Did it ever occur to our economic gurus that encouraging banks to give away free money for over a decade might increase demand and make prices rise?

It gets worse. Who actually gets that 0.25% interest rate? Not you or me, and certainly not the average worker. That’s the rate at which banks lend each other short-term excess funds. But that rate influences, if not determines, the rates at which banks lend short-term to businesses, which competition among banks also presumably restrains.

Real interest rates that consumers pay are much higher. For this post, I just looked up the rates on my two credit cards: their July APRs for purchases are 10.74% and 16.74%. And I have a high FICO score because I pay off my balances every month.

Two points should be apparent from these figures. First, banks have been making a lot of money for the thirteen years of rock-bottom interest rates. So they can easily pay excessive salaries and indulge in financial speculation.

The second point is more subtle. Businesses and wealthy people have a number of ways to borrow money at rates way below what you and I pay on our credit cards. They have expensive homes with low or no mortgages and big equities on which to borrow. If they have “personal” businesses, such as partnerships, S corporations and LLCs, they can take business loans and borrow from their businesses at whatever rates they please.

So what’s my point here? The rich and business owners can borrow money at artificially low rates, pushed down by the Fed’s consistently low interbank rates for thirteen years. When the economy is going well, as it has been since the post-2008 rate drop did its trick, there’s no reason for them not to borrow, both for their businesses and their own personal consumption. Yachts, mansions and personal jets, anyone?

The end result is, in essence, free money for the rich. This increases demand especially for luxury and “high-end” goods and services. But the excess demand also “trickles down” to things like cars, travel, restaurant meals and even supermarket food. (The rich have to eat and drive, too, although they can more easily afford electric cars, with vastly lower energy and maintenance costs.)

So that’s the big story. With a short and desultory break in 2016-2020, and except for the recent rise—all up to less than 2.5%—the Federal Funds Target Rate has been 0.25% for thirteen years.

Think that long era of free money contributed to the historic rise in stock prices, which just now seems to be unwinding? (Note that the stock market bump started long before the pandemic and continued through uniquely chaotic politics and the worst part of the pandemic, until the Fed got serious about taking the punch bowl away.) Think the free-money party exacerbated financial and social inequities in the US? Think it may have distorted our national economy by increasing demand for, and therefore production of, goods and services that became more “popular” with free money, i.e., luxuries and frivolities? If so, you think like me.

Glibber explanations for inflation make little sense to me, especially pandemic relief. If you pay people as relief less money than their lost salaries, where’s the consumer bonanza, i.e., the increased consumer demand? The breakdown of global supply chains under pandemic stress, and under the slow process of de-globalization now occurring, could affect supply. But I’ve never seen a report of any quantitative study of these phenomena, and the chips that go into most cars come not from China, but from Taiwan, which has suffered far fewer draconian Covid lockdowns.

As for oil and gasoline, I’m skeptical of incessant referrals to “global markets,” as if they were Newton’s First Law of Motion. Do US producers really hire big tanker fleets and send fracked US oil abroad when prices rise in Europe, for example? I doubt it. Or do they just raise prices at home reflexively, hoping that no one will notice that there’s no actual physical connection between domestic and overseas markets? (To my knowledge, there are no overseas oil or gas pipelines, and no railroads running tankers through tunnels under the oceans, so ad hoc hiring of vast tanker fleets is the only feasible method of actual supply.) And do American and Canadian markets really get much grain, corn or other foodstuffs from Ukraine? If not, are higher prices for cereal in US supermarkets more financial exploitation than a reflection of truly interconnected global markets?

At the end of the day, the glib resort to recent and temporary phenomena—including government pandemic-relief spending and Putin’s atrocity in Ukraine—to explain rising prices requires far more detailed quantitative analysis and proof than I have ever seen. Meanwhile, there’s an 800 pound gorilla sitting in the middle of the room, in plain view of all: near-zero Fed interest rates for thirteen years. They started to rise just a bit in 2016 but then were cut back to near-zero again when the pandemic hit.

So the Fed’s been letting banks give away free money for a long time. In my view, it’s going to have to take the punch bowl away convincingly and decisively before the joyous buying binge ends, especially among the wealthy. The risk is not a small recession, which may be necessary, but creating a mindset among banks, businesses, the rich and the rest of us that the free-money party will never end. Isn’t a national economy based on consistently free money a bit pathological?

Before closing, let’s compare the time scales of another anomalous period in the US economy: the interest-rate spikes in the mid-seventies to mid-eighties, when the Federal Funds Target Rate briefly exceeded nineteen percent. (I remember this period well because it kept me from buying, rather than renting, a home for over a decade.)

Economists and politicians made much of the “wage-price” spiral as a cause of inflation in this period. But the underlying cause was foreign and much simpler: the Arab Oil Embargo of 1973-74 and its consequences. The Embargo had political (anti-Israel) origins. But eventually the Arab nations, which had already nationalized their oil fields and formed OPEC, learned economics and took control of global oil prices with their collectively dominant supply. Their cartel raised oil prices steadily and worldwide. It kept them there until the discovery and exploitation of the North Sea oil fields and (later) fracking in the US increased global supply, and Japanese (and later law-mandated) high-mileage cars decreased demand.

Fed Chair Volcker’s draconian interest-rate increases may have curtailed the resulting inflation, and perhaps they were entirely necessary. But, whatever the causes, the rise in interest rates spanned about a decade. Could it be that a similar market stimulus to demand, namely rock-bottom rates, might have an effect of similar longevity? If so, it may be better for the Fed to “stay the course” in taking the punch bowl away until prices and production have adjusted to the end of this more-than-decade-long free-money party.

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The Dems’ Seppuku, and How to Stop It

Dems and progressives are losing the working class, both whites and people of color. That’s not a fear or suspicion. It’s a fact. Whether your greatest fear is accelerating climate change, exploding economic inequality, institutionalized racism, women’s loss of rights, or fascism in America, the loss of workers’ support should be foremost on your mind. It does absolutely no good to dismiss workers, whatever their views, as misguided, let alone “deplorables.”

If this trend continues, nothing else will matter, and every one of those risks will get worse. Much worse. Why? Not only do workers outnumber bosses, they outnumber the rest of us voters, too. In particular, they vastly outnumber those of us with college degrees who work with our mouths and brains, not our hands. Lose those who work with their hands, and the Dems will become a permanent minority party, even without gerrymandering and the skewed Senate and Electoral College.

I reached voting age in 1966. Then American workers were still strongly Democratic. Their labor unions and houses of worship both reinforced their progressive instincts. Union halls and churches resounded with calls for fair pay, workers’ rights to organize and bargain, and equal economic opportunity. The ratio of CEO to average-worker pay then was about 30. Today it’s over ten times as high, and it’s rising rapidly.

Yesterday’s voting machines made progressive voting easy. Entirely mechanical, not electronic, each one had a “straight ticket” lever. All you had to do was pull the lever labeled “Democratic,” and the machine would mark your paper ballot with an “X” opposite every partisan candidate labeled “Democrat.” You didn’t have to research the names and positions of all the candidates on a complex ballot. All you had to do was pull the right lever, as advised by your union leader, your priest or pastor, or your co-workers.

Fast-forward to today. Registering to vote, let alone voting, has become a lot more complex. But forget about that, for a moment, and put yourself in the shoes of a newly-minted citizen from south of the border.

You came from a tough place in Mexico, or Central or South America. Death-dealing gangs preyed on you and your family, as did the police. Police protection, if available at all, required bribes or family connections. Justice was non-existent. Hope was scarce.

You lost some family members, maybe even young children. So you decided to go north. You walked, rode, hitchhiked and hobbled over a thousand miles, through deserts and snake infested jungles, to get to the US border. You made a successful crossing, probably after several failures, and ultimately managed to get a Green Card. After several years, maybe a decade, of law-abiding hard work, you became an American citizen.

Maybe the US is still not ideal for you. But it’s infinitely better than where you came from. You’re proud to be an American. You can vote. You can call 911 when you need police protection, and they come, often quickly, without being bribed. You can practice your religion, raise a family, and maybe even sponsor some foreign relatives as immigrants. You can speak your mind without fear.

Do you, the reader, see why you, the new citizen, might not be entranced by a party that wants to defund the police? that focuses on bathroom and athletic rights for transgender people? that worries (sometimes appropriately) about nuances of equal protection, when what you, the new citizen, faced to get here were literally matters of life and death?

By now, the mass media have sounded the alarm. White workers, Hispanic workers and workers of color are slipping away from the Democratic Party because of its obsessive focus on “cultural” issues and perfecting personal equality. They see it as neglecting bread-and-butter economics and the pride (and relief!) that most workers feel to be American. They are drifting away because of incessant perfectionism, rather than a focus on what workers see as vital kitchen-table issues.

Pick up almost any newspaper and you can see the results of the polls. But if you want a succinct and damning summary, reach this piece by Ruy Teixiera, a little-known doctorate-level, leftist social scientist who’s been studying US politics for several decades.

Here are a few quick headlines. Hispanics, by 70-23, see the US as the greatest country in the world, as do workers (by 69-23). Strong progressives disagree (66-28). Hispanics are split (47-44) on allowing more legal immigration versus increasing border security and enforcing existing immigration laws. So are workers generally (32-58). In contrast, strong progressives opt for increasing legal immigration only (97-2!). Hispanics (50-41) want full funding of police, as do workers generally (59-31), while strong progressives want to reallocate police funding (88-12). (Black voters, while perhaps more ambivalent, provide scant support for defending the police, as distinguished from rooting out the bad apples.) Finally, Hispanics (55-39), and workers generally (55-40) believe that hard work gets you ahead, while strong progressives think that’s not necessarily so (88-12).

These discrepancies, let alone the rest of the polling, highlight vast gulfs in perception between strong progressives, most of whom are college educated, and workers. It doesn’t matter who is right or wrong. What matters is unity: no progressive movement ever has, or ever can, succeed without strong support from workers. And no progressive movement in the US—with Hispanics our most rapidly rising ethnic group—can hope to succeed in the long run without their support.

So what can we progressives do to start winning over, in much greater numbers, the Hispanics and workers without whom we are little more than an elite debating society? Here are a few key points to consider:

1. Drop the pessimism. Accentuate the positive, always. If our nation is imperfect (and it is!), emphasize our capacity for positive change. Recall that it took a Civil War, the bloodiest in our history, to begin to honor Jefferson’s credo that “all Men are created equal.” Point out our successful struggles for civil rights, voting rights workers’ rights and women’s rights, and try to emulate them. In that regard, perseverance is key.

2. Try to make police better, not fewer and poorer. Provide more money for policing, especially in high-crime areas, while emphasizing fairness, diversity and accountability. Make fair and even-handed policing and earning the community’s respect points of pride and promotion. Even make them quids pro quo. Promote and reward police who earn respect, not fear, from the communities they serve. Change the culture while increasing the budgets, hiring more police, and training them better.

3. Work hand-in-hand with labor. The most exciting thing in progressive politics today is the resurgence of organized labor, with partially successful drives to unionize Amazon, Walmart, Apple and Starbucks. The Democratic Party should honor, recruit, reward and feature the organizers of these unions. It should make a full-court press to repeal so-called “right to work” laws, organize realistic options to offshoring jobs, and make labor organizers an integral part of Party politics. The goal should be to reproduce the “Golden Age” of the American Middle class, in the postwar era, when 36% of private-sector workers were unionized and most reliably voted Democratic.

4. Be smarter on climate. Keep prohibitions on and regulations of fossil fuels in the background. Focus on positive change toward electric cars and renewables. Emphasize the millions of cleaner, better paid jobs, with a better future. Who, after all, wouldn’t prefer working in the open air on a solar array or windmill to working in a dank, deep coal mine with deadly gases and occasional rockslides? The emphasis should be on replacing exhaustible oil and gas, which will certainly run out this century, with alternatives that offer cleaner energy and reliable jobs for the long haul.

Take a page from a little-known political pundit named Van Jones, who made the equation “clean energy= jobs” during Obama’s first campaign. Maybe make him energy policy czar. The neat thing about addressing climate change is that the nation that leads it will also lead our species’ industry and manufacturing for the foreseeable future.

* * *
Selling a progressive program to college-educated elites is not enough. How many of us ever call 911 with our property or lives on the line? We have to sell every part of our progressive program to people who work with their hands for a living and whose lives and fortunes are a lot more precarious.

That shouldn’t be too hard. Better (not less) policing, fairer immigration and whole-hearted energy conversion as a way to retard the acceleration of climate change benefit everyone. We just have to emphasize the positive and the short-term benefits to the average voter.

For forty years, Republican propagandists have perpetrated an historic scam on America’s workers. They have gotten them to vote against their own interests and to sympathize with the bosses who exploit them as inanimate factors of profit. But the United States has always been richer, more united and happier when workers got a fair share of the pie, through their own efforts, their own politics, and their own pressure in labor unions. If the college-educated elite can only perfect and sell that cooperation and unify the Party with labor, we can enjoy another progressive era to match those at the turn of the twentieth century and the beginning of FDR’s presidency.



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We Are So Close . . .

“The darkest hour is just before dawn.” — Old folk saying

For months our sensationalist media have fed us a steady diet of doom. The party in power inevitably loses control of Congress in midterm elections, they say. So the Dems are doomed to legislative irrelevancy. The Demagogue could make a resurgence and become our first emperor. American democracy is on the ropes. Breathe your last few breaths of freedom; then steel yourself for George Orwell’s world, or at best for more stagnation.

But the past is prelude, not destiny. Things become inevitable only if we let them. We Americans have proved that point repeatedly. We did so in 1776, in our Civil War, in the two world wars (whose outcome depended greatly on us), and in the Cold War, not to mention the Great Depression and the Crash of 2008. Doom depends on what we do—or, more directly, on what we don’t do. And poll after polls shows that a clear majority of Americans wants things to be different.

The future holds great promise for true Americans, especially progressive ones. The spiderweb of lies around the January 6 Insurrection and the Demagogue’s last lunge for power is breaking up under winds of scrutiny. Women are coming to understand their status as the first big group of Americans ever to have basic rights taken away. The summer has only just begun, with its inevitable deadly hurricanes, heat waves, wildfires and tornadoes. So global warming and its many disasters will be top of mind. And monstrous acts of war and genocide have shown beyond doubt who is the Vladimir that our Demagogue so adored.

But the biggest reason for hope is simple arithmetic. No one should be surprised that a nation based in part on slavery, with a Constitution set up to preserve it, is not an ideal democracy. Yet notwithstanding our dismal history, the political math is changing as rapidly as our demographics. If the Democrats can hold the House and pick up just two Senate seats, making Manchin and Sinema irrelevant, all things become possible.

The first act will be to kill the filibuster stone cold dead, restoring majority rule to the United States Congress. Then we can: (1) make abortion legal by statute, at least before late term; (2) pass national requirements for voter registration, voting by mail, early voting (including on Sundays), and drop-boxes in all elections for federal offices; (3) guarantee rights of privacy by federal statute, including the rights of gays to marry nationwide; (4) heavily subsidize solar and wind energy and smart grids to put the US in the lead of energy conversion globally; (5) subsidize vital industries like semiconductors and electric cars to maintain our technological lead; (6) get the big tech giants under antitrust control, just as Congress did the railroads and oil giants in the last century; and (7) make a flying leap at racial, gender and social equity in education, housing, and home ownership.

We can even beef up equal employment rights for women with legislation. With the filibuster gone and clear Democratic majorities in both Houses, we can enjoy a progressive legislative cycle to match or surpass FDR’s first 100 days. We can revive America and make it work for all Americans. And we can do so in months, not years.

How can we work this “miracle”? Do we have to convince all the Demagogue’s cult that they’ve been duped? Do we have to get lifelong Republicans to vote Democratic? Do we have, in short, to turn long-established political wisdom on its head?

No, no and no! All we have to do is get all eligible Democratic and progressive-leaning voters out to vote as if their futures depended on it, which they do.

Turnovers in midterm elections have been reliable for a simple reason. Our nation has been politically divided for two generations. The party that loses the presidency does its level best to make sure that the party that wins accomplishes little or nothing in Congress, at least not right away. The filibuster, which appears nowhere in our Constitution, makes this easy.

Republicans raised this strategy to a high art under both Bill Clinton and Barack Obama. Remember when Mitch McConnell, following the blowhard Rush Limbaugh, declared as a goal, just days after Barack Obama’s first inauguration, making him fail?

So what happens then? The rank-and-file voters of the party in the White House get dispirited. Nothing they were promised seems to be happening. The party out of power demonizes them and their goals and distorts their attempts at legislation. (Remember the “death panels” that Obamacare was supposed to bring?) It gets its voters out by making them fear what will happen if the other party can actually do anything. Dispirited, the power-party’s voters stay home in droves in the midterms, and the out-of-power party’s voters come out in fear, at least in greater numbers.

That’s the reason for the consistent “midterm turnover” for about two generations. It really is that simple.

So what’s the solution? It’s what got Obama elected, twice, as the first Black president ever. It’s a little thing called “hope.”

In the case of this fall’s midterms, it’ll be hope mixed with fear. Women know their long-held rights have been cut off. Voters of color see little progress in equality of voting. So they fear the future. But they also know, or should know, that things will get a lot better if Joe Biden gets a compliant Congress with no filibuster. Then their hopes can be realized, perhaps beyond their wildest dreams.

So, despite all the problems of our democracy—and they are many!—it really is up to us, Democrats and progressives. Poll after poll and census after census show that we can win if we turn out.

So we have to turn out. We have to vote (and register, if we haven’t already). We have to get our sons, daughters, mothers, fathers, grandmothers, grandfathers, aunts, uncles, nieces, nephews, cousins, friends and coworkers out to vote. We have to persuade, nag, and harry them until they do so, because their and our own futures depend on it.

This is the wisdom of Stacey Abrams. This is why she will be the next governor of Georgia.

We don’t have to change minds. We don’t have to “recruit” or “convince” the other side. We don’t have to make a splash by wasting billions on TV and Internet ads. All we have to do is get our own side out in numbers and beat down the nonsense that voting is useless, that all pols are the same, or that nothing ever changes. (Not voting is a sure way to make sure that nothing ever will change!)

If we can do just that, the numbers say that we will win. We can kill the filibuster, establish majority rule and do all the things that we know the majority wants but that the oligarchs and demagogues and their lackeys have been willfully blocking.

All we have to do, in short, is keep the faith and keep hope alive. Each of us must spend a few hours registering and voting when it counts. Then we wait for the results. We are America, at least the majority, as poll after poll has shown on abortion, voting rights, gun control, energy conversion, marriage equality, women’s rights—you name it. Now we must act the part by voting.

Endnote on the presidency. As for the presidency, it’s impossible to predict two years out. But this column by Jennifer Rubin reports facts and figures showing that, if Joe Biden were to face the Demagogue again right now, Joe would win again. And distaste for the Demagogue and his lies and crimes will only increase with time, as more evidence becomes public and federal and state prosecutions begin.

So think about that. If the Demagogue runs, he will likely lose, if only because of general disgust and our nation having moved on. If someone else runs (DeSantis, Hawley, Cruz?) he will be largely unknown to the nation, perhaps much hated outside his own state, and unpopular among the class of Republicans who will go to their graves thinking the Demagogue wuz robbed. It’s not easy to imagine a better situation for whoever runs as a Dem.


For brief descriptions of and links to recent posts, click here. For an inverse-chronological list with links to all posts after January 23, 2017, click here. For a subject-matter index to posts before that date, click here.

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