Day 648 – The Two Economies

Wednesday, October 26, 2022

I heard Janet Yellen, the Secretary of the Treasury, on a talk show this week. She said something that brought me back to my college economics class.

When asked about the possibility of a recession she pointed out that for the last three months the U.S. has been adding 600,000 jobs a month. She said that didn’t look like a recession to her. This made me think about people like Jamie Diamond head of one of the biggest banks in this country, if not the biggest. He has been talking about a looming recession, as have many of the stock investing types. But then I realized that old maxim that the stock market does not reflect the economy. The investor types are warning of a recession. Meanwhile, the job numbers and growth in non-investment areas is not showing any signs of a recession. 

Well, what about inflation? She was asked. She said more has to be done, but the labor rates are causing some of the inflation. Translation, people are making more money and that is causing people to spend more and they are willing to pay higher prices. That causes prices to go up. That’s inflation. Ta Dah!

We may be coming into a situation of stagflation. First an econ review. Inflation is when too much money is chasing too few goods and services. Prices go up. Deflation is the opposite. To stop too much money in the system the Fed takes money out of the system. They do this by issuing bonds at higher interest rates. The idea being that if there is less money in the economy people won’t have it to spend and drive up prices.

Stagflation happens when prices and interest rates stay high. The only thing the Fed can do is to keep their interest rates high to try and take more money’s out of the system. The U.S. economy is a huge beast and it may take years for this to happen to turn things around. I remember asking at that time (late 1970s) a financial buddy of mine how come interest rates were still high (like 15%) and he said there was a lot of money unaccounted for in the system and it was taking a while to get it out of circulation. As he put it, there was a lot of money in mattresses. I said but it’s taken a lot longer than people predicted. He said that the mattresses were thicker than anyone thought.

To go back on the econ history of the last stagflation. Nixon was worried about it. Ford was too. Remember WIN? (Whip Inflation Now). Carter got in and the Fed chair was Volcher He kept interest rates high and eventually got inflation under control, but it cost Carter his second term. Reagan got in, claimed credit for it. Kept Volcher, and proceeded to sow the seeds to destroy the middle class. The Republican talking points haven’t changed much since then. Other than they no longer believe in elections (minor point.)

Republicans are big on talking about fixing out economic problems and on reducing crime. Don’t let fact get in the way, however. Under Republicans since WWII they always spend more than Democrats. They talk about balanced budgets, but only when Dems are in, because when they are in it’ okay to run the counry into more debt.

As far as crime goes, the worst crime rates are in states run by Republicans. Nebraska has a worse crime rate than New York City. 

But Texas under their Republican governor is doing something about it. To combat gun violence in the schools they are handing out DNA kits so the school can have a record of a kid’s DNA so if they get so shot up by a weapon and can’t be readily identified the school will have the DNA to match. Great. What do you want? Fewer guns or more dead kids? The Texas governor has made it clear what he prefers.