The Jawbone of an Ass

[The White House] is considering whether to escalate an attack on parts of corporate America over rising consumer prices, according to an administration official and three people with knowledge of the discussions who spoke on the condition of anonymity to reflect private meetings.

—The Washington Post, Front Page, November 20,2021.

As surely as night follows day, the Biden Administration, a breeding ground for economic illiteracy, is once again looking for someone to blame for its policy errors. The latest search is necessitated by a sharp rise in inflation. 

Up until recently the Biden Administration denied the existence of an inflation problem. When that didn’t work they, along with the Fed, erroneously described inflation’s rise as merely transitory. Now transitory is being redefined upwards to a date uncertain. 

Funny thing though, the rise in prices has been relentless and broad based.  According to the Bureau of Labor Statistics (BLS):

“The monthly all items seasonally adjusted increase [of the Consumer Price Index] was broad-based, with increases in the indexes for energy, shelter, food, used cars and trucks, and new vehicles among the larger contributors. The energy index rose 4.8 percent over the month, as the gasoline index increased 6.1 percent and the other major energy component indexes also rose. The food index increased 0.9 percent as the index for food at home rose 1.0 percent.” 

In response to the bad news, the Biden Administration has decided to jawbone corporate America. After all, that approach worked so well for Lyndon Johnson, Richard Nixon, Gerald Ford and Jimmy Carter, none of whom served 2 full terms. Moreover since the rise in inflation has become broadly based and embedded in the minds of consumers, Mr Biden will apparently have to jawbone corporations in every sector of the American economy. 

Which will all have precisely the same effect: Zero. 

The fact is that the rise in inflation is directly attributable to (1) policy actions the White House has taken and (2) policy decisions implemented by the Fed that the White House has cheered on. This year alone Congress, at the behest of the White House, has continued to spend money with gusto—and the Fed has accommodated the exercise by purchasing about half the Treasury bonds used to finance the enterprise. 

The result is a huge increase in the money supply and consumer demand. At the same time the Biden Administration and its allies have constrained the production and distribution of  goods and services. For example, the Administration is at war with domestic producers of fossil fuels, but begs OPEC to produce more. Mr. Biden’s nominee for comptroller of the currency, Cornell Law Professor Saule Omarova, has said that she wants to “…basically get rid of these carbon financiers…by [starving] them of their source of capital”. 

And then there are the executive orders the Administration is issuing that will increase regulatory costs on producers. Those costs will inevitably be passed on to consumers. Not only that,  Mr Biden has decreed that regulators no longer even need be constrained by cost – benefit analysis. Regulators may rely on aspirational but vaguely defined goals when imposing new rules on businesses. How’s that for increasing the costs and risks of doing business, not to mention handing out favors to friends?

So the net of it is that the Biden Administration is busy increasing demand and reducing supply. Any freshman student in economics will tell you what will happen as a result: Prices will rise. There isn’t any mystery here. 

It is, or should be, crystal clear that the Biden Administration is (1) simply  trying to change the subject, (2) remarkably illiterate in matters of basic economics or (3) both. My money is on 3—both.  

What is truly unfortunate is that the Biden Administration actually seems to think, despite a mountain of evidence to the contrary, that the government is actually capable of micro-managing the $23 trillion U.S. economy. But what they have actually demonstrated beyond all reasonable doubt is gross incompetence, even in executing legitimate governmental functions. 

Under the circumstances, the idea that the Administration is going to jawbone prices lower is simply ludicrous. 

At the moment the U.S. has issued over $22 trillion in outstanding (and headed higher) publicly held debt. A lot of that debt is held by foreign governments, including China. Which also means that those bond holders also hold dollars. That doesn’t leave a lot of room for policy error, a consideration which seems not to have occurred to the Biden Administration. 

A loss of confidence in the U.S. would be devastating. High and sustained inflation could be the spark that provokes such a loss. In turn that would likely cause a run on the dollar as it did when Jimmy Carter was President. And the performance of President Biden, whose Administration increasingly resembles that of Mr. Carter’s with each passing day, isn’t helping any. The U.S. Treasury may be a lot closer to the edge of a financial cataclysm than the public thinks. 

JFB

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