Economic

The Fed Fighting Inflation

Posted on by j.giglio

Prices at the gas pump and in the grocery store are climbing at the fastest pace since 1981.  As inflation spreads throughout the economy, it is proving painful for working families.

The Federal Reserve has raised interest rates three times so far this year and has signaled it plans to keep doing so in coming months.  The country is in the eye of the storm; the price spiral is nowhere close to over.

The Fed is passing off these interest rate increases, in bits and bobs as the British say, as a coherent strategy organized around a defining theme: to fight inflation and put the beast back in its cage without tipping the economy into a recession.

The American public has been told with monotony by various media outlets that the central bank has a laser-like focus on cooling the economy and limiting demand for goods and services, noting that the Fed has not hiked interest rates by 0.75 percentage points in one go since 1994.

The media was so transfixed with this figure that if you had a frequent flyer mile for every time it was mentioned you would have enough miles to circumvent the globe by now.

What is absent from this reporting is that the funds rate is now in the 1.5 to 1.75 percent range.  The Fed plans on the rate reaching a relatively modest 3.4 percent by year’s end.

Meanwhile, inflation hit 8.6 percent in May, the fastest rise in 40 years, with more pain to come.  Interest rates are still way below the rate of inflation.  It is crucial that the Fed take the cost of borrowing well above the inflation rate for price pressures to cool.

The reasons behind the current inflation are not hard to fathom, from the global pandemic to supply chain issues and the war in Ukraine.  The expansionary monetary and fiscal policies of 2020 and 2021 surely put a fire under the economy, driving up consumer demand and putting upward pressure on prices.

While it might not quite be true that, as Milton Friedman memorably put it, “inflation is always and everywhere a monetary phenomenon,” it is still a large part of the explanation.  Skip over blaming Putin.  To believe that is to think in political cliché.  Inflation was high before the Russian invasion of Ukraine.

By any normal reckoning, the Fed and others steering the economic ship remained conspicuously in the wrong for a long time when it came to dealing with the rise in prices.  By to-ing and fro-ing and insisting that inflation was transitory last year and hoping it just went away as though it didn’t exist, inflation got out of hand.

For the U.S. to defeat inflation, it will take real leadership.  To put it crassly, the Fed needs leadership like that provided by its former Chair Paul Volcker, the consummate public servant, a rarity on par with Halley’s comet.

As Volker understood it, inflation can be defeated, but it takes a willingness to make tough choices and the minerals to face down critics.  He did everything except kick extra points to deal with runaway inflation, explaining to the public the tough road ahead, the sacrifices to be made and the fact that there was no alternative.

For example, when inflation reached 15 percent in 1980, Volcker understood the need to go for inflation’s jugular and ratchet up interest rates above the rate of inflation.  He raised interest rates to over 20 percent to crush raging inflation.

That gives a foretaste of what the U.S. will experience in the coming years if the Fed does not move more aggressively and quickly to combat inflation.

While predicting the future is beyond difficult, if the Federal Reserve is to get inflation under control, it has a long way to go when it comes to raising interest rates.

Corporate America and Income Inequality in the U.S.

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Economic inequality, the gap between the rich and poor, has always existed. This disparity has increased dramatically in the U.S. over the last four decades.  Inequality can be measured in many ways, frequently using income.

The Gini coefficient is one of the most utilized measures of how income is distributed across the population with 0 being perfectly equal (where everyone receives an equal share) and 1 being completely unequal (where 100 percent of income goes to only one person). The measure has been in use since its development by Italian Statistician Corrado Gini in 1921.

The United States has a Gini Coefficient of 0.485, the highest it has been in 50 years according to the Census Bureau, outpacing that of other advanced economies.  This measurement finds that the U.S. is the most unequal high-income economy in the world.

The top 1 percent of earners made a little over 10 percent of the country’s income in 1980.  Currently they take home about 20 percent, more than the entire bottom half of earners.

Academicians and politicians argue over whether automation or overseas manufacturing is more responsible for eliminating American manufacturing jobs and keeping wages lower.  The question is debatable, but the answer is surely a mosaic from globalization to automation.

One factor that catches the eye time and time again has been the role of corporate America.  Sure, automation and globalization have transformed labor markets across the globe, but it is important not to overlook corporate America’s role in accelerating these effects.

The late Jack Welch, the CEO of General Electric from 1981 to 2001, captured this reality when he talked of ideally having “every plant you own on a barge”.   He turned the firm from a manufacturing company into more of a financial services firm while offshoring American manufacturing jobs.  In 1999, Fortune Magazine named him manager of the century.

Other leading companies followed Welch’s path. For example, General Motors moved production to low-wage areas like northern Mexico starting in the 1980s.  In 2017 Boeing, America’s biggest exporter, opened a plant in China for its 737 planes.

From both an economic and national security perspective, the US needs to strengthen smart manufacturing and provide good jobs for future generations through effective public policies.  War and the pandemic have exposed the fragility of supply chains. Increasing domestic production of items like energy, food and medicine would better secure supply chains and create high value jobs and support American workers and their families.

For example, semiconductors (chips) are foundational for many industries, as everything digital has transformed all sectors of the economy. Bear in mind that digital technologies are disrupting entire industries and blurring industry boundaries.  Still, the US is suffering from a severe shortage of semiconductors.

While the US global share of semiconductor manufacturing capacity was 37 percent in 1990, the number has fallen to an alarming 12 percent today.  The US has become an outlier in an industry that is a major engine of U.S. economic growth and job creation.

The US has grown dependent on other countries that provide government subsidies and incentives to make it easier and cheaper to manufacture semiconductors.  The European Union is planning to provide the industry with $48 billion over 10 years.

More importantly, China is investing $100 billion into the sector. The Chinese government is funding the construction of more than 60 new semiconductor fabrication plants and is poised to have the single largest share of chip manufacturing by 2030.

When push comes to shove, the political class should remember that the US must be the world leader in advanced manufacturing: “Not only the wealth but the independence and security of a country appear to be materially connected with the prosperity of manufacturers”.

Who said that? The never less than interesting Alexander Hamilton, of Broadway fame in his Report to Congress on the Subject of Manufactures in 1791.

Do Economic Sanctions Work

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When Western policymakers want to influence an outcome and military intervention is deemed too risky, economic sanctions are a favorite non-lethal tool in their bag of tricks. The war in Ukraine is the latest example of their use.

Attacking a country’s economy through sanctions can be a way of hitting your enemy where it hurts—in the pocketbook. And it’s a lot easier than going to war. The question is whether sanctions cause as many problems as they solve.

Economic sanctions are not a novel concept in international diplomacy. The aim of weakening the enemy through the material deprivation of its population long predates modern times. In fact, it dates back to the ancient Greeks, when Athens imposed a trade embargo on its neighbor Megara in 432 B.C. that helped trigger the Peloponnesian War.

Economic sanctions come in different forms depending on the desired outcome. Besides economic and trade sanctions, these measures include targeted actions such as arms embargoes, freezing assets, commodity restrictions and travel bans on key individuals and organizations.

These sanctions can be imposed by a single country or multilaterally, by like-minded nations, or international bodies such as the United Nations and the European Union. Sanctions can be wide-ranging, banning all transactions with a specific country, while targeted or smart sanctions aim to minimize collateral damage to the general population and instead focus on specific individuals or entities believed to be responsible for offending behavior.

The economic sanctions placed on Russia following its invasion of Ukraine are the widest ranging ever placed on a major economic power. Will they work? Restrictions on Iran, Venezuela, and North Korea, for example, impoverished their populations but haven’t led to political change.

To take just one example, the war in Ukraine has put pressure on European energy markets where supply and demand were already being disrupted. Consider will the European Union’s (EU) proposed oil sanctions on Russia weaken Putin’s ability to finance the war? Fossil fuel exports provide the revenue for Russia’s military buildup and brutal aggression against Ukraine.

The 27 members of the EU buy a quarter of their oil and more than 40 percent of their gas from Russia, paying $450 million per day for oil and $400 million per day for gas. There is no consensus yet among EU members on stopping Russian gas imports.

The EU recently stopped Russian coal imports, and after dithering over a decision to sanction Russian oil imports, the EU Commission has committed to weaning itself off Russian oil. The President of the Commission announced that oil imports from Russia will be banned after six months and refined petroleum products by the end of the year, ratcheting up its efforts to cut off a key source of funding for the Kremlin.

This was the EU’s sixth package of sanctions against Moscow, and its biggest and costliest step yet toward supporting Ukraine and ending its dependence on Russian fossil fuels.

Now the EU is struggling to replace that oil. It is also making a big bet that Russia will not retaliate by turning off natural gas supplies, as they have already done with Bulgaria and Poland for refusing to pay in rubles. Just as Europe hopes to find new oil suppliers, so Russia is working hard to line up alternative buyers such as India to minimize the impact on their bottom line and to continue to take advantage of higher oil prices to compensate for lower volume.

China is a likely market. Last year a third of Russian oil exports went to China. While Russia relies on oil and gas exports for 45 percent of its revenue, according to the International Energy Agency, it may well be that the EU’s oil ban won’t cause large and lasting damage unless China joins the Russian oil boycott, and that is highly unlikely.

But it’s very likely that the proposed ban will hurt the European economy and Europeans are going to have to deal with higher energy prices.

The war in Ukraine and COVID-19 pandemic could spell the end of globalization

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Times are changing. The global pandemic and Russia’s unprovoked invasion of Ukraine have sparked debate on the future of globalization — nations trading with few barriers, focusing on the industries and services they do best.

The war in Ukraine has strained ties between countries that were already under pressure due to the coronavirus pandemic. It has exposed the risks inherent in economic interdependence among nations with different ideologies and security interests.  It may well be that globalization as it has been known is dead in a post-COVID-19, post-Ukraine war world.

The war has had a big impact on the global economy, especially as supply chain shocks threaten everything from energy supplies to auto parts to exports of wheat and raw materials, and sent prices skyrocketing.  It has also raised concerns about food shortages because Russia and Ukraine are among the major breadbaskets of the world.  Many countries have banned the export of food grains, fearing supply disruptions and higher prices due to shortages.

The CEO and chairman of Black Rock, the world’s largest asset manager, said in a letter to shareholders last month that “The Russian invasion of Ukraine has put an end to the globalization we have experienced over the last three decades.” He added that companies and governments will now be forced to further “reevaluate their dependencies and reanalyze their manufacturing and assembly footprints.”

The pandemic dramatically demonstrated vulnerabilities in long supply chains and made countries look closer to home. While it is impossible to predict the outcome of the war, Russia’s invasion of Ukraine on Feb. 24 has upended a world order that has been in place since the end of the Cold War in the 1990s. It signals changes to globalization as the world has known it.

The combination of technology and a relatively stable geopolitical landscape promoted steady expansion of global trade over the last 50 years. In 1970, trade accounted for 25% of global GDP, meaning one quarter of all goods produced were traded with international partners. By 2000, global trade had doubled to 50% of all goods and services produced.

But the trend toward globalization recently started to run in reverse. The world trade share of GDP output peaked in 2008 at 61%.  In 2020, global trade accounted for just 51.6% of worldwide GDP, the lowest since 2003.

Even before the pandemic, the 2008 financial crisis dealt a blow to globalization, as cross-border investments, trade, and supply chains all contracted.  In the last decade, globalization has suffered multiple setbacks in the form of Brexit, the US-China trade war, the pandemic, and now the Russia-Ukraine war.

The conceit that economic interdependence promotes political stability has been shaken. Russia, the ninth largest economy in the world, is being economically isolated from the West, which has responded to Russian aggression with harsh economic sanctions. Consider that the European Union is Russia’s main trading partner, accounting for 38 percent of its exports. Of course, this is partially neutralized by its dependence on imports of Russian gas and oil.

Governments and corporations are recognizing the limits of having supply chains spread out in multiple locations.  For instance, shortages of surgical masks and personal protective gear at the outset of the pandemic in 2020 showed the vulnerability of the world’s dependence on Chinese factories for all sorts of goods.

All this means global trade may have crossed the Rubicon and is heading toward cold war-era trade blocs, one led by the U.S. and the other by China.

Globalization may not fully recover from the pandemic and the war in Ukraine.  A version of it based on different principles and moves away from pure efficiency to consider security, reliability, and partnerships may be in the offering.

Billionaire Tax

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The return of inflation has changed politics. For months the Federal Reserve and the White House dismissed inflation as the dog that had not barked in over 40 years. Inflation has now started to spiral out of control and the country may be on the brink of a recession.

Inflation is one of the main reasons why Biden faces record low poll numbers and Democrats may lose control of both the House of Representations and the Senate in the November mid-term elections.

The president’s political response has been to include a “Billionaire’s Minimum Income Tax” in his $5.79 trillion fiscal 2023 budget proposal.  Despite the name, it would require that households with a net worth over $100 million (the top 0.001percent of U.S. households) pay a rate of at least 20 percent on their income as well as unrealized gains in the value of assets like stocks and bonds. The Biden Administration refers to the name of the proposal as a “billionaire minimum income tax” despite the $100 million threshold.

Attempting to impose a minimum tax rate of 20 percent on the likes of Jeff Bezos and Elon Musk may be good politics in an era when the prevailing wisdom is that the super-rich don’t pay their fair share of taxes, but this proposal is highly questionable from a governing standpoint.   Essentially the proposal is taxing gains from their wealth.

It is beyond debate that the gap between the richest and the poorest Americans has widened in recent decades. According to the Pew Research Center, in 1970 upper income households had a 29 percent share of US aggregate income. By 2018 it was 48 percent. Middle income household income was 62 percent of the total in 1970, by 2018, it was 43 percent.

It gets even worse when you look at wealth inequality. The richest 1 percent of the population owns 56 percent of all US equities.  The least wealthy 40 percent of the population owns no assets at

all—nada.

Rather than waiting for a taxpayer to sell an asset and tax those gains, the administration plan would allow the federal government to start collecting revenue now. The proposal raises complicated questions about how the IRS and taxpayers would assess the value of assets that are not publicly traded.  It would be more efficient to simply tax the profits from sales of stock and other assets at the same rate as ordinary work income.

Another basic question is whether Biden’s proposal would raise the $361 billion over a decade that the White House says it would. Taxes based on capital gains coming from tradeable assets such as stock and bond prices are certainly more volatile than income earned by taxpayers. What are the assumptions about stock and bond prices over the next ten years that are behind the $361 billion projection and how do you value non-tradeable assets?

Broad-based taxes are more likely to deliver projected revenues than those that focus on a subset of the population. But Biden promised during the campaign that he would not raise taxes on anyone making less than $400,000 a year, effectively locking out 98.2 percent of taxpayers from any proposed tax increase.

Like the COVID-19 pandemic, Russia’s war in Ukraine has contributed to stagflation pressures in the United States and other advanced economies where prices are increasing beyond what many ordinary people can afford.

Global food prices set a record last month according to the United Nations. People are on edge. The only certainty when people go food shopping these days is the price will be cheaper today than tomorrow.

Inflation is a very real problem, but Biden’s political response of proposing a minimum income tax on the ultra-wealthy doesn’t address it.  Instead, it is all about political virtue signaling.

With household budgets stretched due to inflation, the Fed finally raises interest rates

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The Federal Reserve (Fed) has chosen to do the bare minimum when it comes to raising its benchmark interest rate. Last month’s 0.25 percentage point increase was no more than the markets had expected.

It was the first time the Fed has raised rates in more than three years and marked a reversal of a zero-interest rate policy and injecting unprecedented levels of cash into the economy. Still, real interest rates – nominal rates adjusted for inflation – remain extremely low. Taking interest rates to near zero has caused one of the greatest asset bubbles in history. The Fed has its hands full to achieve a soft landing and get inflation back to its 2 percent target over the next three years.

That may be the triumph of hope over experience. After all, the Fed ignored all the warning signs, spending much of the last year telling Americans that inflation would be but a transitory problem.

The Fed feared that a larger hike would hold back the economy. On the contrary, the real threat to economic growth and living standards may come from a sustained period of high inflation, not small changes in short-term interest rates.

Inflation skyrocketed to 7.9 percent over the past year, according to the February report from the Bureau of Labor Statistics (BLS), the fastest increase since January 1982 when the U.S. economy confronted the twin threats of higher inflation and reduced economic growth.  Excluding food and energy, both of which moved sharply higher during the month, core inflation still rose 6.4 percent, the highest since August 1982.

Wherever you look, prices of essential materials, products, and services are shooting up at rates unseen in a decade or more. The most recent inflation problems have also been compounded by fast-rising gas prices.  In February, gasoline cost 6.6 percent more than in January, which translates to a nearly 40 percent annual increase.

The White House has largely blamed the inflation problem on supply chain disruptions during the COVID-19 pandemic, corporate greed, and now Putin’s war.  Blaming Putin is utter nonsense.  For sure oil prices have increased over the last two months, but consumer inflation rose from 2 percent to over 7 percent in the last year.

Food, housing, cars, recreation – it has all gotten more expensive.  This is attributable to an unprecedented government spending blitz coupled with persistent supply chain disruptions that have been unable to keep up with stimulus-fueled demand, particularly for goods over services.

That’s putting upward pressure on wages. But although wages are increasing, inflation is rising faster, meaning that workers are falling further behind.  Inflation-adjusted average hourly earnings fell 0.8 percent in February, contributing to a 2.6 percent decline over the past year, according to the BLS.

After allowing for inflation, the Fed funds rate is still exceptionally low, especially in real terms.  Indeed, with the CPI measure now expected to top 8 percent, raising nominal interest rates by just a quarter of a point hardly even counts as monetary tightening.  A larger hike would have sent a clear signal that the Fed is serious about getting inflation under control.

Inflation is something a large majority of Americans have not experienced in any meaningful way. Those who are under 50 have no memory of the high inflation rates from 40 years ago, so the current price increases come as a shock.

While the consensus view is that the Fed will raise the benchmark interest rate six times this year, these passive increases may be too little and too late to get inflation under control. The longer the Fed waits to raise rates aggressively, the harder it will be to bring down inflation and the worse it will be for the American economy and the living standards of ordinary people.

Debt matters as U.S. deals with highest inflation rate in 40 years

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The United States’ total public debt has ballooned to nearly $30 trillion. Split among the nation’s roughly 130 million households, that is about $229,000 per household. And the bill is about to go up, as rampant inflation triggers rising interest rates.

Few in the media took notice when the nation’s debt hit the $30 trillion mark. There was little if any reaction from the denizens of D.C.’s political and policy establishment, busy as they are fighting over just about everything. Budget hawks are nowhere to be found.

Setting aside the intergovernmental debt that one part of the government owes to another part, such as what the federal government owes the Social Security Trust fund, debt held by the public is about $24 trillion. That is more than GDP, a level previously seen only at the end of World War II.

Much of the national debt owed to foreign institutions is held by the Japanese and the Chinese, who definitely want to get paid. It should not be overlooked that a growing debt burden may undermine confidence in the U.S. dollar as the world’s reserve currency, making it more difficult to finance economic activity in international markets.

But why worry about debt when vast sums of money can be created out of thin air to pay the interest on all that debt, and nominal interest rates are near zero? It’s a free lunch!

The federal government spends about $300 billion annually on interest payments on the national debt. This is the equivalent of nearly 9 percent of annual federal revenue, and more than the federal government spends on science, space, technology, transportation and education combined.

The cost of servicing debt from past spending reduces the money available for other spending programs.  Each 1 percent rise in interest rates would increase debt servicing costs by about $225 billion at today’s debt levels. This is not chopped liver.

Even in an historically low interest rate environment, the amount of debt we’ve accumulated results in daunting interest costs. It will get even more expensive when the Federal Reserve gets around to raising interest rates significantly to deal with the highest inflation in 40 years.

Who would have thought trillions in stimulus spending and money being printed by the nominally independent Federal Reserve and plowed back into the economy when companies couldn’t produce enough of what consumers wanted would drive prices higher?  More demand plus less supply equals higher prices. The Fed ignored the inflation risks inherent in monetary financing of the government deficits. After all, there is virtually no limit to money creation under a fiat monetary system.

The hard truth is that these folks were out to lunch as the cost of living for ordinary Americans was rising. Paychecks will feel tighter than usual as inflation outpaces wage increases.

Americans are then told that a key way to help relieve rising prices is to pass a $1.85 trillion collection of spending programs and tax cuts known as the Build Back Better bill, which is currently languishing in the Senate. It will deliver good economic outcomes: low inflation and low unemployment.

And now financial markets are nervous about the prospect of the steepest monetary tightening cycle since the 1990s, with markets pricing in more than five quarter-point Federal Reserve interest rate hikes in 2022.

Debt matters. Fiscal responsibility matters. The short-term pain associated with fixes that will bring long-term gains is a real challenge for politicians – especially in even-numbered years. They much prefer to kick the can down the road hoping the bill will come due on someone else’s watch.

The American public is equally culpable, electing politicians who don’t have the courage to advocate for solutions to the debt issue. Those who do are run out of office.

To paraphrase Hemingway’s words from “The Sun Also Rises,” “How do you go bankrupt? Two ways: gradually, then suddenly.”

Traditional conglomerates such as GE, J&J and Toshiba are moving in a new direction

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Last November, three major conglomerates – General Electric, Johnson & Johnson, and Toshiba – all revealed plans to break themselves up in an effort to maximize shareholder value. They won’t be the last to do it.

Conglomerates are large parent companies made up of smaller business units that operate across multiple markets in an effort to diversify the risk of being in a single market. The financial health of a conglomerate is difficult to discern, as the parent company reports results on a consolidated basis. Recall the key role GE Capital played for many years as the catalyst for growth and profitability at General Electric.

Johnson & Johnson (J&J), the biggest pharmaceutical company in the U.S. based on market cap of $435 billion, announced its intent to break off its consumer health division in the next 18 to 24 months. J&J is the 36th largest company in the U.S. based on total revenue, according to the 2021 Fortune 500 list.

It will spin off its consumer business, which includes such brands as Band-Aid, Tylenol, Nicorette, and Neutrogena, into a new publicly traded company by November 2023. Its prescription drug and medical device businesses will continue to operate under its banner.

What is behind these break-ups? There is an argument that these firms have all become too diversified, complicated and grown too challenging to manage efficiently.

The recent history of all three has also been tumultuous. General Electric was nearly taken down during the financial meltdown in 2008. J&J is facing over 20,000 lawsuits related to claims that its baby powder causes cancer and for its role in the opioid crisis. The firm took a hit when the Centers for Disease Control and Prevention recommended that Americans not receive its COVID vaccine because of adverse side effects. Toshiba is still trying to recover from a massive 2015 accounting scandal.

A different approach for Amazon, Facebook, Microsoft and Apple

At first blush it would appear that the era of the conglomerate and the notion that brilliant management can successfully run businesses in varied industries is over. While traditional industrial corporate conglomerates may be pushing up daises, the success of tech giants such as Amazon, Facebook (parent Meta), Microsoft, Apple, and Alphabet as modern-day conglomerates should be noted.

These firms are not throwbacks to the traditional conglomerate model whose main purpose was to allocate financial capital across various businesses and rebalance the portfolio through acquisitions and divestments.

Take Amazon for example. While the company does not describe itself as a conglomerate, it operates online and brick-and-mortar retail stores, sells outsourced computing services, runs global logistics operation, produces movies, and the beat goes on.

These tech conglomerates do differ from traditional industrial conglomerates. They have created platforms that knit together and support the varied businesses. Put differently, the businesses in these companies rely on a common infrastructure to provide the unifying thread.

A platform is essentially a marketplace that connects the supply side and the demand side. Amazon links shoppers and sellers, producers and consumers in high value exchanges. The company enables Prime members to order Whole Food deliveries on the Amazon website.

The spectacular growth of these businesses has been explained by network effects. The value of a platform depends in large part on the number of users on either side of the exchange. The more users a platform has, the more attractive it becomes, leading even more people to use it. This allows business to scale up quickly and creates a competitive advantage. The tech companies are exploiting the power of platforms and the relatively low capital investment they require. These network effects are the driving force behind every successful platform.

Another ugly inflation report is cause for worry for working Americans

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After yet another ugly inflation report, the United States has its highest inflation rate since 1982, an eye-popping 6.8%. It was an increase that surpassed anything even the most pessimistic forecasters expected.

Inflation is up almost a whole percentage point in a single month and is three times the Fed target of 2%. It may climb higher still before it starts to come under control.

Inflation has become impossible to ignore. Working people are struggling to meet the cost of basics like food and housing because of skyrocketing prices. In November, food prices were up 6.1% from the year before, with meat, poultry fish and eggs up 12.8%, cereals and bakery products were up 4.6% and non-alcoholic beverages up 5.3%. Energy prices increased 33%. Used trucks and vehicles went up 31.4%.

All these items are basic necessities. Working Americans have had trouble this year affording basic needs amid soaring inflation.

Is it any wonder why the ordinary working American is anxious when they go to the grocery store or gas station? Basic necessities have become unaffordable for many middle- and low-income families whose salaries have not kept up with inflation. Ignoring these numbers is like going to the Grand Canyon and keeping your eyes shut.

The Federal Reserve, after having been caught flat-footed, is now struggling to get ahead of inflation.  After nearly a year of insisting that inflation is transitory, the Fed finally acknowledged otherwise. It will cut back its stimulus program more quickly than planned, ending asset purchases by March and raising interest rates as much as 75 basis points by the end of 2022.

That word “transitory” has been put to pasture as the Fed gradually tightens monetary policy to put the economy on a smooth glide path back to a growth and inflation equilibrium, and the promised land.  Good luck with that.

The Fed’s hawkish pivot comes as the economy faces the fastest inflation since the 1980s and a tight labor market. The Fed made a historic mistake that they now have to fix by slamming on the brakes without sending the economy into recession. Prices rise when goods become scarce or the money supply expands rapidly.

For sure, pandemic-induced supply chain disruptions have caused scarcity, but the Fed increased the money supply more than 40 percent in the past two years, creating excess demand that has contributed to inflation. Say what you want about inflation, and everybody does, today’s version is an unusual combination of both the demand and supply side.

Stopping inflation is a slow and painful experience for ordinary working-class Americans. Inflation may become self-perpetuating through price and wage-setting behavior. American workers will demand higher wages to compensate for inflation, and firms will raise prices, creating a vicious cycle. It eats away at consumer purchasing power and has historically required crushing interest rates to bring it under control.

Anyone whose pay is not rising by at least 7% will, in effect, feel like their pay has been cut. Inflation is now America’s public enemy number one.

It should be clear as gin that the pay hikes the country is seeing for workers traditionally at the lower end of the pay spectrum are long overdue after decades of stagnation. But higher wages are only meaningful if working Americans can afford more as a result. Next year’s price surges threaten to cancel out bigger paychecks as working people will be paying more for less.

The fight over the federal debt ceiling is Kabuki theater. What is Kabuki theater, you ask?

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The United States is once again flirting with a default crisis. The clock is ticking on a deal to raise the federal borrowing limit, or debt ceiling, and prevent a default on the national debt. After months of wrangling, Congress struck a short-term deal to temporarily avoid a first-ever default, but it sets up another showdown in a matter of weeks.

The recent legislation raised the nation’s borrowing limit by $480 billion, the amount the Treasury Department said it needed to meet the country’s cash needs until Dec. 3, setting up yet another deadline for Congress to resolve the issue.

The debt ceiling, also known as the debt limit, is the maximum amount of money the feds can borrow cumulatively by issuing debt in the form of bonds to meet its obligations.

The fight over the federal debt ceiling is Kabuki theater in the city of sound and fury. Tracing its origins to the 17th century, Kabuki is the stylized Japanese drama in which performers wear elaborate make-up and costumes. Actions aren’t literal but metaphorical, conveyed through singing, dancing, and mime.

In Washington, D.C. the Kabuki theater of America’s debt ceiling is a debate with overheated rhetoric and extravagant gestures, as politicians of both parties engage in the silly debt ceiling dance until the 11th hour, when each gives ground to save face, resolves the standoff and avoids a default just in the nick of time.

A default would be a catastrophic blow to the economic recovery from the COVID-19 pandemic. Global financial markets would be disrupted, and Americans would pay for this default for generations, as global investors would come to believe that the federal government’s finances have been politicized and they are not going to get paid what they are owed. Going forward they would demand higher interest rates on the Treasury bonds they purchase.

Congress enacted the debt ceiling in 1917 to placate anti-war lawmakers who were uncomfortable about letting the Treasury Department borrow too much money to finance World War I. Since then, the limit has been raised or modified 98 times according to the Congressional Research Service. Yawn.

It’s a mechanism that allows the U.S. Treasury to borrow money for any approved spending up to a certain limit without first getting approval from Congress. Lifting the debt limit does not initiate any new spending. Rather, it simply allows the U.S. to finance obligations already authorized by Congress, including interest on the debt and payments to Social Security, Medicare, and Medicaid.

There have been regular congressional battles over the debt ceiling. Despite partisan disagreements, Congress and the President have never allowed the country to default on its debt. During the Obama administration in 2011, when Republicans refused to raise it without significant spending cuts, a deal was finally struck to resolve the debt ceiling issue.  But coming within days of the Treasury being unable to pay out certain benefits did lead to Standard & Poor’s to strip the U.S. of its triple-A credit rating for the first time in history.

There were also government shutdowns in 2013 and 2018, when the government closed non-essential services, such as national parks, and sent federal employees on forced leave.  President Trump’s demand for $5.7 billion to build a wall on the Southern border led to a 35-day shutdown in 2018.

If the debt ceiling is not raised and the government can’t borrow to pay the bills, it would have to suspend certain pension payments, withhold military and federal workers’ pay, and delay interest payments on outstanding debt, potentially roiling financial markets and raising borrowing costs.

But not to worry, Americans have seen this movie before. The debt ceiling will be raised, and the government will not default. After all the Sturm and Drang, all will be fine after Democrats and Republicans have used it to embarrass one another and seize some electoral advantage.