If the United States were simply experiencing a sustained period of inflation caused by booming consumption and investment activity, this might constitute an effective approach. Yet, this inflationary period has been caused by excessive money printing at the hands of the Fed and substantial government spending throughout the COVID-19 pandemic, rather than any sort of natural phenomenon.
It is likely the Biden administration is pushing the idea that America is not in a recession to salvage a modicum of political viability, with congressional mid-terms quickly approaching. Unfortunately, the casualties of this naked political posturing will be American citizens’ wallets, not to mention the entire U.S. macroeconomy.
A recession is defined as a period of sustained economic downturn, which has historically been indicated by two consecutive quarters of negative GDP growth. As anticipated, Thursday morning’s second quarter report from the Commerce Department shows a reduction in real GDP by 0.9 percent, hot on the heels of a reduction of 1.6 percent in the first quarter.
Biden administration officials, from National Economic Council Director Brian Deese, to Council of Economic Advisors member Jared Berstein, to Treasury Secretary Janet Yellen, have attempted to throw wool over the eyes of the American people by explaining that this traditional definition of a recession is faulty. Powell echoed the party line after announcing his latest interest rate hike: “I do not think the U.S. is currently in a recession. It doesn’t make sense that the U.S. would be in a recession.”
So, basically, because Powell does not personally believe the numbers right before his eyes, the U.S. central bank has continued down the path of dropping napalm on economic production. I am reminded of George Orwell’s 1984, “The party told you to reject the evidence of your eyes and ears. It was their final, most essential command.”
First, though the unemployment rate remains robust – which has been indicated by Powell, Yellen, and others to be a reason a recession cannot be possible – the U.S. labor market is far from healthy. The unemployment rate does not include the vast number of individuals who have voluntarily left the labor force since before the pandemic. The labor force participation rate sits at 62.2 percent, compared to 63.4 percent in February 2020, and 11.3 million jobs remain open compared to 6.9 million pre-pandemic.
Second, if these individuals insist upon operating from NBER’s framework, what do they think will happen to income, spending, and production after pronounced hikes in interest rates? These three measures are clearly already decreasing, considering that GDP intrinsically takes them into account by aggregating consumer, business, and government spending.
The Fed is basically operating under the Phillips Curve assumption that inflation and the unemployment rate are inversely correlated. Essentially, by raising interest rates, Powell hopes to inhibit spending and investment through increasing the cost to borrow for consumers and businesses. This would theoretically trickle down to labor markets, with businesses laying off employees due to their higher operating costs, and those unemployed individuals no longer spending at the level they did when they had a stable income. This would ultimately lead to increased unemployment and decreased inflation.
The Fed is reacting to a problem it has created through excessive money printing. And, raising interest rates will plunge the economy further into the troughs of a deep recession.
Perhaps, as an alternative, it would be wise to simply reduce government spending and intervention, allowing markets to equilibrate naturally rather than through artificial manipulation. It would be more beneficial to limit the scope of entitlement programs, cease the giant transfer payments represented by student loan moratoriums, and end discussion of spending hundreds of billions more dollars on green-energy initiatives.
The White House and the Federal Reserve must come to terms with the fact that our economy is in free-fall, and that they are largely responsible for this mess. If they continue to ignore reality and push their false narrative, we will find ourselves in a situation similar or worse to the height of stagflation, with the American people paying the ultimate price.