OPINION:
We are wrong to insist that the Federal Reserve must increase interest rates to slow the economy and reduce inflation. It might eventually help, but the resulting recession will cause more poverty.
The real cause of inflation is the war on fossil fuels. And the cure is to stop the war on fossil fuels. More on that later.
A large money supply does not necessarily cause inflation. It does not cause someone to offer $3 for a loaf of bread when the price is $2. If bread were in short supply, customers would bid a higher price.
A large money supply may buy boats or homes; however, that is good for the economy. Our bloated money supply does fuel demand. But inflation requires a spark on the supply side — an excess of cost or reduced supply of usable goods.
Classic economic theory says inflation is caused by too many dollars chasing too few goods. That is still true. But the “too many dollars” part is overrated as a driver. “Too few goods” is the real culprit.
Overspending causes many problems, but it did not cause the current inflation. Inflation from 2009 to 2020 averaged 1.8%. And in 2020, it was 1.4%.
Government spending soared when President Barack Obama took office in 2009. In his first 90 days, he spent more than triple the cost of the Afghan and Iraq wars over five years. Don’t believe it?
President George W. Bush requested war funding each year and dueled with Democrats for at least a month each time. At the end of five years, Congress had authorized a total of $365 billion, including $40 billion for the “surge.”
Mr. Obama created the $787 billion stimulus in his first week, and some weeks later revived the remaining TARP money of $370 billion that Mr. Bush had discontinued. That $1.157 trillion was more than three times the five-year cost of wars. Then Mr. Obama added continuing resolutions of $813 billion stimulus for each of the next four years, plus two years of QE spending at $200 billion each.
Still, there was little inflation compared with now.
Similarly, President Donald Trump and then President Biden spent trillions more. We had runaway spending from 2009 to 2020, and very little inflation. The spark that ignited high inflation occurred when Mr. Biden shut down every source of oil within his jurisdiction his first week in office.
In the month after Jan. 24, 2021, our domestic oil production plunged from 13.1 million barrels per day — its highest level in history — to 9.7 million.
That same month, the oil price doubled from $55 per barrel to $110. Inflation soared to 9.6%. Our oil companies have scrambled to renew sources of oil outside Mr. Biden’s ambit. They have increased production back up to about 11.6 million barrels, which has somewhat mitigated the problem; however, they cannot do much more.
The Fed raising interest rates to choke off the economy is like strangling the patient rather than treating the ailment.
President Biden caused our inflation juggernaut. He must reverse his destructive policies, which extreme climate change activists are driving.
• James T. Moodey has a degree in economics from University of Southern California and has written economic essays since 1978. His recent book, “The Ladder Out of Poverty,” explains why the poverty rate has not declined since the Great Society promised to end poverty.
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