As Trump Economy Surges, the New Challenge Is Inflation
Prices rise due to lower monetary value or companies shrink what they're giving you for the same price.
In December 2008, the economy was in a downward spiral thanks to the reckless policies of congressional Democrats who a decade prior demanded an expansion of the subprime loan market and then guaranteed that taxpayers would cover the risk. Naturally, the “solution” was more government interference. Federal Reserve Chairman Ben Bernanke instituted the first round of Quantitative Easing (QE1), a fancy way of saying that he dumped about $1 trillion manufactured out of thin air into the economy in order to increase liquidity.
The problem with QE1 was that banks held the money rather than lending it out, so it did little to help the economy. In November 2010, Bernanke announced QE2, and later QE3 and QE4. By the time all was said and done, the Fed printed more than $12 trillion, and interest rates plummeted to near zero and stayed there for years.
Barack Obama put a rotten cherry on the Keynesian dung heap of Democrat economic policy by pushing through an $800+ billion “stimulus” bill that never stimulated. In addition, he introduced drastic increases in baseline federal spending, tax increases and massive new regulations. As a result, the U.S. struggled through its worst economic recovery since the Great Depression.
And we were told by Team Obama that such economic stagnation is now the “new normal.”
But a curious thing happened on our nation’s way to becoming a global has-been. Republican Donald Trump shocked the world and foiled the political Rasputins who declared the 2016 elections to be a mere formality to the coronation of Queen Hillary.
Upon taking office, President Trump immediately began reversing Obama’s policies; he didn’t just cut regulations, he took a blowtorch to them. He ended the War on Coal and fossil fuels, introduced business-friendly policies, and topped it off with a tax reform bill (passed by Republicans without a single Democrat vote) that has hundreds of billions of dollars flooding back into the U.S., and massive new investments creating new jobs and driving up wages.
This is fantastic news for most Americans, but it creates a problem for Jerome Powell, the new Federal Reserve chairman who replaces Obama’s pick, Janet Yellen. With the sudden resurgence in economic growth, we’re also seeing rising prices, with consumer inflation rising 0.5% in January, and 2.1% over the past year.
The Federal Reserve has had a target inflation rate of 2% since 2012, but as the economy heats up — with projections of 2018 GDP growth reaching 4% — Powell must negotiate a delicate balancing act, controlling inflation without dousing the surge in economic growth.
Low inflation — usually indicating weaker wage growth — has kept down prices of food, clothing, fuel and other common expenditures. However, last week the Labor Department reported a 2.9% increase in average hourly earnings, the highest year-over-year gain since 2009 (not coincidentally the first year of the Obama administration).
So what does this mean to the average American?
Well, it means the prices of goods and services rise as wages increase. Furthermore, experts are predicting two, possibly three increases in the Fed’s benchmark interest rate in 2018, hoping to manage interest rate increases so that wage growth outpaces inflationary growth in the prices of commodities and consumables.
For savers, it means they finally see a positive return on their investments. For those with high levels of debt, it means even more of their paycheck going to pay off interest on loans and credit card balances. According to Bankrate, the average annual rate for new credit cards is up about 1% over last year, to 16.4%.
These dynamics have a direct impact on businesses as well, who live and die based on how well they understand consumers. They must find a way to offset higher prices for their raw materials and labor without losing customers, an inevitable result of increasing prices.
That’s why for years food manufacturers have responded to the dilemma by simply taking advantage of consumers’ inattention to detail. That bag of Doritos you buy now has a lot more air and 20% less chips, and that half gallon of Breyer’s ice cream is now just 1.5 quarts … but you’re still paying the same price.
Consumers will almost always notice the higher price, but far fewer recognize the smaller quantities, especially when rolled out in new packaging.
Of course, this would be a moot point had we followed the wisdom of our Founding Fathers. Washington, Jefferson, Madison and Hamilton (before he became famous to Millennials as a Broadway rapper) all preached mightily against the dangers of paper money. Said Jefferson, “Paper is poverty. … It is only the ghost of money, and not money itself.” He also declared that paper money’s “abuses also are inevitable and, by breaking up the measure of value, make a lottery of all private property.”
In 1933, Democrat Franklin Roosevelt issued Executive Order 6102, essentially banning private citizens from holding gold. In 1971, Republican Richard Nixon severed the link between gold and the U.S. dollar, resulting in a massive expansion of the M3 money supply from $688.4 billion in 1971, to $10.3 trillion in 2006, at which point the Federal Reserve stopped publishing that number.
Gee… we can’t imagine why.
When the value of money is determined by fiat instead of an objective standard, and when the government then floods the market with that money, inflation happens. And it happens either by prices rising due to lower monetary value, or because companies shrink what they’re giving you for the same price. Either way, a dollar goes a lot less far than it used to.