Inflation Speech Flashcards
Is it just me, or does everything from food…
gas and other living essentials seem more expensive? Well a matter of fact, the pain you are feeling at the gas pump or in the grocery store is real and can be directly attributed to inflation.
So what is inflation?
Is it just another catchphrase repeated in mainstream news and media or is there more to it?
So I decided to do a little research on the topic…
Inflation can be simply broken down into two words. Supply and Demand. When the demand of goods exceeds supply in the market, then the prices of goods rise. When supply is scarce, this drives the demand of goods even further which perpetuates the rate of inflation.
So why are we experience so much inflation?
In 2020, the government spent an absorbent amount of money at the beginning of the year to blunt the impact of the coronavirous. This was all done for good reason of course as tackling the global health crisis was public enemy number one at the time.
A total of $3.3 trillion dollars was printed by the Federal Reserve
in 2020 alone to keep the economy afloat. Let’s put that into perspective. This equates to one-fifth of all US dollars in circulation during the same year.
Money went to both business and consumers…
alike as a part of Covid relief efforts. As a result, the stimulus that was pumped into the economy fueled stronger demand for goods. The problem we have now is there are too many dollars chasing too few of goods.
What does this mean for the current US economy?
Well unfortunately, the outlook is grim. The US economy finds itself trying to smoothly land an airplane with no wheels.
Over the past year, the Federal Reserve has been increasing interest rates to restrict money supply.
This is a monetary policy technique used by the Federal Reserve to tame inflation. If the Federal Reserve raises the rates too quickly, this can send the US economy into a deep recession. However, not addressing inflation is equally if not a more dangerous scenario.
Let’s go back in time and revisit a similar scenario in US History.
The story starts back in the late 1960’s, during Lyndon B. Johnson’s presidency when there was a huge amount of government spending. Johnson is known infamously for trying to tackle the war on poverty as pervert rates were running ramped at 19%. And while that is happening, the country is still engage in the war of Vietnam. So there is a lot of money pouring into the economy during this time. This is what is likely to kick off this inflationary cycle.
Into the early 1970, inflation was spiraling out of control which
had a physiological effect on how people thought of money. People started to think about money differently because everything is going to cost more. For example, a $100 grocery order in 1970 cost $170 in 1978, just 8 years later, to buy the same goods. Up to this point, elected officials have not been very effective in constraining prices.
So what did the US government do to fix this?
In 1979, President Jimmy Carter appointed a man named Paul Volker to take the top position at the federal reserve. Paul Volker was a frugal man and was tasked with bringing down inflation.
To do so, he was going to push up interest rates to unprecedented…
levels while inflicting pain on the economy and that’s what he did. He had to crush inflation completely to get America out of this self-perpetuating cycle. Interest rates were already at 10% in 1979 and Paul Volker pushed up rates to 17% in just a years’ time.
By earlier 1981 interest rates were nearly 20%.
The cost to borrow was way too expensive, so people just stopped spending money. Cars and houses were not selling, the unemployment level rose to above 10%, and the economy fell into a deep recession. While this may be perceived as the better of two evils, others argue that the cure was worse than the disease.
So fast forward back to today.
Our current Fed chair Jerome Powell plans to take a chapter out of Paul Volkers book, and is expected to raise rates by another 3 quarters of a percent during its upcoming committee meeting on November 2nd bringing the federal funds rate to 4%.
This is quite a significant jump from the beginning of this year
as the federal funds rate was near zero percent. Will Jerome Powell be able to land this plane safely without sending the economy into the next great recession, only time will tell.
